How To Make Money Collecting Art

Interview by Tom Dyson

Tom: Let's talk about art. You've mentioned many times what a great investment it has been for you.

Mark: Are you sure that's a door you want to open, Tom? I can talk forever about art collecting.

Tom: Yes, let's hear it. I'm interested to know why art collecting? Why not cars, or antique dollhouses or something?

Mark: Fine art, paintings, drawings, and sculpture has always held a special place in my heart, so it was a natural choice for me.

My art collection has enriched me in three ways: Buying it is a lot of fun, especially when you know you are buying it right. Owning it is a great pleasure. It enriches your life every time you look at it, and it tells your friends and people something important about you. Thirdly, it can make you richer. My art collection, as a whole, has appreciated more than a million dollars. I wouldn't care if it didn't. I'd be happy if it simply maintained its value. But I made investing in art a hobby, and it paid off.

Fine art, like a number of other historically recognized collectibles, has a lot of the qualities you want in an investment: It's a tangible asset, so it tends to appreciate during inflationary times. It's portable, which is a very good thing in case you might want to disappear one day. It's also private and by that I mean that you don't have to report your transactions to the government. And finally, if you buy the right art it can appreciate sometimes a great deal.

Tom: So what does a novice need to know before collecting?

Mark: The novice needs to know that, from a wealth-building perspective, there are different kinds of art.

First, you have what I call "decorator art." These are pieces of art that simply fill a given space with color and texture, but will never appreciate. This is the kind of art you see in Las Vegas hotel lobbies and Caribbean resorts. "Decorator art" is a waste of time and money.

Commercial art is what you find in galleries. However, the quality of this art can vary widely...it all comes down to the dealer and his expertise. While it's true that some dealers peddle that "decorator art" I was talking about, there are also some fine art commercial galleries that cater to local artists, graduate students, the talented Sunday dauber, as well as fine art by recognized talent. Priced right, these artworks make a very good starting point for the fledgling collector.

Those small local galleries I was talking about is where you want to go when starting your collection. You can find oils, pastels, and drawings that are worth a few hundred dollars. Buying pieces like that is a good way to train your eye.

Investment-grade art is different. It hangs in major museums. The artist is already in the art books. He's already a serious figure. His art isn't going to disappear. Nor will its value. It might fluctuate, as all investments do, but the long-term trend is good, and you can be confident that over the long run it will maintain or increase its value.

When buying art for investment purposes, collectors need to understand that appreciation happens over a substantial period of time. Unless an artist dies or is the subject of a 60 Minutes interview, collectors will cool their heels for a while before selling for a profit. However, studies show that high quality, investment-grade art is one of the top performers in terms of long-term return on investing.

Tom: Okay, so how does someone begin?

Mark: There are two methods. If you are new to art and aren't sure what you like, you can begin by buying inexpensive art. I'm not talking about decorative art. It won't teach you anything. I'm talking about art that you might find at small galleries, local art shows, or antique shops. Buy the stuff you like, but don't spend any more than a few hundred dollars on any individual acquisition.

As your taste improves and it will improve, you may find that much of what you once admired is not so wonderful anymore. When that happens, you can sell it (for whatever you can) or give it away. Ask questions of the dealer every time you buy art. If you meet the artist and like him, make friends. Gradually, your circle of contacts will improve and so will your eye. Eventually you will feel ready to venture into investment-grade art.

Tom: Sounds like a relatively slow process. Is there a better way?

Mark: Yes. You can begin with investment-grade art, but you have to do your homework and be patient. Start by trying to figure out what genres of art you like. Do you like landscapes? Do you like abstract art? Do you like portraits? Sculpture? It doesn't matter. Don't let someone talk you into, say, abstraction, if you prefer portraits. Art and collecting are life-enhancing endeavors, first and foremost. There is investment-grade art of every kind. The collector needs to figure out his personal tastes before acquiring. That is why museum visits, gallery openings, etc., are so important.

Find what type of art appeals to you. Then figure out what artists you like within that genre. Try to limit your interest to two or three artists to begin with. Study the price history of those artists. Find out what their pieces have sold for in auction in the past. Find out what they are selling for currently. Try to become an expert in their work as quickly as you can. You don't need to take any art appreciation courses. Just read books about the artists and the genres you like. You should also visit museums whenever you can and study the work of your preferred artists. When you have studied a thousand paintings, you will have developed your eye. You will know what you like. And more importantly, you will have a sense for quality.

You don't want to start off spending lots of money. This can lead to costly mistakes. Begin by buying inexpensive pieces such as sketches from major artists (expect to pay $1,500 and upwards) and gouaches and paintings of second-tier investment-grade artists ($2,500 to $7,500). This sort of buying will keep your risk relatively low, so if and when you do make the occasional mistake (like buying a fake or overpaying for a piece), it won't break you.

When I first got started, one of the things I got involved with was a school of art called CoBrA. CoBrA is an acronym for Copenhagen, Brussels, and Amsterdam. It was a period of art that officially took place from 1948-1952. It had a total of 10 or 12 artists in it, of which there were three major artists: Appel, Corneille, and Jorn. All of these artists hang in the major museums in the world. I knew their art would never be worthless. This was a good group to begin with because it was small. It took place over a small period of time, it comprised a small number of artists, and each of them was recognizably different. In other words, it was easy to study. So I began by collecting these three artists. I bought sketches and crayon pieces at first because they were cheap, and afterwards I sold some of them at a profit and "traded up." Eventually, I was able to purchase a very nice collection of good pieces that have appreciated over 300%.

Tom: Okay, so let's say I've done all that. I've picked my genre and my artists, I've spent months pouring over paintings and visiting museums. When I'm ready to buy, how do I know what's a fair price, or how to value a piece of art?

Mark: That's actually easy. But you have to ignore what the pundits say. Art pundits say that valuing art is impossible because it's subjective. That is true in terms of the pleasure you get from art but it is not true of the investment value of art.

From an economic perspective, art is valued by the marketplace, just as stocks are. An artist's work is valuable because important critics at some point decided it was good. Because of that, it went to the big museums. It got into books. It is taught in art courses. And when it goes to auction, people bid it up.

Once there's a ten or twenty-year market for a particular artist, the value of his art is unlikely to collapse. By that time, so many people, museums, brokers, and wealthy collectors are invested in it. None of them, if they can help it, will allow it to collapse.

Who is ever going to say that Rembrandt wasn't a great artist? Or that his paintings aren't worth millions of dollars? Nobody. That doesn't mean he was the best Dutch painter of his time. If you look at paintings by his contemporaries you might think that some of the other Dutch masters (or even a few of the minors) were just as good. But Rembrandt's values will hold. Why are his paintings worth a hundred times more than another one that is technically just as good? Because history has decided it should be so. Art critics, experts, people who dedicated their lives to studying art, have decided. The marketplace has put a value on it, and that's what makes it more valuable.

When you're collecting art, you're collecting the history of what art critics have decided. You might disagree with them on an aesthetic basis, but you'd be foolish to disagree with them with your money.

My point is that the value of art, from an investment point of view, is not subjective at all. It is objective. More objective and easier to predict, in fact, than stocks.

Tom: Are there differences in value for the same artist?

Mark: Yes. First of all, there is almost always a range of values according to medium. You know, paintings versus sculpture versus watercolors versus pencil drawings. As a general rule, you will pay more for an oil painting than you will for a pastel, and you'll pay more for a pastel than you will for a drawing.

But there is one notable exception. A medium that an artist is "known for" will always demand the highest price. For instance, the artist Andrew Wyeth is known for his watercolors. Those will get the top pricing. But if you know your artist you will know this.

The other factor that comes into play is size. As a general rule, the larger the piece, the more expensive it will be.

A third thing is period. Most museum-level artists are best known for certain periods. Their works that were composed during those periods are therefore considered more valuable.

Finally, there is image. Certain artists are best known for certain images. Andre Derain's "best" images, for example, are somewhat abstract. When he got older, he reverted to a more representational style. These pieces are beautiful! I have one. But they will not fetch the prices that his abstract works do.

One last thing, it is better to buy a top-quality, wholly representative work by a second-tier artist than an uncharacteristic piece by a major "name." So many collectors get wooed by names and prestige. But nobody wants a painting of a barn by Jackson Pollack. They want his "splatter" work.

Tom: Seems like a lot to know.

Mark: Not really. There are about half a dozen good websites that track auction prices of investment-grade artists. All of these will give you the key elements: the image, the medium, the size, and the year. You can study them and learn them very quickly.

Tom: So, when I'm looking at an artist's body of work, how do I know what to buy?

Mark: In collecting in general, you always want to buy the best you can afford. If you are very rich, you should buy large paintings or sculptures with the right image, painted at the right period. The best of the best is going to appreciate the most. For example, if you were buying a Karel Appel, you'd want to buy a colorful abstraction in oil of a figure that is dated in the 1950s or the early 1960s.

Tom: Okay, so now that I know what to buy, where do I go to actually buy it? Do I have to participate in some kind of auction or do I pay a broker to get it for me, or do I go to a store and just pull out my checkbook?

Mark: There are several places you can go: galleries, auctions, and private owners.

Galleries will sell you their products at retail, which means they will charge you 50% to 100% more than what they paid. As an investor, you can't afford to pay that kind of premium. But sometimes galleries buy cheap and don't insist on such big margins. If you know what you should be paying (by educating yourself) then you can negotiate.

Auctions charge a premium, too. Usually it's 10% to the seller and another 10% to the buyer. That's not a trifling amount, but it can work if the piece sold is sold at a price that is considerably under its retail value. This happens all the time at auctions. Again, you just need to know the right price to pay and don't bid above that.

The best venue is a private sale. I've just bought a few great pieces from a private collector who ran into financial difficulty and wanted to raise money fast. By buying privately, you can sometimes get paintings at rock bottom prices and with no commissions. Again, it's critical to know the right price.

On a side note: it is remarkable how many collectors pass by antique shops and estate sales. This is an environment outside the gallery scene or auction house that may house bargains and sleepers. That grimy oil landscape (which can be cleaned) could be a hidden gem. I came across many items in my collection this way.

When buying investment-grade art, be cautious. There are lots of forgeries in the market, especially of popular artists like Salvador Dali and Wilfredo Lam. You can't protect yourself from this problem by buying only pieces that have good sales records. Buy from reputable dealers and auctioneers. Ask for a complete provenance. And you can always have the work looked at by an expert if you have any doubts.

Tom: Do you have anyone you can recommend?

Mark: For matters like that, I go to my friend Roger Hurlbert. This guy knows everything about art. He has been an art history professor for over thirty years and wrote a fine arts column for The Sun Sentinel for twenty years. He has also been an art collector and a buyer for clients for decades. He has literally attended hundreds of exhibitions, met and interviewed tons of artists, and personally dealt with more dealers and gallery owners than anyone I can think of. In fact, we should publish his contact information in this piece.

Tom: Ok, we will. Well, thanks Mark. We'll see you next week.

Mark: My pleasure.

Opinion: Retirees to Be Hit With Social Security Cuts

37 percent say they'll never retire and will work until they are too sick or die. What's the solution to this?
Building savings and creating a retirement plan can improve the retirements for those now in their working years, says Laurie Nordquist, head of Wells Fargo Institutional Retirement and Trust

Meanwhile, a 59 percent majority of the middle class say paying monthly bills is their chief day-to-day financial concern. That's up from 52 percent last year. Saving for retirement takes second place, with 13 percent calling it a priority. Overall, 42 percent say saving for retirement and paying bills concurrently is impossible.

Thus 48 percent don't have confidence that they will be able to save enough for a comfortable retirement.
The survey of 1,000 middle-class Americans between the ages of 25 and 75 was conducted July 24 to Aug. 27. "For the past three years, the struggle to pay bills is a growing concern, and the prospect of saving for retirement looks dim, particularly for those in their prime saving years," Nordquist says in a statement.
"Having a plan and saving not only creates more hopefulness, but it produces results that can grow and lead to a solid retirement."

In the survey, 52 percent of the middle class say they are confident they will save enough for retirement. But only 29 percent say they have a written plan. Among those who have a written plan, 70 percent feel confident about their retirement, while only 44 percent of those who don't have a plan feel confident. Of those who have a plan, 91 percent say they have willpower to save, compared with 75 percent for those who don't have a plan.

In the key 40-to-59 demographic, those who say they have written a plan also say they have saved $63,000 for retirement, while those who say they haven't written a plan say they have saved $20,000. "This data so clearly shows what a difference a retirement plan makes in that people who have a plan have saved three times what those without a plan have saved," Nordquist explains. "A plan instills confidence and gives people the discipline to stick with their objectives and reach their financial goals."

As for the respondents who don't have a written retirement plan, 45 percent say it's because they have "so few financial assets." One-third of the middle class say Social Security will be their "primary" source of income in retirement.

"People say they don't have a plan because they don't have enough money," Nordquist notes. "The most important message I can impart about retirement is that planning is for everyone. It is the foundation for consistent savings, which can allow people to have the nest egg they will need in retirement and can also help people determine the role Social Security will play in their retirement."

Further, 40 percent say a large unexpected healthcare expense represents their biggest retirement fear, while and 37 percent list the loss or reduction of Social Security as fear No. 1. As for the stock market, only 24 percent of the middle class view stocks as a good investment for retirement. Meanwhile, 45 percent say "the stock market doesn't benefit people like me."

A majority (52 percent) say they shun stocks because "I am afraid to lose my nest egg in the ups and downs of the market." Surprisingly enough, fear of the stock market is more intense among those aged 25 to 29, with 56 percent of them afraid they would lose their savings in equities. Asked what they would do with $5,000 given to them for retirement investment, 58 percent of people in this age group say they would allocate it to a saving account or certificate of deposit.

The reluctance for stocks may stem partly from the fact that 51 percent of the middle class say they have little interest in learning about investing. Nordquist is struck by the fear of stocks. "The middle class just isn't making the link between being invested and the potential growth of their savings, but on top of this fear is apathy. There is no interest in learning more about investing," she states. "Fear and apathy are a bad combination, whereas knowledge about saving and investing is empowering. We've got to move people to this mindset." 

By Bob Carlson

IRAs seem to be simple things when we open them and begin annual contributions. Over time, as we move from the accumulation years, trickier rules kick in. This is where many people inadvertently lose portions of their nest eggs to taxes and penalties. Others simply miss opportunities they didn't know were available. Here's a review of some opportunities to consider and traps to avoid.

Establish a Roth for a youngster. A child or grandchild who worked over the summer or part-time during the year could use some encouragement and a bonus. You can contribute to a Roth IRA for the child as a gift. In 2013 you can contribute up to the lower of $5,500 or what the youngster earned from working. (Investment income doesn't count.) This amount will be a gift that qualifies for the annual gift tax exclusion of $14,000.

The Roth IRA, even if you make only one contribution, can compound over the years to provide a nice foundation for retirement. Then, money can be withdrawn tax-free. Or, the youngster can withdraw the contributions tax-free any time, such as to pay for college or use as a down payment for the first home.

Check your IRA custodial agreement. Your IRA is supposed to be protected from creditors under the bankruptcy law. But the protection doesn't apply if you committed a prohibited transaction. Many people are inadvertently committing prohibited transactions with their IRAs that void the bankruptcy protection, according to a recent court decision.

Here's how a technicality can cause trouble for an IRA. The IRA owner opened an IRA with a major brokerage firm. He had no other accounts at the broker and didn't intend to use margin lending in any account, but he didn't check the box on the application to decline margin lending that was standard with that custodian. The agreement also provided for cross-collateralization, meaning that if he took out a margin loan and couldn't pay it from other assets, the IRA could be used to pay the loan. This, according to the court, amounted to pledging the IRA to back a loan, which is a prohibited transaction.

He eventually won on an appeal, where the court ruled there isn't a prohibited transaction unless a loan actually takes place. But it was a long, expensive process, and there's no guarantee other courts will rule the same way. To be safe, you should avoid any IRA agreements that provide for cross-collateralization of loans. Many IRA custodians are in the process of removing such language from their documents.

The IRS is monitoring contributions and distributions. A congressional research report found that many IRA owners are violating either the contribution limits or required minimum distribution rules. The IRS could generate a lot of money in taxes and penalties by more closely enforcing the rules. So, you have to be sure you don't contribute too much to IRAs during the year and that you withdraw the right amounts.

Of special interest to my readers are the required minimum distributions rules after age 70½. The investigation found that a lot of people don't take the required minimum each year. The penalty for that is 50% of the amount you should have withdrawn but didn't. For a refresher on how to calculate your RMD and the deadlines, see back issues of Retirement Watch or IRS Publication 590.

Inherited IRAs. Be sure your heirs have good information about how to handle an inherited IRA, because the rules can become very tricky.

For example, when an heir decides to move an inherited IRA to a different custodian, the rollover must be directly from one trustee to another. With other IRAs, you can receive a check from the IRA custodian and take up to 60 days to deposit the same amount with the new custodian. But the 60-day rule doesn't apply to inherited IRAs. If it's not a trustee-to-trustee transfer, the entire amount is treated as a distribution even if you deposit it in a new IRA within 60 days.

Also, September 30 of the year after the original owner's passing is an important date. By then, the IRA custodian needs to be notified who the beneficiaries are and who is the "designated beneficiary,” whose age is used to determine required distributions. Also, if a non-individual, such as a charity, a trust, or the estate, was named as a co-beneficiary, the entire IRA must be emptied within five years. But if that beneficiary is paid its full share by the Sept. 30 deadline, it no longer will be a beneficiary. Required distributions then are scheduled over the life expectancy of the oldest beneficiary.

There are a host of other things heirs need to know about inherited IRAs. Do your research and get the facts before your next move turns out to be a surprise.

By Bob Carlson



The 4% rule was generated from attempts to answer the question: How much can I safely withdraw from my retirement portfolio each year without taking a high risk of running out of money? Studies using databases and Monte Carlo computer simulations derived what became a consensus conclusion among financial planners. A retired person or couple can withdraw just over 4% of a nest egg the first year, and then the next year can increase that dollar amount by the inflation rate for the previous year. After that, the dollar amount of withdrawals can be increased for inflation each year.

In the studies, under these terms a standard diversified portfolio (usually 60% stocks and 40% bonds) would last at least 30 years 90% or more of the time. The most difficult times for the strategy were when someone retired early in an especially negative economic period, such as the late 1960s and early 1970s.

Despite the professional consensus for the 4% rule, for the most part people draw down their nest eggs more rapidly. Younger retirees tend to withdraw money at a faster than older people are required to under the IRS's required minimum distributions, according to a recent survey by the Employee Benefit Research Institute. Other surveys show that people tend to believe they safely can withdraw 7% to 10% annually without a problem. Perhaps that is one reason why most people in the U.S. die with only about $10,000 in assets to their names, regardless of their financial condition entering retirement.

I've always warned my readers to be cautious about the 4% rule. For some people, even 4% is too high a withdrawal rate, while for others it is too low.

The rule has many shortcomings. Its measuring period ends at 30 years, which is too short for more and more retirees. You also can change the results by altering the investment mix or strategy. Many people won't have 60% of their retirement portfolios in stocks and so probably should have a withdrawal rate lower than 4%, because they'll earn lower returns. Others have more balanced portfolios or other differences in strategy that justify a higher withdrawal rate because of higher investment returns.

Also, while 90% or higher sounds like a good confidence level, it's really not when you live in those few periods when the strategy fails. During those periods, the failure rate is 100%. Also, the confidence level doesn't answer two key questions: By how many dollars and how many years does the strategy fall short? The extent of failure makes a big difference, because it tells whether you can avoid failure by making small adjustments along the way or need a major overhaul to save your retirement.

More people are raising questions about the 4% rule. In addition to the above criticisms, they're pointing out that we've been in a period of low interest rates and below average investment returns for some time, and that is likely to continue for a while yet. Using historic investment return patterns isn't relevant to today's retirees. I've seen some studies argue a more appropriate safe withdrawal rate today is 1% to 2%.

For most retirees, however, the underlying approach is wrong. The 4% rule and its methodology are good benchmarks or starting points, but they aren't the final answer. People simply don't spend money the way it is modeled in these studies.

Instead, you should have a more dynamic and flexible spending plan. I usually recommend you consider two strategies, or combine them.

One strategy is what I refer to as the Yale Endowment Strategy, because it is based on the distribution strategy of the Yale University Endowment. The university wanted distributions to fluctuate somewhat with investment returns, but it wanted changes to be gradual. The university can't plan its budget if contributions from the endowment are as volatile as the investment markets.

They came up with a two-part formula. One part is very similar to the 4% rule, and it determines 70% of the distribution. The other part determines 30% of the distribution and fluctuates with the size of the endowment fund. So, the second part will rise or decline in line with the net effect of contributions, distributions, and investment returns. You can adapt a version of the Yale University Endowment formula as your retirement spending plan.

The first step is to set the withdrawal percentage for the first year of retirement. Let's say you choose 4% of the portfolio's value. Using the principles of the Yale Endowment, for the first year you spend 4% of the portfolio's starting value.

After the first year, use two separate formulas. The first formula is last year's distribution amount increased by the inflation rate for the last year. Multiply that amount by 70%. The second formula is your initial withdrawal rate multiplied by the fund's value at the end of last year. Multiply that result by 30%.

Add the two results together to get the distribution for the year.

Here's an example. The withdrawal rate is set at 4%, and the initial portfolio value is $600,000. The first year's withdrawal is $24,000. After the first year, the portfolio's value is $604,800 (The initial value minus the first year's spending plus a 5% investment return). Inflation was 2%. Using the first formula, 2% inflation is added to $24,000, then multiplied by 70%. That result is $17,136. Under the second formula, $604,800 is multiplied by 4%, and then by 30%. The result is $7,258. Add the two amounts together and the second year distribution is $24,394.

Under this formula, spending fluctuates with the markets and inflation, but the changes are not as volatile as the markets and inflation are. If the markets experience an extended decline, spending declines gradually. During bull markets, spending increases faster than inflation but not as rapidly as the portfolio increases. That allows you to enjoy some of the excess gains of a bull market, but the spending does not rise enough to absorb all the investment gains. That leaves a cushion against the inevitable market downturns and allows you to have a smoother spending pattern.

The other strategy is based on actual lifetime spending patterns as revealed in Department of Labor surveys. I call this a natural spending cycle.

Spending varies by age. Even after retirement there are several cycles. For most people, annual spending peaks around age 50 and then steadily declines, according to the Department of Labor's Consumer Expenditures survey.

A spending model that accurately reflects the historic spending of Americans divides retirement into three phases. In the first phase, spending is highest (though as indicated, still lower than at age 50) because the retirees are healthiest and most active. They tend to have some pent-up desires for activities and spending. It's not unusual for retirees in the first few years to spend as much or more than they did during their last working years.

In the second phase, they slow down a bit physically and have checked off a lot of items on that Bucket List. So, in this second phase spending is less than in the first phase of retirement. The amount of the reduction varies among retirees, but overall there's a clear reduction. In the third phase, after age 75 or so, spending slows again. The spending reduction after age 75 can be significant, because many people are physically less active or aren't able to do things they used to.

Based on this data, retirees can plan for a three-stage spending cycle.

The first stage can be referred to as the honeymoon period of the first few years. This is when the retiree has pent-up demands and also is relatively young and healthy. After that period, the lifestyle becomes more normal and regular. Spending settles at a level that is lower than during the initial years of retirement. Sometime after age 75, spending is likely to downshift again.

The Department of Labor studies indicate that spending by those over age 75 is 25% or more below that of younger retirees.

This pattern of spending, of course, is very different from that assumed in the 4% safe spending rate model and some other retirement planning models. What the 4% rule is really good for is telling you whether the level of spending you plan for the first year of retirement is reasonable. If your planned nest egg distribution the first year of retirement is well above 4%, review and reconsider your spending plans.

There might be a fourth spending stage in which major medical expenses or long-term care expenses are incurred. Often when this occurs other living expenses decline. The total expenses incurred by the retiree during that period depend on the extent of insurance coverage and the level of care needed. It also depends on whether there is a spouse who needs to remain in the marital home while the other spouse enters a long-term care facility. This is why medical and long-term care expenses are the wild card in retirement planning.

By Amy Calistri
 
Most people don't have a million dollars to invest. It doesn't matter. What I'm going to show you applies no matter how much money you have to invest -- whether it's $100 or $100 million. But there is a sad truth about a million dollars. Even that heady amount wouldn't earn you much in regular income -- if you put it to work in the "traditional" ways.

$560. That's the most you will get each month if you put that $1 million into a 1-year CD, which, according to BankRate.com, is yielding just 0.67%. For comparison, the average Social Security check is $1,266 per month. In other words, you'd earn more from Social Security than you would from $1 million.

It's a similar story with a number of other investments.

10-year Treasury Note -- Sitting near historically low levels, if you loaned the federal government $1 million, with annual yields at 2.9%, you'd only earn $29,000 a year... or $2,900 a year on $100,000.

Savings Accounts -- With a maximum yield of 1%, the absolute best you'll get from a savings account according to BankRate.com right now is $10,000 a year.

Corporate Bonds -- If you invest in the right investment-grade corporate bonds, you could net roughly 3.5% a year on $1 million -- generating $35,000 a year in income. Not a bad amount of money to bring in each year, if it didn't require a million-dollar investment. A portfolio of $100,000 would earn just $3,500 per year.

S&P 500 -- You could also simply buy an index fund with your million dollars. With an average dividend yield of about 2%, you'd earn about $20,000 a year if you invested alongside the S&P 500.

The sad truth is that even with a million dollars, your options for income with "traditional" investments aren't very comforting. But there is some good news.

As of now, I'm earning $16,750 a year (or almost $1,400 a month) on a portfolio of securities currently worth $250,000 using my "Daily Paycheck" strategy. If my portfolio were worth $1 million -- four times as much -- I'd be earning $67,000 per year. That's considerably more than you can earn from Treasuries or CDs or the broader market.

Of course, there's a big difference between a portfolio of dividend payers and simply putting your money in a CD, Treasury or even a broad index fund that tracks the S&P. I'll be the first to tell you that it's hard to match the safety of a U.S. Treasury bond if you hold it to maturity. But you might be surprised how stable a "Daily Paycheck" portfolio can be.

Let me give you one example...

You may remember the market sell-off that occurred back in August 2011. All the headlines were dour... investors around the world were anxious about a potential default by Greece, high oil prices, budget problems in the United States and elsewhere and soaring unemployment. The S&P 500 lost 5.7% in the month of August alone; a major move for one of the world's most recognized indices.

My portfolio? Despite all the turmoil, my account fell just 1.0% during the month. That's roughly one-sixth the amount the broader market fell.

That's not to say my portfolio will always hold up as well, but I do like my odds. After all, the last time I checked, the S&P wasn't throwing off thousands of dollars in income each month, helping to smooth out returns no matter which way the market moves.

Your wealth is in imminent danger!

By Phil Ash


Thirty years ago, Ronald Reagan gave this insidious robber a name: "the Thief in the Night". Now this stealthy crook is out to steal 10% of your wealth this year and 50% by 2018.

Four warning lights are flashing on our financial dashboard, signaling that we've entered a dangerous era of "Preflation." You may not be familiar with the term, but I think you get the idea. It probably wouldn't surprise you to discover that your money's buying power is being stolen while you work, play and even while you sleep.

In this current period of Preflation—i.e., the steady run-up to what
will likely be 1970s-style double-digit inflation—you're being robbed
every hour of every day.

It doesn't matter how smart an investor you are. Even worse, inflation invades like a cat burglar—so quietly you barely notice until you realize HALF YOUR BUYING POWER HAS VANISHED in less than five
years.

It's happening right now and it's just the beginning. Sooner than most folks imagine, thousands of investors will look back and wonder "why didn't we recognize the blatant theft of our wealth while it was happening right in front of us?"

Here's why: "The Thief in the Night" is being aided and abetted by one of the biggest lies in our nation's history.

The "422% Lie" Deliberately Spread By Our Own Government
The four indicators flashing red today warn of an inflationary surge that will attack your wealth and deal a nasty wallop to anyone who depends on investment income. These indicators are the classic predictors of soaring inflation. In fact, they have preceded numerous bouts of hyperinflation in the past century.

They are: (1) persistent global unrest and multiple ongoing wars; (2) intense international competition for critical commodities; (3) massive government spending; and (4) continuing currency debasement (in the U.S. we call this QE 1, 2 and 3.)

I suspect these conditions have a familiar ring. In fact, they're the day's top headlines—and they don't bode well for investors and savers. Ultimately, should these conditions persist (as I believe they will), many folks will find themselves **running out of money in their lifetime.**

Slow-Motion Robbery Is Still Robbery

At the moment, we are in a period of "Preflation." Today's inflation is like a jet on the tarmac powering its engines prior to takeoff. Rather than roaring down the runway on a straight line to hyperinflation, there will be speedups and slowdowns.

This volatility, as in the past, is distracting investors until the worst possible time—when it's too late, **after** they've discovered the Thief in the Night has robbed them blind.

The time to protect your wealth is NOW.

You can't trust the government's reporting of the actual cost of living. As you're about to discover below, the official CPI number is one of the most shocking examples of government "disinformation" in our history. You can't stop inflation yourself but you CAN do something besides helplessly watching your money erode. You can even make double-digit profits if you follow exactly the right strategies.**

I believe that we are perched on the precarious limb of Preflation—though we both doubt one investor in 10 realizes it. Don't look for headlines warning, "Inflation Is Back." Rather, there will be an awful awakening one day down the road when millions of investors realize that inflation—drip by drip—has drained away their wealth.

As obvious as it might seem to you and me, preparing for inflation is a step that most people will never take. Because most people like to pretend that the government has things under control.

Surely the SEC was looking out for investors, making sure that the dot-com start-ups raising billions of dollars were legitimate businesses and not run by fraudsters, right? Surely regulators were preventing banks from making no-money-down loans to people with no jobs and allowing them to buy multiple homes, right? Surely our own government would never recklessly spend so much money that it had to run the printing presses day and night, sapping the value of our savings and threatening the very existence of the dollar. Right?

A Cruel Lie
At this very moment, thousands of Americans believe their investments will reward them with a rich retirement—unaware that the buying power of their nest egg is melting away. And their own government is NOT warning them. Instead, it's feeding them false numbers and disinformation.

Take the retired small business owner who believes his hard-won nest egg of $400,000 will actually be worth $400,000 in buying power. In fact, it's losing almost 10% of its value this year and is likely to be worth 50% less in five years.

A soon-to-be-retired couple would be stunned to discover the income from their $1 million portfolio will buy only HALF as much before the decade is over.

In short, the U.S. government's repeated assurance that inflation is below 2%—and thus nothing to be concerned about—is a lie of breathtaking magnitude.

Because in truth today's REAL inflation rate is closer to 10%—a staggering 422% higher than the official number our own government is hoping we'll believe. Here are the facts: The "official" inflation rate according to the government is 1.8%. But the "rea" inflation rate is actually 9.4%—a staggering 422% higher.

Of course, we all know politicians tend to lie—and lie easily. It really doesn't matter if they're Democrats or Republicans, liberals or conservatives; most of them play fast and loose with the truth. But it DOES matter when they lie about something such as inflation—you need to know the truth about.

Imagine visiting a doctor who lies to you about the severity of an illness. Well, our country's money is "sick"
and threatening your future—and the quacks in Washington are telling you, "Don't worry, you're fine!"

How the Lie Is Spread
It begins, as you might expect, deep in the bowels of the federal government. Down here, the "official" inflation rate, known as the core Consumer Price Index (CPI), is concocted and issued by the Bureau of Labor Statistics (BLS). (As you'll see, the term "core" is brilliantly devious—it allows
politicians to finagle the inflation number any way they wish.)

Yes, the BLS bureaucrats themselves are supposedly "non-political." Yes, the CPI number disseminated by these government bean-counters is the one you almost always read in the paper or hear on TV. To most Americans, the CPI is the trustworthy rate of inflation, the gospel truth. After all, didn't their own government determine the number and their favorite anchorperson confirm it on TV?

But is the figure really credible? You be the judge. The latest BLS release—I have it right in front of me—puts the core CPI at just 1.8%. That's quite low by historical standards. However, there are strong reasons you should regard this number with extreme skepticism. Chiefly because the core CPI—the "official" rate of inflation—has been brazenly manipulated over the past three decades for political
purposes.

For example…

If the rate of inflation were still calculated (as it should be) the way it was back in 1980, it would be a staggering 9.4% and angry citizens would be storming Washington with pitchforks. The graph below reveals the truth.

Note: The red line indicates inflation as calculated by the formula the BLS used in 1980. The blue line represents today's formula.

As you can see, inflation surges during the Ford and Carter administrations, then drops sharply during the Reagan years, with the U.S. enjoying the longest economic boom in its history.

However, when Reagan departs the White House, REAL inflation (the red line) begins its steady rise again—but the official CPI version (the blue line) remains curiously lower than the red line.

Why the divergence? Answer: Political manipulation of the core CPI. Count on it! If the Gipper were alive today, he'd be thundering. "Mr. Obama, tear down this phony CPI!"

After all, how can you trust a CPI that excludes energy costs simply because they are "too volatile"? How can you trust a CPI where tofu replaces steak when the price of beef goes up?

Yes, that's what they do at the BLS when the real inflation numbers are politically inconvenient! They call it "substitution." I call it a scam.

The game wasn't always rigged this way. Originally, the CPI was determined by comparing the price of a FIXED basket of goods and services at two points in time. So there was no way to fudge it. But now, if the price of steak goes up and people eat tofu instead, the BLS reduces the weight of steak prices in the CPI formula. Voila, less inflation!

The Fox Is Guarding The Henhouse
Think about it: The politicians and bureaucrats who create inflation in the first place also get to decide how to measure it. If that's not a conflict of interest, I don't know what is. If we were just talking about abstract statistics, I wouldn't care. But this deception is doing real harm to millions of Americans. These phony
low-ball CPI numbers not only shortchange anyone who receives payments tied to the cost of living, but they're hiding a cancer in our economy that will eat away at every asset you own. Let's call this practice what it really is: disinformation spread by a government addicted to racking up trillions in debt.

I live in Washington, about four miles from Capitol Hill. My neighbors on both sides of the block are Congressional staffers and campaign hacks. These D.C. denizens are, first, last and always, "men and women of government" and their Number One goal is to create and market more of the only "product" they know: "government".

Which requires them to spend and spend—even if they have to print money by the trainload. And that's the rub. It's an ironclad law: If you print too much money, it loses value. The more dollars our government prints, the less each new dollar is worth. Why do you think a dollar from 1942 is worth just 7¢ today?

The Gas Pump Isn't Lying

Just five years ago, the average price of gasoline was $1.84 a gallon. Currently, gas costs about $3.60—up more than 95%. In some cities, signs read $4.00 a gallon. But not to worry. Gasoline, which is energy-related, isn't calculated into the core CPI. Nor is the 42% more you've been paying for electricity since 2002. (Like the proverbial tree that falls unheard in a forest, if a price increase isn't counted in the CPI, it never happened—at least according to the government.)

Are you paying for a child's or grandchild's college education? Since 1986, the cost has risen a mind-boggling 598%. Since 2002, you're paying:

26% more for milk…

73% more for eggs…

90% more for coffee…

39% more for a loaf of bread…

56% more for turkey…

44% more for spaghetti…

143% more for margarine…

61% more for ground beef…

The average increase over the past 11 years for each of these everyday items: 48.3%. And that's just for supermarket staples. What about something BIG—like healthcare?

Since 2002, healthcare costs have more than DOUBLED for American families, according to the independent Milliman Medical Index. As of 2011, counting both employee and employer contributions, the total healthcare costs for a family of four have soared to over $19,000 per year—up more than $10,000 in just nine years. This has already placed a huge burden on both employers and workers. But
it may become worse—far worse.

According to a new report released by the U.S. House Energy and Commerce Committee, Obamacare could raise the average health insurance premium by nearly 100%. Scary? Of course it is. But what should frighten investors out of their skin is what creeping inflation can do to their investment income.

The Retirement Wrecker
If you've never invested when inflation is high, it's a house of horrors. Just ask anyone who tried it in the 1970s. Most of your stock gains will be steadily washed away, like castles in the sand. If you're retired and dependent on income, inflation could decimate your lifestyle. That's no exaggeration—just fifth-grade arithmetic.

Today's 9.4% real inflation rate makes mincemeat of the pathetic returns on Treasuries, CDs and money market accounts. It even wipes out solid 4%… 6%… and 8% dividends on high-yielding stocks (if you're lucky enough to have them).

Imagine you're retired with a nest egg of $750,000. Let's say you've been earning about 4% on your money.
That's $30,000 of income per year you can take out without touching your principal—and it's crucial to maintaining your standard of living, right?

The bad news is that even at the government's phony 2%-to-3% inflation rate, that $30,000 is actually worth only $29,100 when you spend it at the end of the year, and it will dwindle to about $22,000 just 10 years from now. But that's ONLY if you believe the official CPI—which is like swallowing financial hemlock.

Remember, REAL inflation as calculated using the BLS's own 1980 formula is 9.4%… meaning your money's buying power is shrinking THREE TIMES FASTER than the government admits. Look what happens to $30,000 of income when inflation hits 9.4%.

How to Fund Your Own Worry-Free, 100% Tax-Free Retirement
This super-safe "off the IRS grid" account can't go down in value, has paid uninterrupted dividends for over 100 years, and currently earns five times more than your bank savings account and CDs.

By Tom Dyson

 
Over the past 10 years, I’ve examined almost every type of safe income investment in existence. So I must admit, when I discovered a secret investment account used by more than 4,000 banks, I was a little shocked.

That’s why top bankers and Fortune 500 executives in the know have quietly been taking advantage of opportunities like these for years now… safely earning generous yields on their money—5.5% on average—while everyone else has been stuck chasing low-paying CDs, bonds, and dividends. (Tax-free returns of 5% may not sound like much, but if you’re in a 35% tax bracket, that’s the equivalent of earning close to 8% in your regular taxable brokerage account).

This Has Become My Single-Largest Investment
We’ve coined a term for this strategy, “Income for Life.” Today, my wife and I have more than 20% of our total net worth allocated to the Income for Life strategy and we’re still adding money to it. We have made it the foundation of our retirement strategy. I’ve even opened up accounts for each of my three children, and because of this decision, they’ll now be financially set for life. (My oldest son, for example, will have about $4 million in his account by the time he retires).

Today, I’m going to share with you everything I know about this strategy... and explain how you can set it up for yourself.   With this strategy, there is virtually no risk of principal loss. Like a bank account, your money will never go down in value.   

The Safest Place on the Planet for Your Money
We’re putting our money into a special type of dividend-paying company. You’ve probably never heard of these companies, even though they’re among the oldest in America. Most financial professionals haven’t heard of them, either. I made a list of 35 of these special companies doing business in America today. The oldest company on the list is 177 years old.

The average age of these companies is 106 years. Nineteen of them have been in business for more than a century.   These companies are rare. No one has formed one in a very long time (worldwide), and no new ones are likely to ever be formed again. These companies do NOT trade on the stock market. Their values don’t fluctuate like traded stocks. They don’t use debt. Acquiring one of these companies is illegal. This is why Wall Street has no business with these companies. And it’s why you’ve probably never heard of them.

And, of course, they generate tons of cash, and they pay large dividends to their owners every year.

The World’s Safest Industry
The companies I’m describing are a special breed of life insurance company. Now, I know what you’re thinking. Most financial gurus say life insurance is a bad place for your money but please bear with me.
 
What we discovered are not your run-of-the-mill insurance companies. I’ll explain why they’re different from regular life insurance companies in a moment. In fact, these companies behave much more like savings or investment accounts than insurance companies. However, the government restricts the advertising  these companies can use.
 
Okay, so first let me explain why life insurance is such a great industry for safety-conscious investors...    Life insurance is one of the oldest financial products in existence. The sale of life insurance in the U.S. began in the late 1760s. Life insurance has proven itself through two world wars, a revolution, a civil war, the Great Depression, and numerous other recessions. There hasn’t been a single life insurance contract default in the last 300 years in America.  

Can you think of any other product that has proved itself like this? Popular investment products today include mutual funds, ETFs, 401(k)s, and IRAs. None of these products have been around longer than a few decades.    Life insurance is a recession-proof business. People need it regardless of what’s going on in the economy. It’s also a mathematical business, like running a casino, but with even better odds. As long as you price your risk correctly and you don’t do anything stupid with the premiums you collect, you won’t lose money over the long term.   

Of all of the different types of insurance companies, life insurance companies are the safest. Consider common insurable events, such as fires, earthquakes, hurricanes. They’re rare, so scientists have fewer examples to study. The damage claims can be astronomical. And you can’t predict when these types of events will occur. Now consider life insurance. A person’s death is certain. Life expectancy is predictable for large groups. There’s plenty of data. And the insurance company knows what the payout for death claims will be. 

Demand for life insurance never changes. Even in a Great Depression or an economic boom. This industry doesn’t have a business cycle. Statistics drive profits in this industry. As long as their equations are accurate—which they are, because they’ve been using them successfully for decades—they make predictable profits. 

Insurance companies hire data-crunching experts called “actuaries.” Actuaries study this data. Then they create life insurance policies for the insurance company’s customers. As long as the actuaries do their jobs and the insurance company has enough customers, you can virtually guarantee it’ll be profitable. During the Great Depression, more than 9,000 banks went bankrupt. According to a hearing of the Temporary National Economic Committee in 1940, only 2% of the total assets of all life insurance companies in the U.S. became impaired during the Great Depression from 1929 to 1938.   

Because the life insurance industry was so strong, it played a big part in keeping the country afloat and helping many troubled businesses get back on their feet. One example is department store mogul James Cash Penney. The great stock market crash of 1929 almost wiped out J.C. Penney. He was able to borrow funds from his life insurance company against his policy to keep his small department store chain in business through the Depression. Today, JCPenney has 1,000 stores and is worth $3.4 billion.   

The same pattern appeared after the stock market crash of 2008-2009. We examined several of the safest insurance companies and found that less than 1% of their investments were listed as “nonperforming” during the financial crisis. Not only did the recent financial crisis not affect these insurance companies, but they also continued their century-long track records of paying dividends. If I had to bet on a group of companies being around 100 years from now, I’d choose these.

But, as anyone who invested in MetLife stock knows, not all insurance companies are equal. MetLife’s stock crashed 80% between 2008 and 2009. For our Income for Life strategy, we’re interested in only a tiny, much safer subset of the life insurance industry.

An Elite Subclass of Life Insurance Companies
There are two types of life insurance companies: stock life insurance companies and mutual life insurance companies. 

Stock life insurance companies are life insurance companies that trade on the stock market. They issue stock, and they trade like any other public companies. Hartford, MetLife, and Prudential are all examples of stock life insurance companies. So are American National Insurance Company, Kansas City Life Insurance, and National Western Life Insurance.

Mutual life insurance companies do not trade on the stock market. They don’t have shares, and you can’t buy into them through the stock market. They’re like credit unions, except the policyholder is an owner in the insurance company. Mutual life insurance companies are much safer than their “stock-issuing” cousins.   For one thing, because mutual companies have no shareholders, Wall Street analysts and money managers cannot pressure management to make short-term decisions. The companies are free to pursue long-term strategies. As a result, these corporations are known to be among the most conservatively managed companies in the world.  

Stock life insurance companies have millions of shareholders. Many of these shareholders are powerful money managers. They want higher returns on their investments. It encourages the management of stock life insurance companies to take risks. 

Mutual life insurance companies serve only one master... the policyholder. There are no outside shareholders to split profits with. No Wall Street. No quarterly earnings estimates. No conference calls. No insider trading. No takeovers. No message board gossip. No stock options. Think of mutual life insurance companies as cooperatives, or not-for-profit clubs.

A bunch of people have come together and pooled their money to provide life insurance for themselves.   Safety, stability, and good service are the only goals of the insurance company. Mutual insurance companies still generate profits. But these get distributed back to all of the members each year as dividends. We’ll get to dividends in a minute.  

You’re more likely to see stock insurance companies borrowing money, advertising, and using other aggressive growth strategies. They’ll invest in riskier assets to appease hedge funds or large shareholders with higher returns. They’re also more likely to fudge their quarterly earnings releases to make their results seem better. In sum, mutual insurance companies are one of the safest places on the planet to put your money and one of the highest-paying places too.  

In the rest of this report, I’m going to explain how you can use mutuals as “secret savings accounts” that offer the guaranteed growth of our money for the REST OF OUR LIVES. Right now, they’re paying rates of up to 5% tax-free per year. (This would increase, should national interest rates rise.)   

Most Life Insurance Is a Bet on Your Life
The life insurance business started as a wager. On June 18, 1583, a London man named Richard Martin placed a bet with a group of merchants. The bet was on the life of another man, named William Gybbon. Martin put up 30 pounds. If Gybbon died within one year, Richard Martin would make 400 pounds. But if Gybbon did not die, Martin would lose his 30-pound stake. Gybbon died just before the end of the year. But the merchants refused to pay Richard Martin his winnings. So Martin took them to court.

The court ruled in favor of Richard Martin. And the merchants’ payment to Richard Martin became the first official life insurance payout. The modern name for this type of life insurance agreement is a “term” policy.    Putting the above example into contemporary terms, Richard Martin was the “policyholder” and “beneficiary” of the policy. The 30 pounds he paid was his “premium payment.” The merchants were the insurance company. And we’d call William Gybbon the “insured.”   

Term insurance is just a simple bet. It’s the policyholder betting against the insurance company. The policyholder is betting on a death, usually his own. And the insurance company is betting on survival. If the insured person dies in the allotted time or “term,” the policyholder wins the bet (and the beneficiary gets the money). If the insured survives, the insurance company wins the bet and the policyholder loses his stream of payments.  

Please note, buying term life insurance is a bet the policyholder expects to lose, but it’s still a bet. But he’s willing to take this bet. That’s because it’s cheap. And he can provide his family with financial protection if he dies. Today, term policies are the most popular type of insurance policy, representing just fewer than 40% of all life insurance premiums paid in America each year. (Today it’s most common to buy 10- or 20-year term policies).  Here’s a fact that may shock you... Only 3% of the term insurance contracts conclude with a payout. What that means is the insurance company “wins” the bet 97% of the time!  

A Quick Homework Assignment   
I want you to figure out how much a $1 million life insurance policy would cost on your life, valid for the next 10 years. It’s important you do this exercise, because it’ll give you a much clearer understanding of how our Income for Life strategy works. To do this, click on this link, enter your state, birthday, coverage amount ($1 million), term amount (10 years), if you smoke, your health class, and gender. Then click on the “Get Instant Quote” button. It’ll take you about 30 seconds.  

If you’re younger than 60 and in good health, a 10-year, $1 million life insurance policy will cost you $3,000 per year, or less than $30,000 for the 10 years.   It’s cheap because it’s extremely unlikely you’ll die in the next 10 years (3% of the time) and highly likely the insurance company will win the bet (97% of the time).  

The Savings Account No One Knows Exists
Early in the 19th century, insurance companies invented a new type of insurance policy. They called it permanent insurance. Permanent insurance is an insurance contract that remains in force until the insured dies. It has no term. It’s permanent. Because there is a 100% chance that the insured will die, permanent life insurance is NOT a gamble; it’s a certainty. You buy $1 million of permanent life insurance. As long as you don’t cancel the policy and you make your premium payments, the insurance company is going to pay out $1 million someday.

To pay out $1 million when you die, the insurance company must accumulate at least $1 million while you’re living in order to make the payout and not go out of business.  It accumulates this money by collecting premiums from you each year. These premiums build up over time, and they generate interest—which builds up and compounds too. By the time of your death, you’ve built up plenty of money at the insurance company so it can pay your policy off. 

To reinforce this point: In order for the insurance company to pay out your life insurance policy when you die, it must first accumulate this money while you’re alive. It does this by collecting premiums from you each year and investing them.

When you boil permanent life insurance down to its basic cash flows, first you make a series of payments to the insurance company while you’re alive. The insurance company collects these payments, grows them, and then gives them back to you at the end of your life. In other words, permanent life insurance has almost nothing to do with life insurance. It’s a way while you’re alive to save money that you get back when you die. Do you see that? 

Permanent life insurance is a certain payment to you from the insurance company in the future. This money exists because you’ve saved it up—and the insurance company has grown it—over many years. In this way, permanent life insurance has nothing to do with life insurance. It’s about saving money. It’s a glorified bank savings account with a much higher interest rate. In contrast, term life insurance is a wager with the insurance company whether or not you’ll die in a given period. Term life insurance is not a vehicle for saving money. It’s a way to protect your family in case you die unexpectedly.

The Opportunity
As you can see, a permanent life insurance contract is really a strategy for saving up money over time so that the insurance company can pay out the full amount when you die. Here’s the beautiful part: While you’re accumulating money with the insurance company, your money earns interest.

Due to special tax provisions for insurance companies, this return is tax-free. When you buy your policy through a mutual life insurance company, you become an owner of the company. As an owner, you receive a share of the profits your company generates via a dividend.

In fact, we studied eight companies that provide these policies, and they have now paid out, on average, for 121 years in a row. When I add it up right now, the money I have in Income for Life is generating a return of 5% per year, tax-free, after dividends and interest. If long-term interest rates rise, my dividend will rise too.

Your Big Objection
I know you have one major objection to this plan. If you’re like me, you’re probably thinking: “Why would I put my money into an investment that pays only when I die?” This is a great question and the answer is very simple. The way permanent life insurance works is that you can use the money you’re accumulating at the life insurance company anytime you want. You can do this through something the experts call a “policy loan.”   Not one in 100 people know this, but you can use your Income for Life policies to pay for just about anything.

I’m using these policy loans to pay for all of my vacations, cars, houses, and medical expenses. I’ll also use these loans to finance any future investments I make in stocks, real estate, or small businesses. By running these expenses through my Income for Life policy, I’ll generate an enormous positive cash flow, and no one in my family will ever have to borrow money from a bank or financing firm again. I won’t get into the details of this strategy here. For now, all you need to know is that you can use the money you’ve saved anytime you want. You can do this with no penalty, and no fees, as if it were sitting in a bank account. And even while you’re using it, it keeps growing up to 5% per year.  

The Only Life Insurance That’s Worthy
I’m certain complexity is the biggest reason people hate permanent life insurance. Insurance companies have sold permanent life insurance for centuries. But over the last three decades, they’ve made “innovations” to the original model. This has hurt its reputation. 

For example, today, insurance companies sell policies in which you can adjust how much money you get when you die. Or when you pay the premiums. You can buy policies that pay interest based on the stock market’s performance or the bond market’s performance.  You may have heard of some of these innovations. They have names like universal life, variable life, equity indexed life, etc.  

In short, these innovations have introduced hundreds of variables into permanent life insurance policies. The customer can’t understand them. Most agents don’t understand them and most importantly, they have shifted the risk away from the insurance company and back to the policyholder. Plus, the complexity makes it easy for the insurance company to hide the fees and commissions it’s charging.

This was a big reason my wife and I wouldn’t buy life insurance. I couldn’t understand the fees the company wanted to charge me. I’m not saying you couldn’t structure an Income for Life strategy with a universal, variable, or equity indexed life insurance policy. But I’d advise you not to. They’re too complicated. [If you want to learn about the different types of permanent life insurance in more detail, read this article. It’s one of the best we’ve found.]  

Our Income for Life strategy uses the most ordinary type of permanent life insurance. It’s the Coca-Cola Classic of the insurance industry. Its design hasn’t changed in over 100 years.   
Here’s how it works: First, you agree with the insurance company how much money you want to receive when you die. Then you pay a minimum amount every year into your policy. They call these payments “premiums.” You agree to these amounts upfront with the insurance company. They never change.   

While you’re alive, these payments build up a cash value in your policy and you earn interest and dividends, tax-free, on this cash. Meanwhile, you can also use this money whenever you need it. That’s it. There are no fancy customizations and it has nothing to do with the stock market but it’s easy to understand. It’s tried and tested over two centuries and it comes with some of the lowest commissions of any permanent life insurance product on the market.  

In the industry, they call it “whole life insurance.” Whole life insurance is a common insurance product. You can buy it from almost any insurance agent in the country or around the world. Our Income for Life strategy uses a “participating” or “dividend-paying” whole life insurance policy.

Becoming a Part Owner to Share in the Profits
When you own a participating whole life insurance policy, you become a part owner of the insurance company. That means you’re entitled to a share of the profits. Profits come from two places, underwriting and investments.
 
Now, most insurance companies have several lines of business. They’ll issue term policies. Or they’ll offer employee benefit programs that offer medical, dental, and disability insurance.
 
They might issue auto policies. And most have retirement divisions that offer things such as 401(k)s, annuities, or long-term care solutions.
 
If insurance companies underwrite and manage these programs the right way, they’ll pour money into the insurance companies’ coffers. And the only customers of the life insurance companies who share in the underwriting profits these multiple lines of businesses generate are the ones with “participating” whole life policies.
 
The second way insurance companies generate profits is from their investing activities. Think of the hundreds of thousands of customers an insurance company has. All of these customers make annual, quarterly, or monthly payments to the insurance company for all of the policies they have.
 
That means there’s a steady stream of cash pouring into the company each day. The insurance company won’t need to pay many of its claims immediately. It takes years, sometimes decades, for people to collect.
 
Instead of sitting on this cash, insurance companies conservatively invest and grow it. They know with exact precision when they’ll need the money to pay claims.
 
At the end of each year, the insurance company tallies the profits from its investing and underwriting activities. It pays expenses and claims, then sets aside a little into a reserve account for extra safety. What happens to the rest of the profits? They’re dispersed to “participating” policyholders as a dividend each year.
 
The top mutual insurance companies we recommend are so prudent at managing their investments and insurance businesses that they’ve managed to pay dividends to their participating policyholders for more than 100 years in a row.
 
There’s one final twist we’ll add to a dividend-paying whole life insurance policy. This twist makes it different from any other type of life insurance policy, including most of the whole life policies the industry sells today.

[When a mutual insurance company issues a whole life policy, it calls it “participating” or “dividend-paying” whole life insurance. It calls it “participating” because policyholders own the mutual company and participate in the profits by earning interest and dividends.]   

The Secret Ingredient That Makes Income for Life
Call up your local life insurance agent. Ask him for a whole life insurance policy. He’ll sell you the life insurance coverage that comes with a savings component but we’ve established that Income for Life is NOT about the life insurance coverage. What do I mean by this? Most people think of life insurance as something you buy to protect your family in case you die. It’s a precaution.

But our Income for Life strategy has nothing to do with estate planning, protection, or life insurance. It’s a program to save money and build wealth while you’re still living. We structure our whole life policy to emphasize the savings aspect and minimize the life insurance aspect.   

In the insurance industry, they’d say we were trying to “maximize the cash value of the policy and minimize the life insurance coverage.” We do this by stuffing as much money into our whole life policy as we can, as fast as possible, keeping our life insurance coverage as low as possible. For example, a typical term life insurance buyer might pay $1,000 per year for a $2 million policy. But we would prefer to pay $20,000 per year for a $500,000 whole life policy. This way, we get much more money earning interest and dividends in our policy, and we give much less money to the insurance company for life coverage. Do you see this?  

Most people want as MUCH life insurance coverage as possible by spending as LITTLE money as possible.    With our Income for Life strategy, we want to get as LITTLE life insurance coverage as possible, by putting as MUCH money as possible into our policy. Income for Life uses a special tool to make this happen. It’s called a paid-up additions (PUA) rider. Most life insurance companies offer this rider. But few insurance agents know it exists.  A PUA rider is a way to stuff as much money into your policy as legally possible.

This way, you’re earning more interest and more dividends in your account, without increasing the amount you spend on life insurance protection. I’m not going to get into all of the details of the PUA rider just yet.    For now, all you need to know is that the PUA rider changes an ordinary whole life insurance policy into a wealth-building machine.

What do I mean by stuffing as much money in your policy as “legally possible?” Insurance policies confer enormous tax benefits. In the ’70s and ’80s, investors and corporations plowed billions into permanent life insurance policies to take advantage of the tax benefits. In 1986, the IRS clamped down. It set a limit on how much cash you could put into permanent life insurance. If you exceed this limit, your life insurance policy turns into what the IRS calls a “modified endowment contract,” or “MEC,” for short and it won’t qualify for the tax benefits.  

This illustration below shows the relationships of insurance types to this MEC line. At the bottom of the chart, you have term insurance. It offers just insurance, and it’s the cheapest. There is no savings component with term insurance.     

In 371 days, millions of soccer fans will descend on Brazil for the 2014 World Cup. These fans will need hotel rooms, souvenir T-shirts, bowls of feijoada and beer. Since 2003, Brazil has banned the sale of alcohol at sports venues. However, FIFA, soccer’s ruling body, has demanded that all 12 World Cup stadiums sell beer.

Over the course of the 32-day tournament, 3.3 million ticketholders will be able to buy a brew. Most will buy more than just one. If you’re a Brazilian brewery, how do you ramp up production for millions of extra beer servings over this one-month period?  You could construct new buildings and fill them with mash tuns, copper tanks, and tubing. That would be expensive and time consuming, and your work would go to waste as soon as the World Cup finished. You could try brewing beer ahead of time, but you’d have to buy extra vats or kegs to store it. Or you could do something simple.

You could switch the ingredients you use. You see, there’s a secret in the beer industry. It’s a special ingredient that reduces the beer’s cooking time. It reduces the filtration time. And it eliminates the extra work that comes with using solid grains. By adding this one ingredient into the production process, brewers will be able to instantly increase production, without any decline in quality. It’s more expensive than the crushed grains brewers use when demand is low. But it allows brewers to use their equipment to maximum capacity when demand is high.

The name of the additive is “high maltose.” It’s a derivative of corn. By adding it to the beer vat, it provides sugars that are easy and fast to ferment. This allows a brewery to increase the amount of beer it makes, which increases profits for the beer company. High maltose is an example of an important global commodity we call “agricultural additives” or “natural additives.” Agricultural additives are the byproducts of commodities such as corn, tapioca, wheat, potatoes, and cassava. When these natural products are milled, they produce byproducts such as starches, sugars, oils, and meals. When you add these agricultural additives to other products, they change the flavor and texture of those products. They extend shelf life.

They provide gluten-free options for people with allergies. They keep oils from separating out of lotions. They help ink stick to paper. They even help save lives when IVs rehydrate people. You’d never even know these additives were part of the finished products. But they’re the building blocks for tens of thousands of products we use every day. Food manufacturers like Nestle, Unilever, or Kellogg’s use agricultural additives in baked goods and processed foods. These two categories have been on a steady climb for decades.

In 1982, for example, they accounted for 25% of the dollars Americans spent on groceries. By 2012, that total had climbed to 37%, a 48% increase. Worldwide, sales of processed foods are approaching $4 trillion per year and nearly all of those foods use some kind of agricultural additives. Mankind has been using agricultural additives like these for years but as technology and consumer tastes have evolved, there’s been an almost “quantum leap” in the number of uses and applications for these agricultural additives.

Global Industry Analysts is a global market research company that covers more than 180 major industries worldwide. It estimates the compound annual growth rate for agricultural additives at 7% per year through 2018. This is twice the growth rate of the global economy as a whole. Today, we’re going to tell you about a small company that’s benefiting from the bull market in agricultural additives. It’s a producer of agricultural additives. If the research is correct, this company will grow its earnings at up to 10% per year for the next five years...a 60% increase in profits. Assuming valuations don’t change, we’ll be up 60% five years from now.

Additionally, this company is cheap at current prices. As the investment community begins to pay attention to this trend, this company’s valuation should improve. We’ll make even more money. This company has been paying a dividend since it went public in 1998. In March, it raised its dividend 46%!

The Coming Bull Market in Agricultural Additives 
The world is changing. Over the next 20 years, the United Nations Development Program expects 1.5 billion people to join the middle class in Asia alone. People who move up the economic ladder drive newer cars, live in bigger houses, and use more electricity. They also eat more processed foods, for variety and convenience. That means the demand for agricultural additives will explode in the years ahead. There’s another big trend that’s driving the boom in agricultural additives: Consumers in developed regions like Europe want healthier foods. Here, the focus is on specialty ingredients… Additives that increase nutrition or decrease calories.

For example, in Europe, there is a new trend toward “clean labels.” This simply means using ingredient names on labels that people understand. The European Union regulates ingredient names. By treating starches with heat instead of enzymes, you can call an ingredient “starch.” Consumers in Europe understand this word. It doesn’t raise concerns about health or safety. The investing community is starting to take notice of the huge growth opportunity in agricultural additives because of these trends in Europe.  

Now, one of the first signs of a “hot” and growing industry is an increase in mergers. Food-processing companies just had their third straight year of merger increases. In 2012, they accounted for more than one-quarter of the food industry total. And food-processing companies are the No. 1 users of agricultural additives. With merger activity highlighting the growing trend toward processed food, it’s time to invest in the companies that supply them but companies that produce agricultural additives are hard to find.

One is a large, privately owned business, named Cargill. Another, Archer Daniels Midland Co. (NYSE: ADM), has a market value of more than $20 billion. Agricultural additives are just a small part of its total business. There is one small company we’ve found to play this growing trend in agricultural additives. This company is Ingredion (NYSE: INGR), our profiled recommendation.

Ingredion’s Additives Stranglehold
Ingredion is a “pure-play” agricultural additives business. It has no transportation division, no farming business, or any other side businesses. It produces only agricultural additives in 40 countries around the world. It sells these additives to food processors and other companies around the world. They use these additives to make their products.

Each culture has its own food preferences. Ingredion understands this. Local experts staff their factories and, in turn, sell the additives to local companies. It’s the only way to provide the exact products that each culture demands. For instance, Ingredion sells water-soluble soy isoflavones in South Korea. Cassava modified starch in Brazil. And in the U.S., a soluble calcium complex for fortifying products with the mineral.

Ingredion also has a patented line of ingredients, called Novation, to capture the new “clean label” trend in Europe. Any company using Novation additives needs to list only “starch” on its ingredient label. Right now, there is such demand for this product in Europe that Ingredion is building new plants to expand production of the Novation line of additives. But the interest that started with European regulation is spreading to North America.

The new plants Ingredion builds will provide sufficient volume to export Novation products to the U.S., boosting sales even more.   There are other synergies between countries too. The processed tapioca popular in Thailand provides gluten-free alternatives in the U.S. Starches that reduce calories by replacing oil are finding acceptance in Mexico as concern over obesity increases. When Ingredion develops products for one country, it looks for larger worldwide trends. Selling those products in other countries increases the returns on its research and our profits. 

Recession-Resistant Business Model
Ingredion is based in Chicago. It has a market cap of $5.1 billion and annual sales of $6.5 billion. Most importantly, it meets our criteria of safety. It’s recession resistant and has a conservative management team. First, Ingredion has been around a long time. It’s not a startup or some kind of speculative technology company. Ingredion started business more than 100 years ago as Corn Products Refining Co. Among its pioneering products were Argo Corn Starch in the famous yellow box and Karo Corn Syrup. 

In 2010, it acquired National Starch, which focused on specialty starches. With that addition, it became clear that Ingredion’s focus had become broader, encompassing a wide range of food additives. Corn Products Intl. changed its name to Ingredion. Ingredion’s business is recession proof. The products it sells are critical to the food-processing industry. If consumers economize by buying a store brand of soda or shampoo instead of a name-brand one, it doesn’t matter to Ingredion. Its additives are necessary in expensive and cheap brands alike. 

As a pure play, Ingredion’s business focuses on one type of product: agricultural additives. But that doesn’t mean it isn’t diversified. Right now, only 30% of its sales come from the U.S. Mexico is another 17%. It is the largest refiner of corn-based starches and sweeteners in South America, beating out giants like Archer Daniels Midland and Cargill. Asia is a small but growing segment too. This means Ingredion doesn’t depend on economic growth in any one area of the world. Not only are Ingredion’s sales diverse geographically, they also sell products to a wide range of industries. Food is a hefty 44% of its sales, but that reflects a diversity of products, from fiber that aids digestion to the more traditional starches that create the right viscosity in dressings. Beverages, including beer brewing, provide another 24% of sales, and paper products 9%. Byproducts sold as animal feed are 12% of sales. 

Ingredion’s diversification makes it resistant to changes or downturns in any given area. There’s one more reason Ingredion is safe. Its responsible management team hedges commodity risk...Commodity prices. That is the Achilles’ heel of any company using large amounts of a natural commodity, as Ingredion does. Commodity prices can swing up and down, resulting in huge effects on costs… and therefore profits.   Ingredion tackles the commodity beast in two ways. In North America, most companies sign one-year contracts for agricultural additives. When managers sign a contract, Ingredion requires them to buy the commodities they’ll need to fulfill that contract. In some cases, they simply buy and store the commodities they’ll need. With many commodities, especially corn, that simply isn’t practical. Instead, the managers will hedge the commodity. That simply means they pay someone, an investor, to guarantee the price. It will cost Ingredion a few percent of the total cost to buy that insurance but it’s already included that cost in its prices.

It won’t matter if the cost of corn goes up, down, or stays steady. That other investor has taken on the risk and rewards of owning the corn. Outside North America, three-month contracts are the norm. That means if the cost of a commodity—tapioca or corn, for example—starts rising in price, Ingredion will raise its prices in the next contract. Because Ingredion has additives that companies need to produce their own products, it is usually able to pass along higher costs. Occasionally, companies balk at higher prices. In that case, Ingredion can walk away from the deal. It may lose that sale, but it’s not forced to sell products at a loss because of a long-term contract. By keeping its commodity costs steady, Ingredion’s profits and cash flows will be steady. That allows Ingredion to commit to paying dividends, paying down debt, and building new plants to grow its business. 

Ingredion’s recession-resistant products and conservative management team provide a strong measure of safety. The steady growth it’s experienced over the last 10 years proves the durability of its business plan.   It’s also cheap, which gives investors a margin of safety too.

Cheaper Than Its Competitors  
Valuing Ingredion isn’t as easy as with many companies in our Performance Portfolio. Most of its closest competitors are privately owned. There are no P/Es or price-to-cash flow numbers to compare to, because there is no public price for these companies. Archer Daniels Midland is a much larger, more diverse food company but it operates in the same industry. Ingredion currently sells at a P/E ratio of 12. Archer Daniels Midland sells at a P/E of 17. And the processed and packaged foods industry as a whole is selling at a P/E of 21. 

For a well-managed, focused company, Ingredion is cheap. Ingredion also sells at eight times its operating cash flow. That’s low. Once we take out the cash it will use for new equipment, we’re left with free cash flow, the money Ingredion has left to reward shareholders. Right now, Ingredion sells at 13 times free cash flow. This is still cheap and ensures that Ingredion will be able to pay its dividend and grow earnings per share through acquisitions or share buybacks.  

How We’ll Make 10% per Year for Five Years
Producing agricultural additives as Ingredion does requires extensive machinery. It’s a capital-intensive industry. Many companies think only about growing sales. Ingredion makes sure that when it grows, new investments it makes will pay for themselves, with some left over for shareholders. If it finds a good company to buy at a reasonable price, it will do that. If it sees a growth opportunity like the Novation clean label products, it will build new plants.

Ingredion’s management team practices discipline when it comes to rewarding shareholders. Since becoming a publicly traded company in 1998, Ingredion has paid a dividend every year. Over that time, it has grown dividends at a compound rate of more than 20% per year. It doesn’t raise its dividend every year. Some years, when there’s a lot of uncertainty (like during the financial crisis), Ingredion will be cautious and wait to raise its dividend. Other years, when it sees a big opportunity for growth, it will use that cash for an acquisition. Since it started paying dividends in 1998, it has raised its dividend 12 times.

Most recently, in March, Ingredion raised its dividend 46%. Even with this huge increase, Ingredion’s dividend payout ratio is low, 26% of expected earnings in 2013. That means it has plenty of room left to keep increasing dividends. All of these factors qualifies it for our Relentless Dividend Raisers Portfolio.   Since Ingredion went public in 1998, it’s grown its earnings per share at a rate of 17% each year. That’s a huge amount of growth during the last 14 years. With the bull market in these agricultural additives, this level of growth could continue. But we’re going to be conservative and assume that Ingredion grows its future earnings per share at 10% per year for the next five years. Assuming valuations don’t change, its share price will grow at 10% per year right along with its earnings.   We’ll make 60% total returns over the next five years. And we’ll get a 2% rising annual dividend as an added bonus.

Action to take: Buy Ingredion (NYSE: INGR) up to $72 with a 25% trailing stop.