Houston, TX (PressExposure) August 14, 2007 -- Arbitrage. Many folks have no idea what the word means, or, more importantly, how you may be able to increase your retirement income from the concept. Simply put, an arbitrage is exploiting a price variation.
âAssume for a moment that I introduce you to a source that will loan you all the money you want, with no questions asked and the interest rate that youâll pay on your loan is 4% locked in for the rest of your life. (Please note this is an exercise in imagination, but will do a good job of illustrating the point,â explains Eli Mitcham, financial planner and president of Free Market Financial, LLC a fee based registered investment advisor firm headquartered in Houston, Texas.
âNow, assume that I introduce you to another source that will allow you to invest all the money that you want, and this source will pay you 6% interest on all the money that you want to invest. On top of that, the rate of interest credited is guaranteed never to change. Armed with that information, hereâs my question for you: Would you like to borrow all the money at 4% that you can and invest it at 6%?â The answer for many folks, is obviously âyesâ.
Thatâs an arbitrage - taking advantage of a price variation.
The problem with many arbitrages is that theyâre simply not that clean, neat, and predictable. Many arbitrages exist one day and then evaporate the next.
âThatâs where an advanced financial planner can make all the difference,â explains Houston financial planner Eli Mitcham.
Thereâs one arbitrage, however, that may be the proverbial exception to the rule. Thatâs the good news. The bad news is that while this arbitrage will work well for some clients it wonât work at all for others.
Take the following example:
1.) Chuck is 75 years old in retirement with an investment portfolio of bonds worth $2,000,000. 2.) Chuckâs current average yield on this bond portfolio is 4.5%. This means that Chuck is receiving investment income from this retirement portfolio of $90,000 per year. 3.) Chuck looks into a strategy that may allow him to increase his retirement income from his investment portfolio and guarantee his heirs a tax advantaged $2,000,000 inheritance.* 4.) Chuck uses his investment portfolio to buy a $2,000,000 medically underwritten, lifetime income contract* that pays him $285,480 annually for the rest of his life in retirement. ** 5.) Chuck also buys a $2,000,000 life insurance policy to provide a $2,000,000 inheritance to his heirs completely income and estate tax free. 6.) The premium for the $2,000,000 life insurance policy on Chuckâs life is $121,000 per year. Chuck will pay the premium from the increased income heâs receiving from his investments*. 7.) By utilizing this strategy, Chuck will increase his spendable income in retirement from $90,000 to $164,480 per year after paying his insurance premium, plus guarantee a tax advantaged $2,000,000 inheritance to his heirs.
For more information on how this retirement income arbitrage strategy may work for you, contact Houston Financial Planner Eli Mitcham at 1-800-960-3499 or stop by the Free Market Financial, LLC website at http://www.freemarketfinancial.com
*The asset being illustrated here is a life insurance contract and Death benefit amount noted is guaranteed by the claims-paying ability of the issuing insurance company. The purchaser should consider the issuing insurance companyâs credit rating when contemplating a purchase**The asset being illustrated here is a Single Premium Immediate Annuity and the income benefit is guaranteed by the claims-paying ability of the issuing insurance company. The purchaser should consider the issuing insurance companyâs credit rating when contemplating a purchase. The identified strategy is an acceptable option when the retiree is certain that he is or she does not need to withdraw any amount above the annual income amount at present or at anytime in the foreseeable future. Advisory services offered through Free Market Financial, LLC