Tax Pitfalls for Young MLP Investors

MLP investments work well for older, retired investors. But if you're a young person, you might want to think twice about owning an MLP for too long. According to the National Association of Publicly Traded Partnerships, "As long as your adjusted [cost] basis is above zero, tax on your distributions is deferred until you sell your units."

Notice in that quote it says, "as long as your adjusted [cost] basis is above zero." Your cost basis is how much you paid for your MLP units. When you receive a distribution that's qualified as "return of capital," it isn't counted as income but it does reduce your cost basis.

For example, if you paid $20 a share and receive a $1 return of capital distribution, your new cost basis is $19 for future tax purposes. So after $20 in distributions, your cost basis goes to zero. When that happens, all future distributions paid to you are no longer sheltered as return of capital, but instead become fully taxable. So when an MLP's cost basis gets to zero, one of the primary reasons for owning it disappears.

So if you're young, invest in an MLP, and own it for a long time... your adjusted cost basis could go below zero. If that happens, you could incur a huge tax liability when you sell.

A Safe, High-Yield Stock for Your Retirement Account
There's one primary reason you want to own MLPs:  high-yield, tax-advantaged income.
These companies pay out the bulk of their cash flow in dividends. Most MLPs pay much higher yields than regular stocks. The average S&P 500 stock pays less than 2%. You can't retire on that. Many MLPs pay 7% and higher. One of our current recommendations, Vanguard Natural Resources (NYSE: VNR), has a current yield of almost 9% today. Now that's a retirement-sized income.

They also have excellent tax benefits... You don't usually have to pay any tax on income until you sell your shares. And according to the National Association of Publicly Traded Partnerships, if you leave your MLP units to your heirs, they don't need to pay tax on the income you collected. Imagine earning a high-yield income in the last few decades of your life, paying little or no tax on it, then leaving the MLP units to your heirs knowing they won't pay tax on your distributions, either.

MLPs are great investments. But there's one big problem that has kept many investors from earning a high-yield income in MLPs. Investing in MLPs through your IRA or other retirement account can eliminate the tax advantages that come with the MLP. You could wind up paying tax on your retirement account.  Your tax-advantaged income could become regular taxable income. For most investors, putting an MLP into a retirement account defeats the whole purpose of both the MLP and the retirement account. We've found a way around these risks.

There is a way for you to earn high-yield, growing income in your retirement account, without giving up any of the tax advantages of an MLP. Even better, this month's recommendation doesn't require the tedious paperwork at tax time that is normally associated with MLPs.

The Best Way to Avoid MLP Tax Headaches and Still Earn a High Yield in Your Retirement Account
Our opportunity this month is a rare one. It's a special type of MLP you can put in your tax-advantaged retirement account. It doesn't expose you to additional tax risk. It doesn't require extra paperwork at tax time. And it still earns you a high yield, just like a good MLP should. Before we go any further, let's make something very, very clear.

We've done plenty of research on the opportunity we're about to describe. We believe that for many investors, it'll rid them of "unrelated business taxable income" (UBTI) and other tax-related headaches. But we're just making a generalization. We don't give individual tax advice. So before putting your money into any type of MLP or MLP-related investment, you should always check with a tax professional first.

Now that we've got that out of the way, let's take a look at the best way to avoid MLP tax headaches and still earn a high-yield income in your retirement account.

Our brand-new recommendation this month is pipeline operator Kinder Morgan Management, LLC (NYSE: KMR). It's not Kinder Morgan Energy Partners (KMP), the well-known MLP. Nor is it Kinder Morgan, Inc. (KMI), KMP's general partner.

KMR is a company created simply to eliminate the tax problems and extra paperwork that comes with an MLP. It has no employees. It has no properties. And it has only one asset – its holding of KMP units... but with one difference. KMR doesn't pay cash distributions to its shareholders. (And because of that, there are no K-1 or 1099 tax forms to fill out.) It "pays" shareholders by issuing new shares.

KMP unitholders receive cash distributions. KMR also receives distributions from KMP. But it doesn't receive those distributions in cash. It receives them in additional, non-cash paying units called i-units. KMR shareholders in turn receive their distributions in additional KMR shares.

You can think of KMR like a zero-hassle dividend reinvestment plan (DRIP) for KMP. Owning KMR won't give you cash income now, but it will compound your income by automatically reinvesting your KMP distributions in new shares. Each quarter when KMP pays out a cash distribution (it currently yields 6.2%), you'll receive whole or partial shares of KMR that are of a similar value to the KMP cash payment. (This should look familiar to anyone who already participates in a DRIP.) You could wind up with $108,000 for every $10,000 invested.

Here's an example using the last two years of KMP distributions... To keep it simple, let's say you bought just one share of KMR at $64.89 in early 2011. KMP paid a distribution to KMR on February 14. You received 0.017393 KMR shares (we shorten that number in the table below) leaving you with 1.017393 shares and a total position value of $66.08. Here's how that would have played out over the following two years.

You could start out with $8,300 and find yourself with more than $108,000 after 20 years. KMR has performed better than KMP in most periods since it went public in 2001. So it's possible you could make even more money by owning KMR.

The utter convenience of KMR, the high yield of KMP, and the high quality of the Kinder Morgan organization make KMR one of the best income stocks we've ever found.

We'll track KMR a little differently than we track our other stocks and MLPs. We'll have to adjust KMR's cost basis each quarter to properly reflect the effect of KMR stock distributions. For example, if you pay $80 for KMR today and it issues shares worth $1, we'll adjust the cost basis to $79 the next quarter.

How KMP Stacks up Against Our Seven-Step MLP Selection Model
We utilize a model to help us select only the best MLPs. Without it we wouldn't recommend MLPs that can't pass this selection model.

The model boils down to seven key questions we ask about every MLP. The questions are designed to find those MLPs that do the best job of creating value – and income – for investors. Some answers are short (since they require only a quick examination of certain key metrics). Some are longer. But all are complete and tell you what you need to know to understand how KMP can provide you with a growing, high-yield, tax-advantaged income for several years.

Remember, we're recommending KMR, not KMP. But KMR's only asset is its ownership in KMP. So we're running KMP through our MLP Selection Model. You'll find that KMP stacks up well.

1. What are the prospects for future growth?

KMP is loaded with excellent growth prospects. It has completed $22 billion of acquisitions and $16 billion of expansion projects from its founding in 1997, through the first quarter of 2013.

And it has identified more than $13 billion of expansion projects over the next five years, including those we mentioned above. That doesn't include acquisitions and several ongoing expansion projects, like natural gas pipeline expansions to the Mexican border, and the build-out of more natural gas liquefaction capacity (so-called LNG, necessary for exporting natural gas around the world in ships).

KMP is a huge company and has the financial resources to take on virtually any large North American energy infrastructure project it wishes. It has billions of dollars of ready capital at any given moment.

KMP spent about $2.1 billion on acquisitions and expansions, excluding assets dropped down from its general partner. ("Dropdowns" refer to assets it bought from the general partner rather than an outside third party.) This year, KMP expects to spend about $2.8 billion. If you include acquisitions and dropdowns, KMP will spend about $10 billion on growth this year. That's more than double another MLP holding, Enterprise Products Partners (NYSE: EPD), which expects to spend $4.2 billion on growth this year.

KMP's relationship with KMR helps it grow. KMP winds up with more growth capital on hand, since it doesn't have to pay cash to KMR. KMP estimates about $625 million of the equity needed to fund its 2013 growth investment program will come from cash retained by not paying cash distributions to KMR.

2. Is there too much commodity price risk in KMP's revenue stream?

Approximately 20% of KMP's earnings before depreciation, depletion, and amortization (EBDDA, a key earnings metric used by Kinder Morgan) has unhedged commodity price exposure. That makes KMP about 80% fee-based – higher than most of our MLPs.

Fee-based revenue is when KMP is paid for the amount of energy products it transports or processes. These fees don't rise and fall with commodity prices. Steady, predictable, fee-based revenue is one of the main reasons investors flock to MLPs.

A 20% commodity price exposure still sounds like a lot, but it's not that bad... Much of KMP's direct commodity price exposure is through "carbon dioxide flooding" to enhance oil recovery in the Permian Basin in West Texas. As we said, carbon dioxide is pumped into oil wells to get more oil out of them.

KMP estimates about 18% of its 2013 EBDDA will come from carbon dioxide oil production. KMP hedges most of its carbon dioxide oil production, but it does have exposure to some NGL prices.

For 2013, KMP expects every $1 change in oil prices will move its total EBDDA by about 0.1%. So there's really not much chance commodity prices are going to reduce KMP's cash distributions... or KMR's share distributions.

3. Does KMP consistently earn positive net cash flow from operations?

Yes. Over the past 12 months, KMP generated $3.3 billion in net cash flow from operations. It has earned net cash flow from operations for at least the last 13 quarters. "Net cash flow from operations" is how accountants say "cash flow after expenses." That's where your dividends come from.

4. Does KMP have a history of increasing annual cash distributions?

Yes. Annual distributions have increased every single year since 1997 at an average annual rate of about 13% per year. That's phenomenal dividend growth. It'll go up again this year, too. Kinder Morgan expects KMP's cash distribution to rise 7% this year, to $5.33 per unit. That's about a 6.4% yield over KMP's current share price of around $83 and about 6.7% over KMR's current share price of around $79.

So if you buy shares of KMR today, its share price remains the same as it is today, and KMP's yield is still 6.4% the next time it pays a dividend... you should receive an extra 0.01675 KMR shares for every share you currently hold.

5. Are distributions being made in excess of distributable cash flow from operations?

Not very often. KMP pays out 100% of its distributable cash flow. In just three of the past 12 quarters, distributions have slightly exceeded distributable cash flow. We've seen this with other MLPs that pay out 100% of their distributable cash flow. They typically pay out 100% or a little less most quarters, and slightly over 100% of distributable cash flow every now and then. Over the long term, the company winds up paying out no more distributable cash flow than the business generates.

6. Does KMP distribute the majority of its distributable cash flow from operations?

Yes. Again, the policy has always been to pay out 100% of distributable cash flow from operations, less small amounts held back to sustain operations.

7. Is KMP management generating an acceptable return on any cash it retains?

This is the part of the model that kept us from investing in KMR until now. Over the last 12 quarters, every $1 retained returned just $0.18. But over the past four quarters, this has improved to $1.61 for every $1 retained. The partnership is retaining less cash flow and distributing more. The less you retain, the easier it is to get a big return on it. We should always expect periods in which returns are less than we'd like, as growth projects are built up before they begin to generate cash. But the cash distributions are clearly going in the right direction.

A Great Buy Any Way You Look At It
We like to recommend MLPs trading at around 10-12 times distributable cash flow or less. We also like to see them trading at a current yield of 4% or more above the 10-year U.S. Treasury bond yield. Today, KMP trades at just over seven times distributable cash flow, so it's really cheap by that measure... one of the cheapest in our portfolio. The 10-year Treasury bond yielded 2.2% recently. KMP's projected distribution of $5.33 will produce a 2013 yield of 6.4% over its current share price.

Kinder Morgan has an excellent history of delivering on its cash distribution projections. It has met or exceeded projections in 12 of the last 13 years. This puts KMP 4.2% above the 10-year Treasury bond yield – within our valuation guidelines. This company is a great buy any way we look at it.

With KMR, your effective yield is a little bit higher than with KMP. Investors generally like to receive high-yield income in cash, not in KMR's share distributions. That makes KMR a bit less popular, so the share price often trades below that of KMP. Buying KMR today is like buying KMP for about 5% below the current market price. A slightly lower price means a slightly higher yield.

Many people avoid MLP recommendations because they invest exclusively through retirement accounts. Buying KMR is our favorite way to solve this problem. You get a stake in a large, highly diversified energy infrastructure company. You get a slightly higher yield than with KMP. And you can put it in your retirement account without incurring UBTI and without any of the tax-filing burdens you get with MLPs.
The investment is right. The price is right. Now is the time to buy KMR.

By Dr. David Eifrig,

It's one of the biggest financial opportunities in America. It's literally FREE MONEY and the numbers show that it's likely you're not taking advantage of it. I'm talking about the employer-offered retirement accounts known as 401(k)s. I know you hear lots of financial advisors talk about 401(k)s and how beneficial they are but even the best financial advisors often don't take the time to show you the hard numbers of how important this savings vehicle is. 

Today, I'm going to walk you through the numbers and show you exactly how much free money you could unwittingly be giving up every single pay period. This is the story you're not hearing about anywhere else.   One of the easiest decisions you can make in retirement investing is enrolling in your 401(k) plan. If your employer offers an "employee match," this is an investment that simply can't be beat. There is no better strategy out there than letting someone else enlarge your deposits and compounding it tax-free. 

Where I work, employees earn an immediate 50% return on the first 6% they tuck away for retirement. Many companies across the country work the same way. Yet many Americans balk at the opportunity.  
According to the nonprofit National Bureau of Economic Research, only about one-third of American workers enroll in 401(k) programs. I've seen other numbers that say a measly 23% participate. 

When employers install automatic enrollment programs – which allow employees to opt out – enrollment jumps to more than 85%. So it's not usually a calculated, intentional decision that keeps employees from saving in their 401(k)s. It's just inertia that prevents people from making what's clearly the best financial decision for their future.  

Let's walk through the numbers now and take a look at why enrolling in an employer-match program is a no-brainer decision... and why it's worth getting over your inertia. Say you make $50,000 a year and you get 3% annual raises. You set aside 6% of your salary every year. But after you pay 28% taxes on that money, you end up saving just 4.3% of your salary. Now let's say you put it in a regular, taxable investment account and you earn an average of 8% per year on your investment – the S&P 500's historic annual return.   This is what your investment account would look like over 30 years...

By Steve Sjuggerud

What are you going to do for income in retirement?

Social Security is already bust… For 2010, it paid out more in benefits than it brought in through Social Security taxes. If you're in your 40s or younger, you can't rely on Social Security. Chances are, your OTHER pension won't be able to pay you, either (if you have one), as I'll explain today.

Even worse, even if you have NO pension yourself, don't think you're immune to the problems. The reality is that YOU – the taxpayer – will be forced to pay the promised benefits that pension funds won't be able to deliver. The crisis in pension funds is much worse than you can imagine.

Right now, pension funds in the U.S. are underfunded by at least $1 trillion. "Underfunded" means the difference between the promises made and the money set aside to meet those promises. The thing is, that trillion-dollar underfunding is understated by a wide margin. The true number is probably closer to $3 trillion. Here's why…

Pension funds currently expect they can earn an 8% return on the money they have. They think they're solvent because they can grow the assets they have at 8% a year. But that's foolish. Pension funds simply can't earn 8% right now. Here's why...

If your pension fund holds half its assets in safe bonds earning roughly 3% now (which is what 10-year Treasury bonds pay), how much would your pension fund need to earn on the other half of its assets to earn a total return of 8%? The answer is 13%. That's not going to happen. My friend Meb Faber recently wrote a "white paper" on this subject. He says, assuming a more conservative return.

The 50 U.S. states' pension plans have $1.94 trillion in assets versus liabilities of $5.17 trillion, resulting in a funding ratio of only 38% and cumulative unfunded pension liabilities of $3.23 trillion. [Paying out these pension benefits] would require significant debt issuance or increased tax revenue.

The size of the problem is staggering. And guess who is on the hook...YOU. Here's how Meb explains it…

The health of U.S. pension funds is of critical importance to U.S. citizens, as they [U.S. citizens] are the backstop for both private and public pension funds as taxpayers… Most state constitutions require these debts to be paid. There are over 200 defined benefit plans operated by the states covering 20 million employees, 7 million retirees, and roughly 90 percent of public sector workers in the states. How many pension funds will go bust at 4% returns???

When a state comes up short funding their pension liabilities, they "put" those liabilities into the hands of taxpayers. Considering the sheer size of pension plans, this taxpayer backstop could reach trillions of dollars. Novy-Marx estimates underfunded liabilities for state pensions equate to an obligation of roughly $10,000 for each United States citizen.

So if you're in your 40s or younger…

1. Don't bank on Social Security for your retirement income. It doesn't have the money.

2. Don't bank on your other pension plan, either. Using realistic assumptions, it's likely underfunded, too, and won't be able to pay you when the time comes.

3. Finally, as a taxpayer, get ready to pick up the tab for the already-promised pension benefits when these pension plans are out of money.

The problems with traditional pensions are too big to cover in this little essay. My best advice is: DON'T rely on government-created pensions in particular and continue to build your own nest egg outside of a promised pension. Wikipedia actually put together a good, basic explanation of the issue. You can find it here. And you can read Meb's paper on the subject here.

By Matt Badiali

Not long ago, a new royalty investment went public on the New York Stock Exchange. It's located in a different part of the country than the opportunities I showed you in the companion report to this one – Oil & Gas Royalties: The Real Secret to Generating Huge Returns in America's Petroleum Markets. And its primary focus is on a different type of natural resource.

It's located in a part of the country that Bloomberg says has "among the largest and most active producing reserves" of its kind in the U.S. And production in this region is expected to jump 60% by 2016. That translates into potentially huge streams of income for investors who get in early on this opportunity.

As longtime S&A Resource Report readers have heard me say many times... royalties are a "backdoor" way to get paid over and over again. You make just one investment... or control one valuable asset... and get paid over and over again, while somebody else takes on the risk of marketing, development, and distribution. That's the secret to royalty success.

As resource investors, we want to use this secret to collect royalties on one of the world's most vital energy commodities. The royalty investment you'll learn about in this report is currently yielding 12% a year. And like the royalty investments I've already told you about, you avoid all the normal risks of doing business... and simply collect incredible streams of income for owning some of the country's most valuable assets.

We're Getting Tax-Free Money From SandRidge Energy's Third Royalty Trust

As you may recall from the companion report... Owning royalty companies is one of the easiest and safest ways to turn a small investment into incredible wealth.

Royalty trusts generate cash by selling the production of natural resources – such as oil, natural gas, and coal. In this report, we are focusing on a company created around oil and gas royalties – the Permian Trust (NYSE: PER). It's the third trust spun-off from SandRidge Energy.

As we'll show... through the Permian Trust, you avoid all the normal risks of exploring for oil and gas... and simply own a company that collects incredible streams of income from wells in one of the world's best oil and gas fields. The Permian Trust doesn't spend capital on exploration. It doesn't spend it on developing projects or on maintaining them. The royalty trust is built solely around income from existing projects.
It also has no physical operations and no management or employees. It is basically just a lawyer and an accountant. SandRidge – the "parent company" – operates the wells and pays the overhead and costs for new production. The royalty trust just gets paid.

Like SandRidge's other trusts, the Permian Trust has a 20-year lifespan. That means it will receive royalty checks from SandRidge's wells in the Permian Basin – and pass that money along to shareholders – for the next two decades. The Permian Trust is built upon both existing wells and proved, undeveloped reserves (PUDs). In other words, shareholders get paid for both current production and future production from new wells yet to be drilled in the area.

Based on the Permian Trust's current share price – and using ultra-conservative commodities price estimates – we believe this trust is a bargain today. It has the potential for capital gains. And it pays out at least a 12% yield. Ever better, we could keep up to 39.6% of that cash tax-free...

Reducing Risk with Our Royalty Trust Model
We developed a model to figure out a realistic estimate of the value of the Permian Trust... and how much it would pay us.

The operator of the trust, SandRidge Energy, secured prices for – or "hedged" – 60% of the production from the trust. That means we know the price of a set amount of the oil and gas that will be produced in a year. And we'll get that money even if the prices of oil or natural gas collapse.

That reduces the range of possible outcomes... and makes our model results that much more reliable. The volume of oil and natural gas produced from the wells is harder to gauge. Production in every oil well begins to decline as soon as it's put into production. That's why oil companies must constantly drill new wells to replace production. And this Permian Trust is no different.

It was created around existing production and a number of new wells drilled over the first three to four years of the trust's life. That means those first three to four years of the trust will capture the most production. (The Permian Trust is two years old.) One risk with this company is that the cash flow in the trust is subject to commodity price and production swings. That means there can be changes from quarter-to-quarter in the amounts of money paid out by this trust.

Also, we can't know the exact volume of oil and natural gas produced in a period. But we can make an accurate estimate. And in our model, we are conservative. Our estimates were less than the production estimates produced by the trust's engineers. That way, if something goes wrong, we are covered.

One thing that could go wrong with the Permian Trust is SandRidge. You see, we aren't completely insulated from that company... SandRidge operates the trust. That means it drills and maintains the wells. So if it can't drill new wells, we won't get the new production. However, I see that as a minor risk to us. SandRidge owns 11 drill rigs. It plans to spend $1.75 billion drilling new wells in 2013. And many of those will be for the trusts. So I don't see a lack of new wells as a potential problem.

And the last major risk to this investment is that the Permian Trust is "finite." In other words, it exists for 20 years and then ends. By the end of 2031, the trust will close. That means the company will sell off the remaining assets and pay out one last distribution to both SandRidge Energy and the trust's shareholders.

However, as the trust ages, the distributions become smaller. And more of it is simply our original investment coming back to us, instead of dividends – our "return of capital." Let me explain.

Oil and gas wells are finite resources. That means they run out. So if we spend $1 million to drill a well and we get $1.1 million back from selling the oil and gas, we didn't make $1.1 million in profit. We made $100,000 in profit. The rest of that money was a return of our original capital. The same thing is going on here. Our initial investment in the trust can be thought of as our share of the drilling costs.

As SandRidge drills off the wells, it will keep the production stable. However, when the wells are done, the production will begin to decline. We want to be out before that happens. That's why we will only hold the Permian Trust for up to three years. We'll skim the cream and get out before the wells begin to decline. By the end of 2015, we will cash out. We should be able to take a small capital gain on the sale, depending on the prices of oil and natural gas. At the same time, we'll cash out the Permian Trust's double-digit gains from the past three years. Now let's take a look at this royalty investment.

SandRidge Permian Trust (NYSE: PER)
In May 2011, SandRidge spun out its Permian Trust around existing and future wells in the Permian Basin. The terms of the trust say it will terminate on March 31, 2031. But we plan to sell in three years. The trust is in an "oily" part of the Permian Basin. That's why about 86% of this trust's assets are oil... the rest is natural gas.

The Permian Trust's IPO price was $18 per share. And its market value at its IPO was $945 million. Today, it trades around $14.04 per share and its market value is $737 million. It has 52.5 million shares outstanding. Like the Mississippian trusts, the Permian Trust suffered as SandRidge imploded from its tremendous debt burden, as you can see from the chart below. It sank 43% from its March 2012 high.

How to Earn Tax-Free Income from Our Royalty Trusts

I do not provide individual tax advice. So before purchasing any trust, you should consult a tax professional. But this information should get you started.

The Permian Trust is trust is a partnership. Partnerships do not pay U.S. federal income taxes. As a result, the trusts have additional cash flow to give to investors in the form of "distributions." Distributions are like dividends paid on a normal stock... but they are not taxable right away. Instead, they reduce an investor's cost basis in the investment.

For example, the Permian Trust estimates original trust investors will pay federal taxes on 55% of the cash they receive through 2013. In other words, only $0.55 of each $1 they receive is taxable. So assume you made a $10,000 investment into a trust with a 15% yield. You only pay tax on 55% of $1,500 in distributions received ($10,000 * 15%). You only pay tax on $825.

Investors in the top tax bracket pay $594 in tax on $1,500 on ordinary dividends ($1,500 * 39.6%). But since you are taxed on $825 in distributions, you save $267 in tax. The untaxed portion of the $1,500 distribution is $675 ($1,500 - $825). For tax purposes, this is a return of capital. You don't pay taxes on this amount right away. Instead, you reduce your cost basis in the stock by $675.

Your initial cost basis is the same as your original investment. Your adjusted cost basis is equal to your original investment less the $675 reduction, or $9,325. If you sell your shares now, you calculate your taxable gain or loss by subtracting your adjusted cost basis of $9,325 from the sale price. If your adjusted basis is above zero, tax on your distributions is deferred until you sell your units. And if you die and the units pass to your heirs... the prior distributions are not taxed.

The trusts provide specific tax information to each partner after the end of the year. This information comes on a form called a "Schedule K-1." The K-1 includes your share of the trust's income and deduction activity for the year.

By Matt Badiali

It's public knowledge that U.S. President Barack Obama collects nearly $33,000 per month through his presidential salary...

But what most Americans don't realize is that the president is also tapping into an extraordinary income stream which has enabled him to collect an average of more than $72,780 every single month since taking office as "Commander in Chief."

That's more than double his government pay. NPR correspondent Frank James calls it, "One of the best financial moves President Obama ever made." And Reuters reports the president is now worth millions, thanks to this move. Just look at the Obama's tax returns over the past few years and you'll see why...

In each of the last four years he's served as president, Obama has made many times his government salary – in some years multiplying it by 300% or more – using this income strategy. But what's perhaps most surprising is that just about anyone can use this idea to generate a lot of wealth. In other words, it is not reserved solely for politicians, like Obama. For example, do you know the incredible story of Mildred and Patty Hill?

In the late 1890s, these two kindergarten teachers from Kentucky wrote a simple song they hoped with would be a useful teacher's aid. They originally called it "Good Morning to All." They intended it as a morning song to welcome students. The children liked the song. They even started to sing it at birthday parties. So, Patty adapted the lyrics. Today, the little song is known as "Happy Birthday to You." It has been sung hundreds of millions of times.

To this day, the Hill sisters still get paid royalties whenever this song is sung commercially. Producers have to pay money to the royalty holder – in this case, The Hill Foundation – if they want to use the song in a movie or on the radio. (It's also why most restaurant chains use their own versions of the song.) Nearly 120 years later, "Happy Birthday to You" brings in about $2 million in royalties every year.

The story of the Hill sisters highlights one of the greatest ways to become wealthy in America: By collecting money from patent rights and royalties. You make just one investment... or control one valuable asset... and then get paid over and over again, while somebody else takes the risk of marketing, development, and distribution.

That's how President Obama has made on average more than $72,000 per month since taking office from sales of his best seller, The Audacity of Hope. We call it the "Mainz" income secret. The Guttenberg Press, which was invented in Mainz, Germany, is generally considered the invention that first made collecting regular royalties possible... by allowing book publishers and authors to make a fortune after creating a valuable piece of work. And to this day, the "Mainz" secret remains one of the great low-risk ways to get rich in America.

In this report, I'll show you how to take advantage of this extraordinary income model... and how you can immediately take advantage of it in the natural resources markets. A modest investment here could make you tens of thousands of dollars in the coming years.

Get Paid Over and Over Again, For Life
In every industry, there's usually a low-risk way to get paid over and over again for a single idea, property or patent. In the drug business, the big money is in patents. After all the work is done developing a new drug, for example, a scientist can partner up with a larger company to handle the expenses and risks of testing, marketing, and distribution. Then the patent holder gets paid for every prescription that gets filled.

The guy who developed the popular pain medication Lyrica, for instance, shares in more than $2 million per month... because he owns the patents. The women who owned the patents on the antifungal medicine Nystatin shared more than $50,000 per month for 20 years.

In the publishing business the big money is in book royalties. Once you do all the work writing a book – like Obama did – you just sit back and collect your share of the profits. Ex-President Bill Clinton also benefits from this idea. He makes more than $84,000 per month from sales of his best seller, My Life.

Don't get me wrong. You don't have to develop a new drug or write a book. I've found an incredible (low-risk) way you can use the "Mainz" secret as an investor.

In short, you avoid all the normal risks of doing business... and simply collect incredible royalty streams for owning a very valuable asset.

As resource investors, we want to collect royalties on one of the world's most vital energy commodities. As you'll soon learn, you can regularly collect 8%-10% annual payments on some of the richest land in America. And your long-term gains could reach hundreds of percent. Let's get started...

Get Tax-Free Money From Royalty Trusts
Owning royalty companies is one of the easiest and safest ways to turn a small investment into incredible wealth. Royalty trusts generate cash by selling the production of natural resources – such as oil, natural gas, and coal. In this report, we are focusing on two companies created around oil and gas royalties.

Through these companies, you avoid all the normal risks of exploring for oil and gas... and simply own the companies that collect incredible streams of income from wells in two of the world's best oil and gas fields.
These companies don't spend capital on exploration. They don't spend it on developing projects or on maintaining them. The royalty trusts are built solely around income from existing projects.

Think of it this way... One company finds raw land, builds a new housing development, and then draws in people to rent. It manages the development and chases down dead-beats.
This company takes enormous risks. It lays out huge investments and hopes that it will eventually get its money back. That's like a typical oil and gas company. But we aren't buying that kind of company. We are essentially investing after the houses are full of renters... and we just show up on rent day and get a check for our share.

The trusts we're investing in have no physical operations and no management or employees. They are basically just a lawyer and an accountant. A "parent company" operates the wells and pays the overhead and costs for new production. The royalty trusts just get paid.

Royalties on some assets – such as oil and gas wells, mines, patents, or trademarks – are put into a trust. The bank manages the income from the royalties and distributes the income to the shareholders, or "unit-holders" as they are sometimes called. Companies like to put producing assets into trusts because trusts are "pass-through" investment vehicles. In other words, the IRS doesn't tax the revenue of the trust. Only shareholders – not the trust itself – are taxed on these dividends (or "distributions"). That means there is no double taxation of dividends, so more goes to the shareholders.

T. Boone Pickens – the king of natural gas – set up the first royalty trust back in 1979, the Mesa Royalty Trust. He packaged up producing wells as a kind of oil annuity. Investors bought shares in the trust and simply collected income over the life of the wells. Since then, the industry has spun out more than a dozen of these companies... including the three we're investing in this month.

These three oil and gas trusts were spun off from what was once one of the most popular natural gas companies in the industry, SandRidge Energy. But as we'll show you... these days, the former Wall Street darlings have been left for dead. Their share prices have plummeted... but they are still paying double-digit yields.

That sets us up for the perfect buying opportunity... and a great way to profit off royalties.
To understand why these companies are so hated – and thus, why they present such a good deal right now – we must understand where they came from...

Wall Street's Love/Hate Relationship with SandRidge Energy
In 2009, SandRidge Energy was one of the best-loved natural gas explorers on Wall Street.
Its CEO, Tom Ward, had years of experience in the field as the founder and former president of major natural gas company Chesapeake Energy. He was dedicated to expanding SandRidge Energy. And analysts claimed the company would outperform its peers.

However, Ward didn't want to wait for his company to grow using its own cash flows. That would take too long. He wanted to build the company quickly. And to do that, he needed cash now. He borrowed billions of dollars to spend on leasing acreage, hiring drill rigs, and putting fields into production.

Under Ward's "borrow and spend" leadership, SandRidge Energy's debt levels soared from roughly zero in 2006 to $4.3 billion today. As you can see in the chart below, the debt grew quickly. However, the market value didn't keep pace.

In his first year, Ward borrowed and spent $1.1 billion. Within two years, he'd racked up $2.4 billion in total debt. In 2009, Ward began to shift the company away from natural gas and into oil. In its first strategic move in that direction, SandRidge bought assets in the Permian Basin of Texas. It paid $800 million for 80 million barrels of proven reserves that were 65% oil and "liquids"... like butane (lighter fluid), ethane (key component in plastics), and propane (barbeque fuel).

That worked out to just $10 per barrel of oil equivalent (BOE). With oil trading over $70 per barrel by June 2009, that was a great deal. Analysts loved it. (Reporting reserves in barrels of oil equivalent – even when they're mostly natural gas – is a standard industry practice. It's just a way of reporting all the company's reserves with one number.)

Four months later, SandRidge Energy bought oil company ARD. It paid $1.6 billion for 69.3 million barrels of proven reserves that were 87% oil and liquids. That worked out to $23 per BOE. Debt continued to rise. SandRidge's debt levels soared from $2.4 billion at the end of 2008 to $2.9 billion in 2010.

But Ward's vision for the company wasn't complete. That year, SandRidge Energy branched out to the Mississippian oil play in Kansas and Oklahoma. And again... Wall Street cheered and piled into the stock. The company's market value climbed from $1 billion in December 2008 to $3 billion by December 2010.

The oil industry drilled at the Mississippian play for the last 50 years, but didn't make a lot of money with traditional vertical wells. That's because the rocks that hold the oil don't like to give it up. And they are full of water, so for every barrel of oil, you get water as well.

Pumping water instead of oil makes the oil much more expensive. The industry had all but abandoned the field by 2000. However, updated, horizontal drilling methods changed the economics of this field... and maximized the amount of oil pumped from the wells.

Using this new drilling technology... SandRidge engineers predicted wells in the field would each produce around 422,000 barrels of oil equivalent. The cost to drill one of the wells was about $3 million. That works out to $7.11 per BOE. And with oil prices up near $100 per barrel at the time, the economics looked fantastic.

So SandRidge Energy spent another $400 million acquiring acreage in the old Mississippian oil fields. To finance the project, it needed to generate cash quickly. That's when it began packaging and selling off production into trusts.

The company spun off three royalty trusts – two of which will be the focus of this report: the Mississippian Trust I (NYSE: SDT) and the Mississippian Trust II (NYSE: SDR). (The third trust is located in the Permian Basin, a different oil and gas producing region of the country). SandRidge's "borrowing and spending" attitude, exaggerated promises, and poor price projections finally caught up with it... There was no way the trusts could meet expectations, and Wall Street quickly withdrew its support.

Wall Street Abandons SandRidge Energy and Creates a Buying Opportunity for Us
SandRidge Energy marketed its royalty trusts as safe, profitable, high-yield vehicles for investors. Engineers projected the Permian wells were high-value oil producers. And they projected that the Mississippian wells would provide a 36% return to investors. So investors piled into all three of the trusts as soon as they went public.

In all... the IPOs raised $1.6 billion for SandRidge Energy's projects. The company began drilling. And as long as SandRidge Energy continued to drill in the regions... the trusts should have remained profitable.
But the company's glowing expectations didn't pan out. You see, in order to gin up excitement for these trusts, SandRidge Energy set the bar far too high.

SandRidge Energy's profit model used the best possible case for Mississippian and Permian production. It assumed $100 per barrel of oil and $4.25 per thousand cubic feet (MCF) for natural gas. But as we know, commodity prices plummeted over the next year. And there was no way the royalty trusts could have lived up to the hype of their IPOs. By April 2012, the well-head price of natural gas – the price the producers are paid – had fallen to its lowest point in over a decade... $1.89 per mcf. By June, oil prices had collapsed to $77 per barrel.

And instead of engineering projections of 422,000 BOE per Mississippian well, SandRidge was only getting 369,000 BOE. That reduced the reserves by 13%. And the trusts failed to meet expectations. Analysts and investors were furious. In July 2012, brokerage firm Wunderlich Securities issued a "sell" recommendation for Mississippian Trust I. JPMorgan immediately told investors to be "underweight" SandRidge Energy stock, essentially issuing a sell order.

Most damning of all... SandRidge's largest shareholder – the $4 billion TPG-Axon Fund, which owned 10.8% of the company's shares – called for Ward's replacement. In a letter to the Board on November 8, 2012... the fund's CEO, Dinakar Singh, described Ward's tenure as "disastrous." According to Singh, Wall Street didn't trust SandRidge Energy's management anymore.

The market agreed. Shares of SandRidge Energy fell 60% over the past two years. And the three trusts – Mississippian I, Mississippian II, and the third trust – got dragged along with it... down 63%, 48%, and 43%, respectively.

So How Can We Profit Off Beaten-Down SandRidge Energy?
We can't. SandRidge Energy is debt-laden. It is run by an over-aggressive CEO who overlooks simple financials in order to grow the company. I wouldn't touch SandRidge with a 10-foot pole.

But we're not interested in SandRidge. We're interested in its royalty trusts.

It's important to note that SandRidge's mismanagement has nothing to do with the royalty trusts or their business model. Tom Ward beefed up expectations of the size and values of the Mississippian properties. Essentially, he promised two gallons of milk from a one-gallon jug. And when investors didn't get two gallons, they sent the trusts' share prices on a rip lower.

But none of that had anything to do with the trusts themselves. They are doing what they're supposed to be doing – driving to the bank and cashing checks.

Each trust has a 20-year life-span. That means each will receive royalty checks from SandRidge's wells in the Mississippian and Permian Basins – and pass that money along to shareholders – for the next two decades. Each trust is built upon both existing wells and proved, undeveloped reserves (PUDs). In other words, shareholders get paid for both current production and future production from new wells yet to be drilled in the areas.

Based on the current share prices – and using ultra-conservative commodities price estimates – we believe these trusts are a bargain today. They have the potential for capital gains. And they could each pay out at least 10% per year for the next three years. Even better, we could keep up to 39.6% of that cash tax-free...


Our Royalty Trust Model
We developed a model to figure out a realistic estimate of the value of these trusts... and how much they would pay us. The operator of the trusts, SandRidge Energy, secured prices for – or "hedged" – 60% of the production from the trusts. That means we know the price of a set amount of the oil and gas that will be produced in a year. And we'll get that money even if the prices of oil or natural gas collapse.

That reduces the range of possible outcomes... and makes our model results that much more reliable.
The volume of oil and natural gas produced from the wells is harder to gauge. Production in every oil well begins to decline as soon as it's put into production. That's why oil companies must constantly drill new wells to replace production. And our trusts are no different.

Each trust was created around existing production and a number of new wells drilled over the first three to four years of the trust's life. That means those first three to four years of the trust will capture the most production. (These trusts are between one and two years old.)

One risk with these companies is that the cash flow in the trusts is subject to commodity price and production swings. That means there can be changes from quarter-to-quarter in the amounts of money paid out by these trusts.

Also, we can't know the exact volume of oil and natural gas produced in a period. But we can make an accurate estimate. And in our model, we are conservative. Our estimates were less than the production estimates produced by the trusts' engineers. That way, if something goes wrong, we are covered.

One thing that could go wrong is SandRidge. You see, we aren't completely insulated from that company... SandRidge operates the trusts. That means it drills and maintains the wells. So if it can't drill new wells, we won't get the new production.

However, I see that as a minor risk to us. SandRidge owns 11 drill rigs. It plans to spend $1.75 billion drilling new wells in 2013. And many of those will be for the trusts. The company plans to drill 580 wells in the Mississippian this year alone. So I don't see a lack of new wells as a potential problem.

And the last major risk to this investment is that the trusts are "finite." In other words, they exist for 20 years and then end. By the end of 2031, all the trusts will close. That means the companies will sell off the remaining assets and pay out one last distribution to both SandRidge Energy and the shareholders of the trusts.

However, as the trust ages, the distributions become smaller. And more of it is simply our original investment coming back to us, instead of dividends – our "return of capital." Let me explain...

Oil and gas wells are finite resources. That means they run out. So if we spend $1 million to drill a well and we get $1.1 million back from selling the oil and gas, we didn't make $1.1 million in profit. We made $100,000 in profit. The rest of that money was a return of our original capital. The same thing is going on here. Our initial investment in the trust can be thought of as our share of the drilling costs.

As SandRidge drills off the wells, it will keep the production stable. However, when the wells are done, the production will begin to decline. We want to be out before that happens. That's why we will only hold these trusts for up to three years. We'll skim the cream and get out before the wells begin to decline. By the end of 2015, we will cash out. We should be able to take a small capital gain on the sale, depending on the prices of oil and natural gas. At the same time, we'll cash out those double-digit gains from the past three years. Now let's take a look at each Mississippian trust.

SandRidge Mississippian Trust I (NYSE: SDT)
In April 2011, SandRidge spun out the Mississippian Trust I. The trust owns royalty interests in oil and natural gas properties in Oklahoma.

The terms of the trust say that it will terminate on December 31, 2030. At that time, the remaining assets will be sold. Half of the proceeds will go to the trust's unit holders, and the other half will go to SandRidge.

Its initial public offering (IPO) price was $21 per share. Its initial market value was $588 million. Today, it trades around $13.79 per share and its market value is $386 million. The Mississippian Trust I suffered as SandRidge imploded, as you can see from the chart below. It sank 62% from its February 2012 high.

SandRidge built the trust around 37 existing horizontal wells and 123 wells to be drilled over the next three to four years. Today, SandRidge has drilled 117 of the 123 wells.

The trust owns a net royalty interest on 90% of the production from those first 37 wells and a 50% net royalty interest on the production from the 123 new wells. In other words, the trust gets nearly all the revenues from the existing wells. But it only gets half the production from the new wells.

The wells produce a mix of 55% natural gas and 45% oil and natural gas liquids. Here's what the Mississippian Trust I's production and distribution history looks like...

Today, Mississippian Trust I trades around $13.79 per share with a 19.5% yield, using the last 12 months of distributions. However, if the market actually believed that the trust would maintain those payouts, the share price would be higher and the yield would be much lower. At today's prices, the market is anticipating a huge fall in distributions.

To test that, we built a conservative model to predict the future distributions, based on the company's oil and gas production. From the creation of the Mississippian Trust I, SandRidge Energy hedged 60% of the expected revenues that will be used to pay distributions through December 31, 2015. In other words, the oil price is already locked in on some of the production, at around $100 per barrel. Taking that into account, here are our expected yields on today's share price, based on three different price assumptions...

Today, the price of oil is $93 per barrel and the price of natural gas is $4.30 per mcf. And as you can see, those prices are above our mid-case estimate. That's because we want to go in with conservative expectations.

You can also see that even if oil prices collapse 15% to $70.94 a barrel... and natural gas prices collapse 30% to $3.14 per mcf... the trust will still provide an excellent yield. And as I said, the current price builds in a lot of risk here. Barring some major catastrophe, this trust will provide double-digit income on today's share price for the next three years. And the fat yield will provide support for the share price.

The trust pays dividends quarterly, with the most recent distribution coming on May 30, 2013 to shareholders who bought before May 15, 2013. The company will pay $0.59 per share for the first quarter.
If the company’s distributions are consistent this year, that would amount to $2.36 for the year, well above our expected return.

Based on the most conservative case of $70.94 per barrel oil and $3.14 per mcf gas, we expect the Mississippian Trust I to pay out $1.43 per share in 2013. That means we can lock in a 10% yield this year if we buy shares below $14.30. At its current price of $13.79, we get an almost 11% yield. However, if the company comes through with $2.36 for the year, we’ll earn 17%, based on a share price of $13.79. That’s exceptional.

Action to take: Buy SandRidge Mississippian Trust I (NYSE: SDT) up to $14.30 per share. Use a 25% trailing stop.

SandRidge Mississippian Trust II (NYSE: SDR)
In January 2012, SandRidge spun out its Mississippian Trust II. Like Mississippian Trust I, the wells are in Oklahoma. The terms of the trust say that it will terminate on December 31, 2031. But as with our other trusts, we plan to sell in three years.

Its initial public offering price was $21 per share and its initial market value was $1 billion. Today, it trades around $12.33 per share, and its market value is $613 million. Like its siblings, the Mississippian Trust II suffered as SandRidge imploded, as you can see from the chart below. It sank 48% from its April 2012 high.

As you can see, even at our most conservative level, the trust pays excellent yields.
The Trust pays dividends quarterly, with the most recent distribution coming on May 30, 2013 to shareholders who bought before May 13, 2013. The company will pay $0.56 per share for the first quarter.
If the company’s distributions are consistent this year, that would amount to $2.24 for the year, well above our expected return.

Our projected distributions for 2013 are $1.69 per share. That means we can lock in at least a 12% yield this year, if we buy this stock below $14 per share. At its current price of $12.33, our yield is 13.7%. And we could do much better if natural gas prices remain high. However, if the company comes through with $2.24 for the year, we’ll earn 18%, based on a share price of $12.33. And just like its sister company, that’s an exceptional yield.

Action to take: Buy SandRidge Mississippian Trust II (NYSE: SDR) up to $14 per share. Use a 25% trailing stop.

The two SandRidge Mississippian trusts fit our "royalty" model well. They are relatively safe, high-yield investments. I believe that they are great places to park some savings and collect double-digit yields over the next three years. And with most of the traditional safe-yield investments paying less than 3%, this is a fantastic opportunity to take advantage of dirt-cheap prices and high-income yields from two beaten-down stocks.

While I’m not counting on capital gains, these stocks could certainly see some in the future. You see, as they continue to pay out big dividends, the rest of the market will recognize that they are mispriced. And that will attract investors.

Right now, other royalty companies trade at much lower yields. For example, Dorchester Minerals (NASDAQ: DMLP), another royalty trust that I like, yields 7%. Another of my favorite royalty trusts, Permian Basin Royalty Trust (NYSE: PBT) yields just 6%.

In order to get the SandRidge Mississippian Trust I and II to yield 7%, the share prices would have to rise 144% and 160%, respectively. And even if that happened, we’d still collect our huge yields. That makes these companies elite investments. Safe, double-digit yields are nearly guaranteed AND we have the potential to more than double our money with capital gains. As you can see, even at our most conservative level, the trust pays excellent yields.

The Trust pays dividends quarterly, with the most recent distribution coming on May 30, 2013 to shareholders who bought before May 13, 2013. The company will pay $0.56 per share for the first quarter.
If the company's distributions are consistent this year, that would amount to $2.24 for the year, well above our expected return.

Our projected distributions for 2013 are $1.69 per share. That means we can lock in at least a 12% yield this year, if we buy this stock below $14 per share. At its current price of $12.33, our yield is 13.7%. And we could do much better if natural gas prices remain high. However, if the company comes through with $2.24 for the year, we'll earn 18%, based on a share price of $12.33. And just like its sister company, that's an exceptional yield.

Action to take: Buy SandRidge Mississippian Trust II (NYSE: SDR) up to $14 per share. Use a 25% trailing stop.

The two SandRidge Mississippian trusts fit our "royalty" model well. They are relatively safe, high-yield investments. I believe that they are great places to park some savings and collect double-digit yields over the next three years. And with most of the traditional safe-yield investments paying less than 3%, this is a fantastic opportunity to take advantage of dirt-cheap prices and high-income yields from two beaten-down stocks.

While I'm not counting on capital gains, these stocks could certainly see some in the future. You see, as they continue to pay out big dividends, the rest of the market will recognize that they are mispriced. And that will attract investors.

Right now, other royalty companies trade at much lower yields. For example, Dorchester Minerals (NASDAQ: DMLP), another royalty trust that I like, yields 7%. Another of my favorite royalty trusts, Permian Basin Royalty Trust (NYSE: PBT) yields just 6%.

In order to get the SandRidge Mississippian Trust I and II to yield 7%, the share prices would have to rise 144% and 160%, respectively. And even if that happened, we'd still collect our huge yields. That makes these companies elite investments. Safe, double-digit yields are nearly guaranteed AND we have the potential to more than double our money with capital gains.

By Dr. David Eifrig Jr., MD, MBA and Dr. Steve Sjuggerud

One quarter of the Baby Boom generation expects to work until they die.  For Americans ages 46-55,
having enough money to retire is among their most pressing worries.  Nearly half (44%) have little or no
faith that they are financially secure enough to retire, according to a recent Associated Press survey.
And 25% say they simply can’t retire.  (Unsurprisingly, a similar number say they have no retirement savings.).

Thankfully, the good people at CNN and Money magazine have put a “calculator” on the Internet to
tell you exactly what you’ll need.  Just plug in your age, current salary, and total savings… and voila…
the site spits out a number it says you need to sock away each year to retire  on 85% of your current
 salary.  Problem solved, right?

With all due respect to the good intentions of the folks at CNN/Money…It’s bunk.  As a medical doctor,
I can tell you that if you’re relatively healthy right now and a nonsmoker, you could live a lot longer than
the averages.  How long? It’s impossible to say. There are just too many variables.

How do you ensure you won’t run out of money if you don’t know how long you’ll need it?  Stocks have
returned little over the past 10 years, and your pension plan might not meet your needs.  If you’re a
homeowner, you’ve probably seen your house value plummet, too.  And bonds barely pay a few
percentage points of interest.  Can you really trust Social Security to make your retirement pleasant
and worry-free? I doubt it.

How can you be certain you’ll have enough money to last for your retirement?  Today, I’ll show you
how.  I’m going to introduce you to a potential retirement solution only a handful of Americans
ever consider.

I’m going to lift the veil on one of the most misunderstood secrets of the wealthy... annuities.  If you
combine the benefits of an annuity with the strategies we’ve outlined in our report called “Trade
Non productive Assets for a Huge Cash Reward,” you’ll be able to retire free of the money worries
dogging most Americans.

As I’ll explain, the money you receive via annuity is guaranteed by a company that is required by law to have enough cash on hand to meet future obligations (unlike a bank or brokerage firm). Your money is also guaranteed (up to $100,000 or as high as $500,000) by an insurance fund regulated
by your state government. 

Another thing that makes this investment unique is that you can set up your contract so the monthly payouts you receive can go up in value but never down, even if stocks, bonds, and real estate stay in a bear market for another 20 years.  So it’s almost impossible to lose money.  It gets even better.

Unlike any other investment vehicle I know, the money you receive from an annuity could be  sent
to you for the rest of your life and can even be passed on to your heirs.  But before I go any further,
I have to warn you... these insurance products are not right for everyone, and you must meet several requirements before you can begin collecting payouts.  The good news is, most Americans near
retirement age qualify.  Let’s take a closer look...

Will You Have Enough Cash in Retirement?
If you are nearing retirement, you can drive yourself crazy trying to figure out how much money
you’re going to need.  How long will you live? How high will inflation be?  What will happen to the
stock market and the economy?  All these things affect your retirement income and it’s impossible to know the answers.

That’s why you should consider making sure you’ve got at least a certain level of guaranteed
income.  Even in the worst-case scenario, you’ll know that you’ve got enough money to meet your
basic expenses.  Remember, Social Security was only meant to be a safety net.  I don’t have the time
in this report to detail how untenable the current program is (although if you plug “Social Security
outlook” into an Internet search engine, you can read plenty on the topic).  Just trust me…
If you’re 55 today, you won’t be collecting what you think you will be from Social Security
in 10 years.

One way to be prepared is with these annuities.  The products are designed to pay retirees
guaranteed income and are created by the insurance industry.  Over the years, annuities have
gotten a bad name.  But according to several folk I’ve spoken with in the business, when used
properly, annuities can be a vital tool in ensuring you have the income you need to retire.

The problem is you can find thousands of annuity options on the market.  You can invest in an
annuity that pays you for the next five or 10 years... or one that pays you for as long as you live.
You can find ones that pay you immediately or defer your payments for 10 years or more.  You can
buy an annuity that increases your payouts when inflation rises or when stocks go up, or one in
which the payouts stay the same for the rest of your life.
 
I’ll spell out the basics of annuities, some of the options, and how they work. We’ll tell you the
eight things to think about when investing in an annuity.  And show you a real-world example and
how the process might work for you.  Then I’ll explain my favorite type of annuity, which I think
offers the best options for most retirement-age Americans.

How These Investments Work
An annuity is part investment and part insurance.  It’s an investment in the sense that you put
money in and hope to get back more later, depending on how the investment performs.  It’s
insurance in the sense that you pay a premium to make sure your money will never lose value
and you will collect a worst-case gain.

It’s like a mutual fund that offers you insurance.  No matter what happens in stocks, bonds, real
estate, or the rest of the economy, your income will never go down.  Remember, it’s the only
investment in the world besides Social Security and a pension that guarantees you a certain
amount of income, for as long as you live.  And again, you shouldn’t count on Social Security’s
longtime viability.

Here’s another way to think about it: You pay to insure your home against damage.  You pay to
insure your car against collision.  When you buy an annuity, you’re insuring your future income
stream until you and your spouse die.

Dozens of U.S. insurance companies offer annuities.  (We’re even researching a few overseas.)
When you buy an annuity, you enter into a contract with the insurance company.  You give either a
lump sum (my preference) or several payments over time; the company guarantees you income
according to the terms of the contract.

There are several basic differences in annuities:

· Fixed Rate vs. Variable. Fixed-rate annuities give you the same payout every month.  Variable
  annuities, on the other hand, typically have a guaranteed minimum payout, but the payout can
  go up depending on how your investments do.

  We prefer variable annuities, because your payment can go up, but won’t ever go down. 
  Those are the annuities we’ll be talking about.

· Immediate vs. Deferred. Immediate annuities begin paying you, as the name indicates, pretty
   much immediately.  Deferred annuities pay at some point down the road.

  Whether you’re interested in an immediate or deferred annuity depends on whether you’re
  looking for income now, or are preparing for retirement down the road.  Generally, the older
  you are when you start receiving payouts, the larger the payouts will be.  The deferred annuity
  is my preference.

· Single Premium vs. Flexible Premium. When you start an annuity, you can make one single
  principal payment, or you might have the option of making multiple payments in the amount
  and the time of your choosing.

If this all sounds confusing, don’t worry... It’s easier than it seems at first.  And we’ve prepared a
checklist of things to keep in mind when you’re shopping for the perfect annuity.

Annuity Checklist: Eight Things to Look for in Your Guaranteed Retirement Contract

1) Is the company secure?
An insurance company guarantees your annuity.  So you want to know that the insurance
company is going to be around in 20 years.  One corporation, A.M. Best, “rates” the insurance
company’s ability to pay claims now and in the future.

We recommend buying annuities from insurance companies with a rating of A-plus or better.
The higher the rating, the safer the company. You can simply ask your broker for the rating of
the insurance company that’s offering the annuity.

All insurance companies submit to regulation by the government of the state where they
operate.  Part of what these state agencies do is run a “guaranty fund” to which every local
insurance company must contribute.  If the insurance company that issued your annuity goes
out of business, the money from this fund will be used to pay back some or all of your principal.
You can check with the insurance commission in the company’s home state for more details.

2) Can you invest for the long term?
If you are looking for a highly liquid investment that you can buy one day and cash out the
next, annuities are NOT for you.  You must be committed to using them for the long term.
The issuer will only let you withdraw a certain amount of your principal per year during the
“surrender period.”  The surrender period typically lasts four to seven years.

So for example, you may be able to take out as much as 10% of your initial investment per
year without penalty for the first four years.  After that, you can take out as much as you
want or liquidate your investment entirely.

3) Is the tax situation right for you?
Because the IRS treats annuities as an insurance product, your money grows tax-free.  And
annuities aren’t subject to annual contribution limits like with IRAs and 401(k)s.
If you withdraw your money before you’re 59 and a half, you’ll pay income taxes plus a 10%
penalty tax.  Otherwise, you only pay taxes on the payouts you receive that are over and above
the amounts you initially put in.

4) Are the costs worth it?
For years, one of the big criticisms of annuities is the expenses that the stock market
“generally” always goes up, so you don’t need to pay for protection.  That may be the case
“generally,” but what about now?

Guaranteed income does not come free of charge.  Because annuities can offer more benefits,
they have more expenses than mutual funds.  You can expect to pay about 1% more than the
costs of your typical mutual fund.  And you can shop for annuities on a “cafeteria plan.”
It’s simple: You only pay for the benefits you want.  You don’t pay for the benefits you don’t want.

5) Are your heirs taken care of?
If you die before you receive your full principal back in monthly payouts, your spouse or heirs
can continue to receive payouts or a lump sum until the principal (at least) has been returned
in full.

Let’s say you are 65 years old, and you would like to put $100,000 of your savings into an
annuity to guarantee some income for the rest of your life.  And let’s say you’ve found an annuity that will pay you $5,000 a year for as long as you live.  If you live another 25 years, you’ll receive
$125,000,  no matter what happens in the stock market even if we’re in a terrible bear market for
the next 25 years. (As I’ll explain, you could receive a lot more if the market goes up.)

But what if you live just five more years?  You’ll have received just $25,000 from your $100,000
investment.  Doesn’t sound like a very good deal.  That’s why we recommend you opt for a
“death benefit.”  If you live a long time, you make out great.  But if you don’t, you still won’t lose a penny of your initial investment.

If you die before the original investment has been paid, your heirs will continue to receive
payments until your money has been paid back in full.  That’s in the worst-case scenario.  If
your investment has gone up in value (see below for more details), your heirs can receive at
least the cash value of your investment, if not more.  Opting for a death benefit will increase
your costs slightly, but it guarantees you can’t lose money, no matter what.

6) Will you benefit from a bull market?
Some annuities allow you to invest your principal in “sub accounts,” which are like mutual
funds.  The more choices the annuity offers, the more control you have over your investment.
But that’s not even the best part: If your chosen investments go up in value, your payouts
increase. But even if your investments go down in value, your payouts will never decrease.

So your downside is limited to zero.  And your upside is unlimited.  If your chosen investments
skyrocket, you’ll see your monthly payouts balloon.  Your monthly payouts can only increase.
They can never go down.  Let’s look at an example...

Say you’re 65 and you’ve got $100,000 to put in an annuity.  You’ve found one that will pay out
about $5,000 a year. Now if you spread that out among sub accounts that end up losing value, your payments will stay the same. They’ll never go down.  But if your investments double over
four years, your payout could grow to $10,000.  This higher payout is now locked in.

So now let’s say in Year 5, your sub accounts lose all of their gains and drop down to $100,000 or even down to $50,000.  For most investors, that kind of loss would be devastating.  But with the “lock-in” benefit, you will still receive at least $10,000 every year for life, guaranteed. It’s as if your principal is still worth $200,000 and didn’t lose a penny.

Given the market’s volatility skyrocketing one year, plummeting the next this benefit can
be unbelievably valuable.  Imagine if you could get all of the gains of the stock market and
none of the losses.  That’s what happens when you lock in your gains.

7) Will you benefit in a bear market?
Many annuities will guarantee you annual compounding growth of 5% as long as you’re not
taking payouts.  This means that even if your chosen investments lose money, your income
stream is growing.  Let’s look at our example again...

You invest $100,000.  But you start right at the beginning of a horrible bear market.  Five years
later, your investments haven’t grown a penny.  In fact, they’ve lost money.  Your $100,000 has
turned into $80,000.

As I said above, your payments will never go down.  So you’ll never receive less than $5,000 a
year once you start taking payouts.  But with guaranteed growth, your future income can
increase even if your investments lose money.  So with 5% guaranteed annual growth, five years later, it’s as though your principal is worth about $128,000.  It’s as though you’re up more than 25% instead of down 20%.

In other words, your future income will grow if the markets do absolutely nothing and even if
they tank.  So by locking in your gains, you get all the benefits of a bull market, but none of
the volatility.  And by getting guaranteed growth, you never have to suffer in a bear market
again. But the best part is, you can combine these two features.

8) Are you getting the most out of the bull and the bear market?
Nowadays, some annuities can “stack” your worst-case bear-market return (the guaranteed
growth) on top of your best-case bull-market return (your locked-in gains).  Let me show you...

Start with the same $100,000, and we’re back in the bull market.  By Year 4, your $100,000 has
grown to $200,000.  But then in Year 5, your investments take a hit and drop back to $100,000.

Remember, your future income doesn’t fall.  Your gains are locked in, as though your principal
is still worth $200,000.  But if you’ve got 6% guaranteed growth (today’s current rate), it’s
actually more like $212,000 ($200,000 plus 6%).

That 6% will keep compounding every year as long as your principal is less than your locked-
in highest gain and as long as you’re not collecting payouts.  This gives you a worst-case return
you can count on, without limiting your gains.  Your money can grow in bull and bear
markets.  Your income will increase every year, guaranteed.

Let’s Look at a Real-World Annuity...
Here’s an annuity we reviewed with financial planner Jeff Winn.  We asked Jeff to show us an
illustration of an annuity, with the following assumptions:

· I was 60 years old when I invested.
· I made a one-time investment of $100,000.
· I started getting paid immediately.

Jeff chose a simple annuity, just for illustration, from an A-plus rated insurance company.
For simplicity’s sake, this annuity was invested in just three “sub accounts.” They were:

1. A growth portfolio (which had holdings in companies like Google, Microsoft, Nokia,
     Berkshire Hathaway, and Cisco).

2. A growth income fund (which held income-paying companies like Merck and Exxon Mobil).

3.  An intermediate bond portfolio
     (which invested mostly in corporate and government bonds).

Keep in mind, you would continue receiving this annual payout (equal to monthly payouts of $1,474).  It could increase in value but is guaranteed to NOT go down in value.  And your
investment would still have $140,000 in cash value which you could pull out at any time or pass it
along to your heirs.

Considering the fact that the stock market has basically gone nowhere for the past decade, these
guaranteed payments start to look pretty good.  Would you have made more by simply investing your money directly in the stock market in 1985? Perhaps, but what if the stock market had gone
down?  You would have had none of the guarantees that these offer, which is what a lot of retirees
need.

How Much Money Do You Want to Collect Every Month?
Here’s one rule of thumb to “guarantee” a comfortable retirement:

Figure out your basic living expenses and subtract any pensions or Social Security payments.
Now you’ve got the minimum income you need to meet your basic expenses in retirement.
That’s the monthly payout you should look for from your annuity.

For example, if you are receiving $1,000 per month from Social Security, and you get a pension
that pays you $700 a month, that’s $20,400 a year.  Let’s say you figure your basic living expenses
are around $25,000 a year.  You should look for an annuity that pays you at least $5,000 a year
(or about $415 per month).

Beware of anyone who tries to pressure you into more than that.  We would never recommend
you put the bulk of your money into an annuity.  Stay away from someone who tries to put all or
most of your money into an annuity.

How the Process Will Work for You
So now you know just about everything you need to know to find the best annuity for you and
ensure you collect guaranteed income for life.

Once you’ve figured out all the options you want, when you want to get paid, and how much
you want to collect each month, you’re ready to talk to a professional about which annuities
will best fit your needs.

Many different financial institutions can sell you an annuity, including your bank, your online
broker, your insurance agent, and possibly your financial planner.  But they might have a limited
selection and not the right one for you.

With the huge number of options, we suggest dealing with an honest, independent adviser.  They
generally have the best selection and can best match a product to your needs.  I’ve listed two here
in this report as a place to start.  Once you and your adviser have found a suitable annuity, ask to receive an “illustration.”  This illustration will include all the details, including fees, benefits,
withdrawal penalties, etc. 

Take your time to review it.  You’ll then fill out an easy application. It should take about 10 minutes.
You can select your sub accounts then, or wait to choose your investments. After that, you’ll get a “free look.”  When you buy an annuity, you have between 10 and 30 days  to cancel the contract.

This free look period gives you one last chance to opt out.  Ask how long your “free look” lasts,
in case you change your mind. (Just a note: If your sub accounts go down during the free look period, and you decide not to go ahead with the annuity, you will only get back the market value of your
principal.)  If you’re happy with your “free look,” you don’t have to do anything.  You’ll  start receiving monthly payouts as soon as your contract specifies.

What I Recommend
Because of the large number of choices available to you and because each individual’s
circumstances are different, I can’t say for sure what the perfect annuity is for you.  But here are some of the options I think will get you the most out of your annuity:

    Choose a variable annuity that will guarantee your payouts will never go down in value but
    leave plenty of upside for your payouts to increase.  Today, I’ve seen quotes for 6% minimum
    growth from several A-plus insurance companies.

    Look for a good selection of sub accounts to choose from.  I’d recommend you put the  
    sub accounts into funds like emerging markets (i.e. China or India) or Japanese funds.

    Look for an option where you can speculate with your choices.  After all, you have a minimum
    amount guaranteed (6%) and if you do better than that with speculative funds, you could
    make even more. And with the markets down right now, it’s a great time to get into some
    riskier investments.

    Choose an annuity that will give you payouts for life, not over a fixed term.  This will give you
    maximum peace of mind and money for you and your spouse until you die.

    Choose a single payment deferred annuity so your principal can build up over time for your
    retirement years.  This way, you’ll insure a higher payout amount than if you started collecting
    today.

    Add a “death benefit,” which will guarantee you and your heirs will get at least what you put
    into it.

You should ONLY put as much as you need to cover your basic retirement expenses (after your
existing pension or Social Security) and keep plenty of money outside of your annuity to have liquid
funds on hand.

Guaranteed income-for-life variable annuities are ideal for a small piece of your retirement
money, so that you’ll know, beyond all reasonable doubt, you’ll have at least a certain level of
income for as long as you live. You owe it to yourself to seriously consider them for a portion
of your retirement money.

More Resources
Annuities are a great way to ensure you’ll have some income for as long as you live.  You just
have to figure out which options are best for you. Here are a few more sources to help you out:


· Read the SEC’s “Investor Tips” on variable annuities: http://www.sec.gov/answers/varann.htm.

· Fidelity offers annuities... and has good information on annuities on its website: Fidelity Annuities.

· MassMutual, a large life insurance company, has a nice website talking about annuities and
  how they might work for you.  You can take a look here: MassMutual.  I encourage you to 
  check out several sources to get the best combination of price and lower fees, while
  maintaining the quality of the insurer.

· Talk to your financial planner and see if he deals with annuities.  It’s important that he works
  with lots of different insurance companies so that you can be assured he has an independent
  view.

Finally, there are two guys we know who have been working in the insurance and financial planning business for years (decades) and are knowledgeable about annuities.  You should
know we have no financial relationship with either one of them. Be sure you’ve read about
annuities online or spoken to a few other insurance agents about the products first so you
can help these guys help you more easily. If you call them up knowing nothing, you’ll
waste their time and yours.

Todd Phillips - You can reach Todd at 888-892-1102 or [email protected]
Jeff Winn - You can reach Jeff at 800-432-4402 or [email protected]

Jeff and Todd can give you a second opinion on anything you’ve gotten from your own financial
or insurance agent, too.  They are both easy to talk with and knowledgeable.

Few Americans have considered single premium deferred and variable annuities. But they’re an
incredibly safe solution to ensure yourself and your spouse a lifetime of income.  And unlike stocks
or mutual funds, there’s no guessing about how much you’ll have or when you’ll get your money.
You can step up and secure your financial future right now and know exactly when and how
much you’ll be collecting for the rest of your life.