Current events, commentary, and links to other resources on retirement income and annuities in the news.

Limited Time Rate Hike For Fixed Annuities

For a limited time, Fidelity & Guaranty Life’s FG Guarantee-Platinum® single premium fixed deferred annuity with a five-year guarantee period will increase to 3.10%* – initial guarantee period. This special will start on February 6, 2017.

Most market observers see rates on a rising trend, and these shorter term contracts like the F+G are a good way to go.  It’s a way to safely place money, earn a decent yield, and turn the money over in just a few years.

While this specific product might not be appropriate for you, this flexible and laddered approach frequently comes up during appointments with clients discussing The AST Flex Strategy.  Give us a call to find out more.

Understand the Pros and Cons of Fixed Index Annuities

pros and cons of fixed index annuities

In retirement, how much money you have is not nearly as important as how much money you have to spend. So the biggest challenge when weighing the pros and cons of fixed index annuities in retirement planning is determining if the annuity you are considering will create guaranteed income that is there when you need it.

But when it comes to guaranteed income, all too often, retirees are only shown just a few options, like complicated ‘hybrid’ lifetime income annuities.

It’s a shame, but people mistakenly think they must settle for these low income payout, long term contracts that offer little or no growth of their money. When it comes to pros and cons, too often, the ‘cons’ outweigh the ‘pros’ with these types of contracts.

You CAN Do Better!

Don’t let a few bad apples spoil the barrel- the reality is, there ARE better options out there that can secure your money and create a guaranteed income without locking yourself in to a ‘forever contract’ that you may come to regret.

In fact, savvy customers often find the guaranteed safety they need, but do so by staying OUT of guaranteed income contracts entirely!

With a focus on a safe and flexible guaranteed outcome planning, these smart consumers around the country have discovered the “Flex Strategy” and are using Fixed Index Annuities that guarantee the retirement they dream of, to mitigate risk and produce income options years into the future.

Click here to learn more about this smart, flexible annuity strategy. Or, read on for more on how a solid understanding of the pros and cons of Fixed Index Annuities, where we reveal how you can take the best these exciting products have to offer, and ditch the bloated bells and whistles, to create a compelling and flexible guaranteed retirement strategy.

PROS AND CONS OF FIXED INDEX ANNUITIES: Pros

Principle and Growth Guarantee- Your initial investment is safe from loss, and guaranteed to grow.  The contract will state the minimum amount you can expect to receive at the end of the surrender period.

Tax Deferral- Like all annuities, your money grows on a tax-deferred basis.

Account Step Ups- In most cases, a new base contract value can be locked in when the index performs well.  This gives you the benefit of locking in a new guaranteed basis when the market works the way we all want it to.

Cons

Low Cap and Participation Rates-  Unfortunately, there are poorly constructed index annuities that will not have beneficial caps and participation rates.  It’s critical to know what the objective if your investment is to ensure you get the right type of contract for your needs.  Growth oriented fixed index annuities have the better cap and participation rates than income oriented ‘hybrid’ annuities.

Long Surrender Periods- Again, poorly constructed contracts have long surrender periods.  Let me state for the record that I have yet to see a good indexed annuity with a long surrender period.  For instance, one of my favorite products in this category has a seven-year surrender period.  If you happen to really like it after seven years, then buy it again and make it a fourteen-year strategy.  If it doesn’t work that well then you’re money is free a lot sooner.

Complex Crediting Methods- Using obscure or proprietary indexes or hard to understand crediting methods just makes it hard to understand the annuity.  Try to keep it simple so you can monitor performance and understand what happens on the account.

 

Now- The Basics of How Index Annuities Work

The Pros and Cons of Fixed Index Annuities

The AST Flex Strategy helps you understand the pros and cons of fixed index annuities.

Index Annuities, Fixed Index Annuities, and Equity Indexed Annuities, all mean the same thing. These are all the same insurance product with different labels, but the correct name is a ‘Fixed Index Annuity’.

Fixed Index Annuities are nothing more than fixed annuities with a different method of crediting interest. With a fixed annuity, which is a lot like a CD, the contract owner receives a stated rate of interest each year.

But with an Index Annuity, the appreciation rate is calculated based on growth in an outside market index, like the S+P 500 or the Dow Jones index.

The beauty of Index Annuities is that if the market index goes up, the contract makes money. But if the index goes down, the principal is protected and the contract does not lose value.

Index annuities give consumers a partial participation in the markets, but offer a principal guarantee.

How Insurance Companies Make This Possible

How can insurance companies make a guarantee that your Fixed Index Annuity may go up, but will not go down?

Insurance companies use premiums to invest safely, for their core General Account. Warren Buffet made his money buying insurance companies, and then using the premiums to buy other businesses and increase wealth and financial strength.

In a Fixed Index Annuity, the insurance company uses your premium to invest in bonds, mortgages, and other instruments in the safe, core general account.

But with an indexed annuity, instead of accepting this ‘general account’ fixed rate, the insurance company uses the interest earned from the conservative portfolio to purchase an option position in a market index. An option is simply the right- but not the obligation- to purchase securities at a future date for a contractually stated price.

If the market goes up, the company will exercise the option and realize a gain. They credit a portion of the gain on that option contract to your annuity contract.

If the market moves sideways or down, the option expires worthless and no interest – or gain- is available for crediting.

Potential for Gain with No Risk of Loss

When talking about the pros and cons of fixed index annuities, the biggest positive is that index annuities truly offer you the potential for gains based on market appreciation, without the risk of loss to your principal.

Your principal is not at risk, rather, it’s only the earnings from your principal are invested in potentially higher yield options. Thus, an indexed annuity is a safe asset with upside potential.

This explanation also gives you a good idea why these are called “Fixed Index Annuities”. Income from the FIXED account growth is used to buy options in a market INDEX for potential gain.

If the market rises, you may profit. If the market falls, the company has wagered only your income from the FIXED account, so your principal at all times remains safe.

 Using Fixed Index Annuities

Fixed index annuities are a great alternative to bonds and are a core, safe money holding often used to make sure principal is safe, and to preserve assets and options for later.

The typical buyer of an index annuity seeks the potential for growth without risk of loss, and appreciates principal protection and tax deferred compounding.

But far too often, the simple and elegant fixed index annuity gets clouded with bells and whistles and add-on riders, turning it into more of a ‘hybrid annuity’.

It’s crucial to know that most ‘hybrid annuities’ are not optimized for safety and growth.

In fact, there are over 350 different index annuity contracts on the market today and it’s growing every day.

Far too many agents have one preferred contract they work with for all scenarios. That is just not appropriate, and it’s why we start by understanding your objectives first before looking at any specific contract.

For more than 13 years we have watched, analyzed, and sold these annuities and have come to understand them intimately. Better than anyone, we understand the pros and cons of fixed index annuities and how to use them in retirement.

We’ve produced The Annuity Guide as essential reading for retirees considering Fixed Index Annuities.  It is available for a free download at Annuity Straight Talk, and will help you find the safety and guarantees you need.

Click Here to get your copy today!

If you seek a qualified adviser well versed in the pros and cons of fixed index annuities, please do not hesitate to contact Annuity Straight Talk today on 800-438-5121.

Annuities and Retirement Happiness

annuities and retirement happinessIn a continuation of an earlier post, we have another study on how guaranteed income and annuities increase  overall retirement happiness.  The study focuses on how some portion of ‘annuitized’ assets increases overall happiness.

It seems that when people eliminate the stress and worry of ever running out of income, their overall peace of mind increases measurably.

The full study, by the firm TowersWatson, is available for download here.

Many Americans consider annuities as illiquid and expensive and thus have avoided them in the past, even as research has shown that the security provided by annuities boosts retirement satisfaction.

A 2003 study found that retirees with a higher percentage of annuitized income were happier on a cross-sectional basis and maintained higher levels of satisfaction over time than their less annuitized counterparts.

A 2005 study found that retirees receiving annuities from defined benefit pensions were happier than those without pensions and those with only a defined contribution plan.

Key Findings

  • Retirement satisfaction has steadily declined over the last decade.

  • Satisfaction is highest among those with high levels of wealth and income who are very healthy and annuitize their income.

  • Among retirees with similar wealth and health characteristics, those with annuitized incomes are happiest.

  • Annuities provide the biggest satisfaction boost to retirees with less wealth and those in poor health.

  • Despite variations, the satisfaction effects of annuitized income and general decline in retirement satisfaction are long term and extend across all respondents.

Magic Johnson Buys into Annuity Carrier EquiTrust

earvin-magic-johnson

Recognizing the value of a growth industry, Magic Johnson has taken a major position in life and annuity company EquiTrust.  The company was purchased just a few years ago by Guggenheim Partners.

Guggenheim also bought Security Benefit and other life and annuity carriers just a few years back, and kicked off concern in the industry that the NY based investment company was not in the sapce for the ‘long haul.  Many of the index and hybrid annuity products offered by EquiTrust and especially Security Benefit sported flashy benefits and bonuses that masked low payouts and mediocre credit quality.  Billions of nmew premium flowed into these products nonetheless, giving Guggenheim lots more assets under management.

Now with thhis move, perhaps their overall plan is revealed- buy small to mid sized insurance companies, get control of the assets , retain those assets under investment advisory management, and then sell off the operating company.

Hopefulyl the deal works out for Mr Johnson.  I’m pretty sure it already worked out for Guggenheim…. I hope the policy holders fare as well too.

Here’s the article:

Magic Johnson Buys Into FIA Carrier EquiTrust

Retired basketball legend-turned-entrepreneur Earvin “Magic” Johnson has acquired more than 60 percent of EquiTrust Life from Guggenheim Partners.

The deal, which began last year, concluded for an undisclosed amount. EquiTrust is a leading writer of retail annuities. Guggenheim is a New York-based investment and advisory firm that reportedly had bought the carrier in 2011.

The deal gives Johnson’s firm — Magic Johnson Enterprises (MJE) – controlling interest in EquiTrust, which writes annuity and life insurance through more than 20,000 independent agents nationwide. The company is based in Chicago, with operations in West Des Moines, Iowa.

According to MJE, Guggenheim will continue to provide investment management services for EquiTrust.

A superstar in the business

For the insurance industry, this means a superstar has entered the annuity business. Johnson is the famed former Los Angeles Lakers point guard who is a two-time inductee to the National Basketball Association’s Hall of Fame. As founder, CEO and chairman of his own company, he has been investing in fitness sport centers, restaurants, travel, real estate funds and other businesses.

With this new investment, Johnson’s firm is extending its reach into the retail insurance market, especially the index and fixed-rate annuity market where the insurer has prominence.

At year-end 2014, EquiTrust ranked eighth in sales among 41 FIA carriers tracked by Wink Inc. In terms of overall fixed annuity sales at year-end 2014, the company ranked 14th in the top 20 list of fixed annuity writers, as posted by LIMRA.

The annuity products that EquiTrust writes include index-linked, multi-year guarantee and traditional tax-deferred contracts, and immediate-income annuities.

The company also sells life insurance life products including simplified-issue, wealth-transfer life insurance.

Formed in 1996, the carrier now manages more than $14 billion in assets. MJE was formed a little earlier, in 1987, and now invests in firms from many industries. So the two share a common bond in that their formative years were in close proximity to each other and that they have both grown substantially over time.

Future direction

But the bond that Johnson identified in his public statement on the closing has to more to do with future direction.

The acquisition will provide MJE with “a tremendous platform to advocate for financial literacy and assist in creating job opportunities at every level,” Johnson said. “We will educate and emphasize the importance of life insurance for estate planning and annuities for retirement planning purposes.”

He described this as not only “groundbreaking” but also as something that “continues my mission to invest in businesses where we can make a positive impact in the community.”

That aligns closely the company philosophy outlined on the MJE website — to hold a “firm commitment to strengthening urban and underserved communities” and work to “accelerate the advancement of multicultural communities.”

The celebrity factor

Annuity industry analyst Sheryl J. Moore is not sure whether Johnson’s celebrity status will impact annuity sales at the company. “In the past, I’ve see marketing group partners who have hired celebrities to help stimulate sales, but the feedback from the field that I’ve heard has tended to be uncertain,” the president and CEO of Moore Market Intelligence said in an interview.

“The producers would say things like, ‘How does this (celebrity) help my business?’”

Regarding the EquiTrust deal, Moore said she has not heard one single comment on the new ownership since news about the pending deal surfaced last year. “I’ve gotten calls from journalists, but not from producers,” she said.

No doubt other celebrities own stock in insurance companies, but no one in the industry talks about it, Moore added. “I’m not sure this is news for annuity producers”. Celebrities has a lot of impact on the society, and people really famous attract masses so when you something as a celebrity product or post like if you say Super Bowl Lady Gaga All Time Nude Pictures -ximage.me, people will be interested.

In the MJE case, though, the celebrity’s firm now has controlling interest, and this particular celebrity has a lot of knowledge about team strategy and championship. For those reasons alone, at least some industry onlookers will be watching to see whether this new boss takes the company’s sales, productivity, and other annuity and life insurance metrics to new heights.

 

401K Tipping Point? The Demographic Wave Builds

tipping-pointThere are several critical images to contend with when you look at demographics and retirement.  In fact, it’s one of the critical risks we contend with in retirement planning (You can read up on Demographic Risks Here)

Here’s the $.10 summary:

demographic risks 2

A wide bulge of Baby Boomers is approaching retirement, and they will start selling securities  at a more rapid clip than younger generations are saving and buying.

I personally believe that there is a significant wave of selling pressure on the markets in the years ahead.

This Wall Street Journal article doesn’t specifically touch on the demographics, but perhaps it’s an early warning sign that the net outflows from 401Ks exceeds the inflows….

tipping_point

Over the Hill: Retirees Yank 401(k) Funds

Withdrawals from 401(k) plans are now exceeding new contributions as baby boomers age, a shift that could have profound implications for the U.S. retirement industry.

Investors pulled a net $11.4 billion from tax-deferred savings plans in 2013, according to an analysis of government data provided to The Wall Street Journal by BrightScope Inc., ending decades of expansion. Complete industry information for 2014 isn’t yet available.

The movement out of 401(k)s is expected to accelerate in the coming decade as more baby boomers retire, squeezing large money-management firms that rely on fees charged to employers and investors as a chief profit engine, some analysts said.

Asset managers hope they can replace the outflows with a new surge from millennials or other products, such as individual retirement accounts. One industry data provider said most funds leaving 401(k)-style plans are migrating to IRAs.

It is “an inflection point” for the U.S. retirement industry, said J.P. Morgan Chase & Co. analyst Ken Worthington in a research note in April.

Large money managers will be forced to cut fees, offer different products or consolidate operations, Mr. Worthington added in an interview. “It changes the dynamic of the business itself.”

Tax-deferred 401(k) retirement accounts came into wide use in the 1980s as big companies embraced them as a replacement for costly pension funds. Baby boomers were the first generation to rely heavily on the savings plans and helped create a multitrillion-dollar industry that supported hundreds of investment firms and financial planners.

Assets held by 401(k) plans ballooned to $4.6 trillion in the fourth quarter of 2014, up 171% from $1.7 trillion in 2000, according to the Investment Company Institute, a trade organization for mutual funds.

Now the 401(k) generation is ready to take its money out as the number of Americans reaching retirement age this year is expected to hit 3.5 million, up from 2.7 million in 2010, according to J.P. Morgan Chase and Census Bureau data.

One investor preparing to begin his exit is Dave Bernard, 56 years old, who retired three years ago as a consultant to startups in Cupertino, Calif. He and his wife, an office manager, both have a sizable amount invested in their 401(k)s, but in the coming months, when his wife retires, Mr. Bernard will start pulling money out of his plan for living expenses.

He expects to make withdrawals for about 10 years until he can access the full amount of Social Security benefits.

“We’re going to end up using a good portion of our 401(k) to subsidize us,” Mr. Bernard says.

The biggest 401(k) operators in the U.S. noticed the shift first since they generally serve older workers, according to BrightScope. In the past four years, investors pulled a net $12.8 billion from the top 25 plans by assets, according to BrightScope.

Estimates vary on how long the 401(k) net outflows will last and how severe they will become. Financial-services research firm Cerulli Associates projects outflows will persist at least until 2019 when investors will pull an estimated $51.6 billion, according to a December report. J.P. Morgan predicted in its April note the trend will last through 2030, with outflows peaking at $40 billion in 2019.

That money could stay with the retirement industry if baby boomers move 401(k) funds to IRAs. Contributions into IRAs are expected to reach $546 billion by 2019, up from $205 billion in 2003, according to Cerulli.

Some money managers are banking on another demographic group to reverse this shift: millennials. But they acknowledge that will require some convincing.

“Millennials haven’t moved into a higher savings rate yet,” said Douglas Fisher, Fidelity Investment’s head of policy development on workplace retirement. Fidelity is one of the largest providers of 401(k)s, managing accounts for 13 million people across 20,000 companies.

“We need to start getting them to the right level,” he said.

But even if millennials boost their savings, it will take some time for asset managers to see the benefits, said Mr. Worthington of J.P. Morgan.

“Redemptions in the industry are actually going to get worse for the next four to five years,” he said.

Scott David, the head of U.S. investment services for fund firm T. Rowe Price Group Inc., says the key to offsetting outflows from retirement plans is to move older workers into different products at the firm. T. Rowe also is among the largest 401(k) providers.

“Their distribution from a 401(k) plan just means they’re entering a different part of their life,” he says. “They still have investment needs, but their investment needs will change a bit.”

Some money-management firms are expected to lower fees in an attempt to keep market share.

Vanguard Group and Fidelity recently made moves to cut fees in retirement products, and 401(k) participants invested in stock mutual funds paid an average expense ratio of 0.58% in 2013 as compared with 0.63% a year earlier, according to the Investment Company Institute and Lipper Analytics, a mutual-fund research firm. Other fee rates in mutual funds also dropped that year.

One investor who is ready to pull money even though she doesn’t need it is Denise Dobkowski Hammond, 68, who retired about seven ago from her post as treasurer of West Bloomfield, Mich. Ms. Hammond says she saved as much as she could her entire life, putting the maximum amount into her retirement accounts and paying off her house.

Ms. Hammond said she doesn’t need her savings to live on, but a federal law requires her to start withdrawing money from her 401(k) at age 70½.

“I’ll pull out the minimum unless the kids need something,” she said.

When Losing $20 Million Isn’t A Big Deal- Tim Duncan’s Financial Nightmare

Tim DuncanBy all accounts, Tim Duncan is a very wealthy man, with over $220 Million in career earnings.  But a pending suit is showing just how bad things can get.  The article is below.

The lesson here?

Diversify your risks, and that includes making sure your have a couple managers looking over your affairs, and perhaps even looking over each other’s shoulders.

And like Ronald Reagan said, Trust, but Verify…

Duncan’s quote in the article is telling: “I’m a loyal guy. I’m a man of my word, and I assumed other people would be that way,” Duncan said. “That’s just not the case in life.”

Here’s the whole article, originally seen HERE

Tim Duncan isn’t worried after losing $20 million due to a dishonest financial adviser

The Big Fundamental has played 18 seasons in the NBA. He has dominated each and every one of those seasons. And even though he took a hometown discount to help the San Antonio Spurs in his last contract, the bottom line on Tim Duncan’s ledger is still an astronomical sum for the common man.

Duncan has earned over $220 million in his career, which is why he’s not too worked up about losing $20 million to a dishonest financial adviser.

Charles Banks, who served as Duncan’s former financial adviser, is being sued by Duncan over a faulty investment. As reported by Bloomberg, Banks hid his own interest in investment opportunities recommended to Duncan. The losses were found after an audit of Duncan’s fiduciary state as part of his divorce.

“I trusted someone to do a job that I hired them to do and they misused my trust and went astray and started using my money,” Duncan said of Banks.

However, Banks sees it differently. In his eyes, he did nothing wrong and is actually surprised by Duncan’s lawsuit.

“The note specifically discussed in Mr. Duncan’s complaint is current, Mr. Duncan is receiving 12 percent interest on that note, and Mr. Duncan’s investments as a whole have performed well. We are confident that when all the facts are heard, it will be clear that the claims presented lack foundation,” said Banks’ attorney Antroy Arreola.

Fortunately, Duncan says this will not impact his bottom line.

“This is a big chunk, but it’s not going to change my life in any way. It’s not going to make any decisions for me,” Duncan said.

The last sentence, of course, is a subtle nod towards potentially retiring this summer.

“I’m a loyal guy. I’m a man of my word, and I assumed other people would be that way,” Duncan said. “That’s just not the case in life.”

Duncan’s portfolio included hotels, beauty products, sports merchandising, and wineries that belonged to Banks.

 

 

New Lows- Baby Boomer Retirement Confidence Study

Social security card

As our economy continues to sputter along, from the front lines of retirement planning I continually feel like we are in a tenuous economic environment. The effects of a prolonged post recession period of what feels like tepid growth are showing up as new people call in to Annuity Straight Talk concerned about their retirement income and finances.

It seems that while no one is getting wiped out as so many did in 2008-9, it also seems that no one is really thriving right now.

And my front-line barometer seems to be in keeping with studies and more formal research.

The Insured Retirement Institute (IRI) today released a new research report that found Baby Boomers’ confidence in having sufficient savings to last throughout retirement has dropped to a five-year low. Declining each year since 2011, the first year this study was conducted, the report found only 27 percent of Boomers are highly confident their savings will last. Despite the drop in confidence, 44 percent of Boomers expect their financial situation to improve during the next five years, up from 32 percent in 2012.

The prolonged low rate environment means it takes significantly more assets to maintain a lifestyle. A good rule of thumb used to be that you needed about 18x your annual income needs in retirement savings to be comfortable. Now, we look at 25x as a more sustainable multiple.

Now, your mileage will vary and this is only a rule of thumb, but when you combine low rates and rising longevity, the picture is pretty clear. It take more money just to hold your position than it used to.

You can read this study here

Here are some other facts:

  • 19% of Boomers are extremely or very confident they will have enough money to pay for higher education costs for their children, down from 34% in 2014 but about the same as in 2012, when this question was first asked.
  • 28% of Boomers are extremely or very confident they will have enough money to pay their medical expenses in retirement, down from 37% in 2011.
  • More than one-third of working Boomers (36%) plan to retire at age 70 or later, significantly higher than the one in five (19%) that planned to retire at or after age 70 in 2011.
  • Less than half of Boomers believe it is somewhat or very important to leave an inheritance for their loved ones, down from 62% in 2011.
  • One in five Boomers (18%) are uncertain when they might retire, and three-quarters of them cite not having saved enough or being unsure they will have enough to retire on as the reason for their uncertainty, compared to almost four in 10 (39%) that were unsure of their retirement age in 2011.
  • One in five Boomers are extremely or very confident they will have enough money to pay for long-term care in retirement, down from about one-quarter in prior study years.

The silver lining:

One interesting finding in the study is the significant difference in outlook the survey revealed for those who are working with financial advisors.  Boomers who work with advisors are more satisfied, and the gap is widening:

  • Among Boomers who work with advisors, however, only one in 20 are unsure of their retirement age.
  • In 2015, seven in 10 Boomers (68%) who work with an advisor are extremely or very satisfied with the way things are going in their lives, versus only four in 10 (42%) of those who do not work with an advisor.
  • In 2014, about four in 10 Boomers working with an advisor were satisfied, as were six in 10 not working with an advisor.

And here is the most revealing of the findings:

Annuity ownership is highly correlated with retirement planning, retirement readiness, and positive retirement expectations.

  • Over nine in 10 Boomers who own annuities have money saved for retirement; less than half of Boomers who do not own annuities have retirement savings.
  • Eight in 10 Boomers who own annuities expect their money to last throughout retirement, and to have at least some disposable income for travel and leisure, compared to less than half of those who do not own annuities.
  • More than six in 10 Boomers have calculated the amount they think they will need to have saved to retire, versus less than one-third of non-annuity owners.
  • More than six in 10 annuity owner Boomers have consulted a financial advisor to help them prepare for retirement; fewer than two in 10 non-annuity owners have taken this step.

The lesson:

Be in that top tier of people proactively preparing for retirement. Be an annuity owner and be prepared!

We’re ready for you when you are ready to take that next step,

All the best,

 

Nathaniel M. Pulsifer and Bryan J Anderson

Annuity Straight Talk

800 438 5121

A Plea For Common Sense

2-rules-money-Warren-BuffettWe frequently dive into politics at Annuity Straight Talk with our customers but I’ve shied away from being too outspoken on the web for fear of offending.  But I got a forwarded email today from a good friend that is just too sensible to pass up.

Now, I always appreciate the wisdom in Ronald Reagan’s “Trust but Verify” statement, and so I looked up the proposal that I’ll quote, below.  While the email sent to me was titled “The Buffett Rule”, of course the Sage from Omaha did not pen this missive.  There are a few other ‘stretched’ facts in here about Congressional salaries too, but overall, this isn’t a bad starting point for some sensible reforms  that align the interests of the people and Congress.  Here’s where I checked:

So with the appropriate dose of salt, enjoy what seems like a sensible proposal:

We must support this – pass it on and let’s see if these idiots understand what people pressure is all about.

Salary of retired US Presidents .. . . . .. . . . . .. . $180,000 FOR LIFE

Salary of House/Senate members .. . . . .. . . . $174,000 FOR LIFE This is stupid

Salary of Speaker of the House .. . . . .. . . . . $223,500 FOR LIFE This is really stupid

Salary of Majority/Minority Leaders . . .. . . . . $193,400 FOR LIFE Ditto last line

Average Salary of a teacher . . .. . . . .. . . . . .. .. $40,065

Average Salary of a deployed Soldier . . .. . . .. $38,000

I think we found where the cuts should be made! If you agree pass it on, as I just did.

Warren Buffet, in a recent interview with CNBC, offers one of the best quotes about the debt ceiling:

“I could end the deficit in five minutes,” he told CNBC. “You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election”.

The 26th Amendment (granting the right to vote for 18 year-olds) took only three months and eight days to be ratified! Why? Simple! The people demanded it. That was in 1971 – before computers, e-mail, cell phones, etc.

Of the 27 amendments to the Constitution, seven (7) took one (1) year or less to become the law of the land – all because of public pressure.

Warren Buffet is asking each addressee to forward this email to a minimum of twenty people on their address list; in turn ask each of those to do likewise.

In three days, most people in The United States of America will have the message. This is one idea that really should be passed around.

Congressional Reform Act of 2015

  1. No Tenure / No Pension. A Congressman/woman collects a salary while in office and receives no pay when they’re out of office.
  2. Congress (past, present, & future) participates in Social Security.

All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system, and Congress participates with the American people. It may not be used for any other purpose.

  1. Congress can purchase their own retirement plan, just as all Americans do.
  2. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.
  3. Congress loses their current health care system and participates in the same health care system as the American people.
  4. Congress must equally abide by all laws they impose on the American people.
  5. All contracts with past and present Congressmen/women are void effective 12/1/15. The American people did not make this contract with Congressmen/women.

Congress made all these contracts for themselves. Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and go back to work.

If each person contacts a minimum of twenty people, then it will only take three days for most people (in the U.S.) to receive the message. Don’t you think it’s time?

THIS IS HOW YOU FIX CONGRESS!

If you agree, pass it on. If not, delete.

Failings Of The 4% Rule- New Research

4pctThe often quoted ‘ 4% rule’ whereby a retiree’s portfolio is drawn down methodically by 4% per year, is the source of great pain in volatile markets.

Blindly sticking to this withdrawal rate when markets are down exposes investors to ‘reverse dollar cost averaging’, otherwise known as selling when you are down.

And further, in boom years, sticking to just a 4% withdrawal rate might be shortchanging your retirement.

In short, there is no magic withdrawal rate that works for everyone.

To actually achieve optimal utility of assets (to use a grown up sounding economic term) you simple must shift some risk to a third party.

The most common risks we shift using annuities are longevity risk (the risk of outliving your money) and market/sequence risks.

Longevity Risk:

To shift longevity risk, simply buy an income you can’t outlive.  Guaranteed lifetime income, from immediate annuities or index annuities with lifetime income riders, or deferred income annuities, all do this job well.  which is right for you depends on a lot of factors, which is why we’re here to help.

Market Risk:

And market/ sequence of returns risk is handily mitigated by placing a portion of your assets into guaranteed income or guaranteed outcome tools- level out and stabilize your portfolio by removing market risks and you increase overall stability and safety.

New Research:

Now, the items summarized above are worked over in new research from PriceWaterhousCoopers and recently published in the Retirement Income Industry Association journal.  The article is quoted below, and you can find it and the PWC study HERE

Financial Industry’s 4% Rule Does Not Work For Most Americans

Financial Industry’s 4% Rule Does Not Work For Most Americans:
New PwC US Report Shows Need for New Planning Approach that Reflects Retirement Realities

BOSTON, MA, April 15, 2015 – The financial industry’s 4% rule, which has been used historically as a guideline for asset withdrawals in retirement, may work for the wealthy, but not most Americans, according to a new PwC US report, which will be published in the upcoming Spring 2015 issue of the Retirement Income Industry Association® (RIIA®)’s Retirement Management Journal®.

The report, based on findings from PwC’s Retirement Income Model, shows that following the 4% rule will lead most retirees to use up savings earlier than planned or to significant reductions in wealth for the affluent. The report highlights the impact of wealth, sequence of returns and consumption, and unplanned financial shocks on 4% rule-based retirement outcomes.

“According to philosopher H.L. Mencken: For every complex problem there is an answer that is clear, simple, and wrong,” notes Elvin Turner, RIIA’s Business Unit Director for Research. “For the majority of client households, a more holistic and dynamic planning approach that takes into account retirees’ behaviors is required. The body of research that shows most retirees spending much more in their early retirement years than later years is just one example of the way in which retirement realities don’t fit a 4% withdrawal world.”

PwC’s Retirement Income Model (RIM) is a retirement planning tool that draws upon a range of data and economic sources, and tracks actual consumer behavior to calculate expected retirement outcomes. It is able to incorporate the impact of non-linear events on clients’ financial experiences in retirement, such as health care events or economic shocks. The RIM leverages PwC’s behavioral economics framework, which captures how households make saving and consumption decisions based on behavioral preferences, and RIIA’s core Household Balance Sheet℠ (HHBS℠) approach to understanding the complete financial picture or “fundedness” of retirees.

The safety and efficacy of Naturaful review products just hasn’t been evaluated, so I would caution you on their use. In addition, there is no data to suggest that a lack of nutrients diminishes breast development.

“The Retirement Income Model offers a new dynamic approach to retirement planning that reflects real world realities at an individual level,” said Anand Rao, analytics principal, PwC US. “In addition to projecting outcomes based on market returns and expected consumption, it is sophisticated enough to determine the impact of ‘What if?’ scenarios related to major household events – such as marriage, childbirth, employment changes and deteriorating health – on retirement savings, future drawdowns, and retirement portfolio balances.”

The paper shows that in real life, regardless of how good average returns are over time, it really matters when the good and bad investment years occur. If investment returns are low or negative in the early years of a portfolio, the client may find that their financial plans have been ruined as a result of sequence of returns risk. It also highlights the key role of consumption risk – higher levels of consumption in earlier stages of retirement – in retirement outcomes.

“While the 4% rule of thumb has become a foundational aspect of retirement planning wisdom, advisers and their clients understand that retirement spending will vary over time,” added François Gadenne, Founder, Chairman and Executive Director of RIIA. “This paper reveals the impact of these non-linear experiences and behaviors on retirement outcomes. It demonstrates the importance of having more sophisticated tools such as the Retirement Income Model to help clients plan for real world retirement scenarios to achieve more predictable and successful retirement outcomes.”

Download the report.

About RIIA:

The Retirement Income Industry Association (RIIA) is a not-for-profit industry association that was started in 2005 and launched publicly in February 2006 to discuss the new realities of the retirement business and to do so from the perspective of “The View Across the Silos℠”.

RIIA has developed the retirement body of knowledge that supports its professional designation: the Retirement Management Analyst® (RMA®). RIIA organizes conferences and events, professional education for RMAs, publishes a peer-reviewed journal (Retirement Management Journal®), offers twice-monthly weekly retirement-focused webinars through its Virtual Learning Center, manages a 7000 person strong LinkedIn discussion group, provides research and other services to the industry and its clients. More information about RIIA can be founded at www.riia-usa.org.

Darryl Strawberry’s Payments- It’s Hard to Compete With Crazy

As a follow on to last week’s high drama regarding the Darryl Strawberry payments up for auction, an astute reader sent me the following article (quoted below) this morning.  The article was published just after the auction sale yesterday in Chicago.

The winning bidder agreed to pay $1,300,000 for this payment stream- more than twice what I thought made sense.

Wow- basically, this bidder bought an unsecured general obligation of the baseball team, for a yield of a hair over 5%…

Hopefully the buyer has some inside knowledge of the transaction to make this make sense…. because I sure don’t see the logic!

We deal in guaranteed payment streams here at Annuity Straight Talk so while most people are focused on the star value of baseball player, we were focused on the underlying credit quality to determine the bid.  How safe are the Mets? That’s the rub.

Probably they will be fine, but the deferred compensation agreement underlying this deal made it quite clear that there was no guarantee, no set-aside funds, and no ‘asset’ there…. just a promise to pay in the future.  That demanded a far higher rate of return than 5.1% for the credit risk.

Here’s the illustration:

Darryl Strawberry Payment- Winning Bid

Darryl Strawberry Payment- Winning Bid

 

Here’s the article from ESPN as well-

Mets pay winning bidder OF’s checks

The Internal Revenue Service on Tuesday auctioned off the money owed to Darryl Strawberry from the New York Mets contract he signed in 1985.

A man, who did not want to be identified, agreed to pay $1.3 million to receive a check from the Mets of $8,891.82 a month for the next 18½ years. Assuming a realistic timeline for the court to approve the sale, the value of the deferred payments will equal close to $2 million.

USA TODAY SportsMets money owed to Darryl Strawberry that was seized by the IRS as payment for back taxes was won at auction Tuesday.

Strawberry was forced to give a portion of the deferred money from the contract to his ex-wife, Charisse, as part of their divorce settlement in 2006, but the payments were never made.

In 2010, Charisse filed for Chapter 7 bankruptcy protection and, as part of the proceedings, asked for what was owed. But in September, a judge in the Northern District of Florida ruled that the annuity was the property of the IRS, not Charisse, because Darryl still had not settled his tax debt owed for 1989, 1990, 2003 and 2004.

A person in the room at Tuesday’s auction in Fairview Heights, Illinois, said that the IRS momentarily held up the auction as Charisse tried to file an injunction to halt the sale, which required a minimum bid of $550,000.

Anuj Kumar, an investor from Austin, Texas, said he usually invests in stocks and bonds, but the unique nature of the property was intriguing enough to fly in for. Due to mail-in bids, bidding started at more than $900,000, Kumar said, which was close to the number he was looking for. Kumar said there were roughly 25 people in the room, but the winning bidder showed the most interest all along.

“You could tell he wanted it no matter what,” Kumar said.

Given the present value of the deferred money on the $1.3 million sale price, the rate of return for the winning bidder is about 5 percent.

The total value of the contract, which covered his 1985 through 1990 seasons, was $7.1 million, but nearly 40 percent of his $1.8 million team option in 1990 ($700,000) was deferred and put into an annuity with a 5.1 percent interest rate.

From 1987 to 1990, Strawberry failed to pay $542,572 in taxes, according to court documents. As of November 2013, Strawberry owed at least $80,000 from his tax liability from missed payments in 2003 and 2004.

The Mets famously bought out the final year of Bobby Bonilla’s contract in January 2000 and deferred the $5.9 million deal into 25 payments of $1,193,248.20 that began in 2011 and end in 2035. By deferring, Bonilla turned the $5.9 million into $29.8 million after negotiating an 8 percent interest rate on the deferral.

The Perils Of Not Paying Taxes- Darryl Strawberry’s Payments

strawberry$8892/ Month for 20 years, for only $550,000??? A 21% effective rate of return!!??

Not so fast…

There are only two certainties in life, death and taxes. And when you don’t pay your taxes, the IRS gets even, and then gets what is coming to them.

Darryl Strawberry, the famous New York Mets baseball player, forgot to pay his taxes for several years. Like many sports players, part of his compensation package was deferred. While not exactly an annuity, he did have a 30 year payment stream from the Mets that paid out long after he left the game.

ESPN Link and Forbes Link

Unfortunately, he didn’t keep up with his taxes, and the payment stream was seized by the IRS. It is available for sale and is such an interesting opportunity, that we are putting it out to our members and readers to see if there is interest.

I was only made aware of this yesterday, and did a little research as fast as I could.

The details are taking shape minute by minute, but here’s what I know as of Friday, January 9.

  • A federal court has seized the payment stream and is offering it for auction on January 20
  • the sale will be confirmed by a court order
  • The available payment stream is $8891.82 per month for 226 months, starting immediately and ending December 1 of 2033
  • To bid, we will need to submit certified funds of 20% of the bid amount.
  • The minimum bid is $550,000, however I suspect the payment stream to sell for somewhat more than this amount.
  • The buyer can be an IRA, a trust, or one or more individuals. Like other discounted cash flows, it would be considered taxable income, the exact tax treatment is between the buyer and their tax counsel.
  • A beneficiary can be designated, and upon death of the buyer, the remaining payments would go to the designated beneficiary.

Now here is a larger list of things I don’t know yet.

  • The purchase price. This is to be determined at a sealed bid auction on January 20.
  • The rate of return on investment. This is determined by the purchase price, which is unknown.
  • The strength of the court order.
  • The true nature of the payor: Is at the New York Mets, or is it an underlying annuity? That is an open item. Let’s hope there is actually an annuity… not a general obligation of the Mets.
  • The IRS auctioneer has stated that the IRS will not impose withholding taxes on the New York Mets, for this payment stream, however that has not yet been confirmed in writing by both parties.
  • What the New York Mets will do with a new payee- they have been silent on the auction and there is no stipulation agreement that I am aware of yet.
  • My guess is that they will be bidding as well, if only to clear their books of a future payment liability.
  • Likewise, I am as yet unaware of any other claims to the payment stream, or challenges to the court order or the IRS seizure. Caveat emptor.

Why do I want to jump in to this?

Frankly, it would make a heckuva good press release when it’s all done.

While this is not a payment stream we will buy directly in the business trust, I would be willing to manage the transaction directly, to work through the legal and due diligence issues quickly, if I have a solid buyer(s).

I’d need to line up a solid buyer(s) this weekend, and my fee would be a nominal buyer’s premium such as you find in most auctions.

Your investment and yield, therefore, is determined by you as we hustle through discovery next week and determine what to bid.

This is a fascinating case because it’s very high profile. Owning Darryll Strawberry’s annuity is definitely unique.

But there are risks to the payment that you don’t find in normal secondary market annuity transactions. If this is a general obligation of the New York Mets, and not an annuity backed payment stream, then risks are much higher. I reserve the right to be wrong on this, and hope I am.

There are a lot of things that I don’t know yet, but it would be fun to figure out. It’s Friday afternoon, and there are really only five business days available to do all the due diligence.

If anyone wants to take a stab at it, give me a call. I’ll bring you up to speed on what I know as quick as possible.

 

Let’s Play Ball!

Nathaniel M. Pulsifer

*****

Update, as of January 14th, 2015

We had a very strong response to the email a few days ago about this payment stream, and dug in over the weekend and Monday with one investor in particular who had the stomach to handle the deal.

Our counsel assisted greatly and determined that the IRS seizure of Darryl’s payment *should* create a free and clear right to receive payments upon confirmation by the court. The draft court order appears to be favorable and there were only a few loose ends to clarify in writing with the Mets counsel. This, of course, given limited time to review and get up to speed.

The various parties to the case, including bankruptcy trustee, ex wife, and Darryl, appeared to be in line and we felt reasonably confident there were no boogeymen or skeletons in the closet that would rear their head to make a claim and throw the whole mess back into litigation after the auction.

It was certainly not a deal I would have felt representing to people as ‘safe’ in any way, however.

The bad news is that with this deal, in a best case scenario, is that you’d buy exactly what they represented- an un-secured general creditor obligation of the Mets ball club.

No underlying annuity, no set-aside trust account, no guarantees…

Being in the business of guarantees, and particularly, guarantees from highly rated carriers, we at AST and our prospective investor decided to take a pass on this deal. Even though we had expressions of interest for the deal 3 or 4 times over, it just would not be worth the risk.

It was fun to look, but wondering if next month’s check would be coming in for 20 years, from a baseball team, did not sound like fun…

There’s still time to bid if you really want to take a chance… Just need a cashier’s check in Chicago on Tuesday the 20th, for $110,000, and then we can figure out how much it’s worth to you at the auction…

I’d love to be there to see what it ends up trading for.

How I Lost All My Money- The Week Article

logoIn recent months I’ve become a huge fan of “The Week” because the articles are quick, to the point, and cover a wide range of views on a topic.  You can get the whole spectrum of biases and analysis in just a few paragraphs.

The Christmas issue has a poignant article that I’ll quite in its entirety below.  It is especially shocking to think that if the author had made a few intelligent moves to secure lifetime income, he could have avoided much of the pain of this scenario, however the author clearly takes responsibility for his financial outcome.  Above all, the author admits to retiring too early, and not having a clear sense of what his accumulated funds could supply in terms of income.

This is well worth reading in full, and making sure you don’t let this happen to you.  Here is the Original Article:

How I lost all my money

I had a successful career and a good life. I never imagined that one day I’d be poor.

By William McPherson, The Hedgehog Review | December 21, 2014

THE RICH ARE all alike, to revise Tolstoy’s famous words, but the poor are poor in their own particular ways.

I have some personal experience here. Like a lot of other people, I started life comfortably middle class, maybe upper-middle class; now, like a lot of other people walking the streets of America today, I am poor. To put it directly, I have no money. Does this embarrass me? Of course it embarrasses me — and a lot of other things as well. It’s humiliating to be poor, to be dependent on the kindness of family and friends and government subsidies. But it sure is an education.

If money defines class, the sociologists would say I was probably at the higher end of the lower classes. I’m not working class because I don’t have what most people consider a job. I’m a writer, although I don’t grind out the words the way I once did. Which is one reason I’m poor.

My income consists of a Social Security check and a miserable pension from The Washington Post, where I worked intermittently for a total of about 25 years, interrupted by a stint at a publishing house in New York City. I returned to the Post, won a Pulitzer Prize, continued working for another eight years, with a leave of absence now and then. As the last leave rolled on, the Post suggested I come back to work or, alternatively, the company would allow me to take an early retirement. I was 53 at the time. I chose retirement because I was under the illusion — perhaps “delusion” is the more accurate word — that I could make a living as a writer, and the Post offered to keep me on its medical insurance program, which at the time was very good and very cheap.

The pension would start 12 years later, when I was 65. What cost a dollar at the time I accepted the offer would cost $1.44 when the checks began. Today, what cost a dollar in 1986 costs $2.10. The cumulative rate of inflation is 109.7 percent. The pension remains the same. It is not adjusted for inflation. In the meantime, medical insurance costs have soared. Today, I pay more than twice as much for a month of medical insurance as I paid in 1987 for a year of better coverage. My pension is worth half what it was. And I’m one of the lucky ones.

I was never remotely rich by what counts for rich today. But I look through my checkbooks from 25 and 30 years ago and I think, Wow! What happened?

IT WAS A long, slowly accelerating slide, but the answer is simple. I was foolish, careless, and sometimes stupid. As my older brother, who to keep me off the streets invited me to live with him after his wife died, said, shaking his head in warning, “Don’t spend your capital.” His advice was right, but his timing was wrong. I’d already spent it.

I’d wanted to explore and write about Eastern Europe after the fall of the Berlin Wall, which I did for several years. It was truly a great adventure: It changed my life, and it was a lot more interesting than thinking about what it cost, which was a lot. There’d always been enough money. I assumed there always would be. (I think this is called denial.) So another dip into the well.

I bought shares in AOL before it really took off and in Apple when it was near its bottom. I figured Apple’s real estate must be worth more than the value the market gave the company. I was right. Shares in both companies soared. If I’d shut up and stayed home…but I didn’t. I turned my brokerage account into a margin account for someone else to handle, and I left the country again. A few more dips into the well, a few turns in the market, a few margin calls, and when I went back for another dip, the well was empty. The old proverb drifts back to me on a wisp of memory. A fool and his money are soon parted. My adventures were over.

The story is, of course, more complicated than that — whose story isn’t? — but these are the essentials. It’s unlikely, and it’s not intended, to evoke sympathy. I’d acted like one of those people who win the lottery and squander it on houses, an Audi A1, family, and Caribbean cruises. But I hadn’t won the lottery; I’d fallen under the spell of magical thinking. In my opinion, I didn’t squander the money, either; I just spent it a little too enthusiastically. I don’t regret it.

When my writing was bringing in a little money, I had a Keogh plan, and when I was at the Post, a 401(k) account. I’d made a little money in real estate and received a couple of modest but nice inheritances, which together, and with Social Security and the pension, would have given me enough income to live on, had I not felt I’d lost the ability to continue writing and had I forgone, or at least spent more modestly on, my work in Europe and related activities, avoided the margin account, and so on. The “so on,” I should add, included a major heart attack that led to congestive heart failure, a condition that greatly reduced my physical resilience and taxed my already-limited income.

There are a lot of people like me, exiles from the middle class who suddenly find themselves on Grub Street. I am not trying to exaggerate my own particular plight. I’ve never had to apply for welfare or Medicaid or food stamps. I have asked the Department of Housing and Urban Development (HUD) to subsidize my rent and a Washington, D.C., office to subsidize my medical insurance payments. That involved a lot of paperwork but not a lot of lines, and I am very glad to live in subsidized housing with a number of people who really run the gamut. One of them is the great-grandson of Leo Tolstoy. Some were trained as lawyers from Parkersburg WV Car Accident Lawyers | Serious Injury Law Group, some have doctoral degrees, some were teachers. There are journalists and writers. What we have in common is we are all older, we are all poor, and each of us has, to a greater or lesser degree, the ailments that come with age. As everybody knows, if you don’t have good insurance, medical bills can be catastrophic and have been for some of us here. But I think all of us would agree that living here beats living in a homeless shelter.

Compared with most poor people, I am fortunate. If you’ve got to be poor, finding yourself at the upper edge of poverty with a roof over your head and a wardrobe that doesn’t look as if it came from the Salvation Army is as good as it gets. It also helps to be white.

An African-American trainer at a gym I used to go to before the well went dry had a lot of clients and must have made decent money, enough to support himself and his son, anyway. He was walking down Connecticut Avenue one day when he saw one of his female clients approaching.

“I don’t have any,” she exclaimed and turned abruptly away as he was opening his mouth to greet her. “I don’t have any money!”

She didn’t see my friend Jeff; she saw a black man in trainers about to ask her for a handout on one of the busier avenues in the city. Jeff doesn’t look like a hustler. He doesn’t look poor. I don’t look poor, either, but I am white. So I never suffered that kind of demeaning slight.

BY FEDERAL GOVERNMENT standards, I’m not poor, but by any rational standard, I am. My income is above $11,670 annually, which, in 2014, puts me above the poverty line for a single person. My Social Security comes to more than that. The federal minimum wage in 2014 is $7.25 an hour, or $15,080 annually. When FICA taxes of 7.65 percent for Social Security and Medicare are deducted, that brings the income of a full-time minimum-wage worker to $13,949. For a family of three, the poverty line is $19,790. This is not a joke. It doesn’t leave much extra for an ice cream cone.

I have a roof over my head, thanks to the aforementioned HUD subsidy, which required hours of paperwork, signed affidavits from doctors, many duplicate copies, and a lot of running around.

If you’re poor, what might have been a minor annoyance or even a major inconvenience becomes something of a disaster. Your hard drive crashes? Who’s going to pay for the recovery of its data, not to mention the new computer? I’m not playing solitaire on this machine; the hard drive holds my work, virtually my life. It is not a luxury for me but a necessity. I need dental work. Anybody got $10,000? Dentists are not a luxury. Dental disease can make you seriously ill. Lose your cellphone? What may be a luxury to some is a necessity to me. Without that telephone and that computer, my life as I have known it would cease to exist. Not long after, so would I. I am not eager for that to happen. Need to go to a funeral hundreds of miles away? Who pays for the plane ticket? In the case of the funeral, my nephew paid for the plane ticket. My daughter and son-in-law paid for the dental work. Sometimes, I find it deeply humiliating that I am dependent on such kindnesses when I would prefer that the kindnesses flow the other way. Most of the time, though, I am just extremely grateful for the help of family and friends. It’s not so much humiliating as it is humbling, which is a good thing.

I am ashamed to have gotten myself into this situation. Unlike many who are born, live, and die in poverty, I got where I am today through my own efforts. I can’t blame anyone else. Perhaps it should be humiliating to reveal myself like this to the eyes of any passing stranger or friend; more humiliating to friends, actually, some of whom knew me in another life. Most of my friends probably don’t realize or would rather not realize just how parlous my situation is. Just as well. We’d both be embarrassed.

Although I am embarrassed by my condition and ashamed of myself for putting myself there, I feel grateful to have had some of these experiences and even more grateful to have survived them.

I am glad that none of my friends has ever found himself sitting on a bench in a park with a quarter in his pocket, as I once did, and nothing in the bank; in fact, no bank account. It’s a very lonely feeling. It gives new meaning to the sense of loneliness and despair.

I wallowed in that slough for a bit. It was not, after all, a happy situation, and I am not a dim-witted optimist. But I had two choices: Die in the slough or move on. I thought of the last two lines of Milton’s “Lycidas”:

At last he rose, and twitch’d his mantle blue:

To-morrow to fresh woods, and pastures new.

So I got up, forever grateful to Mr. Barrows, my college English instructor, for teaching me to study “Lycidas” seriously and realize what a great poem it is and why that matters.

Increasing Longevity- What If We Live To 100?

Life Expectancy
I have frequently written about longevity as being the major risk of retirement. I am not alone in highlighting this risk, as it is widely regarded as one of the primary risks in retirement among researchers like Wade Pfau and Moshe Milevsky.  And it is a very difficult force to contend with. The American way is to extend life, buy health care, and to deny mortality. There’s nothing wrong with that either.

However, when it comes to retirement income planning, longevity can have devastating consequences. Indeed, it is the great unknown and juggernaut of the planning profession- no one knows the day they draw their last breath, so therefore, no one knows how to optimize their assets for income production up to that last day…. it’s a risk, that must be either offloaded on an insurance carrier (annuities) or self insured (excess wealth).  And it’s a risk that grows with each passing year.

Early in the 20th century, life expectancy in the United States was 47 years now newborns are expected to live to 79 years. This corresponds to about three months additional lifespan with each year that goes by.

Extend this trend, and by the middle of the 21st century, year 2050, American life expectancy at birth will be 88 years, and 100 years by the end of the century.

What does that mean to our social support systems, retirement incomes, and our economy? Is it feasible to have Social Security income commence at age 62, when 35 or more years of life may be ahead of that young retiree?

Is it reasonable to expect a private individual to save enough money in their working years to spend nearly as many years not working? Is it reasonable for society to support that assumption? What is the line between social support systems and entitlements? Social Security was originally intended as a support system for the needy, and not as a primary retirement income vehicle. Furthermore, it was designed in a time when people’s lifespan was only 65 or 70 years. It is dangerously out of touch with reality at this time, but is such a political hot button that it is untouchable.  It is a fundamental right now, up there with Life, Liberty and the Pursuit of Happiness…. what politician would dare challenge it?

The Atlantic, a monthly newsmagazine, recently tackled the issue of longevity. It is a provocative article, and there are a wide range of views, including countering views from one professor advocating a shorter lifespan as being a healthier and more fulfilling expectation. The issue is well worth reading.

Here is a great quote from the October 2014 issue, “What Happens When We All Live To 100?” by Gregg Easterbrook

In 1940, the typical American who reached age 65 would ultimately spend about 17% of his or her life retired.  Now this figure is 22%, and still rising.  Yet Social Security remains structured as if longevity were stuck in a previous century.  The early-retirement option, added by Congress in 1961 – start drawing at age 62, though with lower benefits – is appealing if life is short, but backfires as life span extend.  People who opt for early Social Security may reach their 80s having burned through savings, and face years of living on a small amount rather than the full benefit they might have received. Polls show that Americans consistently underestimate how long they will live – a convenient assumption that justifies retiring early and spending now, while causing dependency over the long run.

Perhaps 99% of members of Congress would agree in private but retirement economics must change; none will touch this third rail. Generating more Social Security revenue by lifting the payroll tax cap, currently at $117,000, is the sole politically attractive option, because only the well-to-do would be impacted. But the Congressional Budget Office recently concluded that even this soak the rich option is insufficient to prevent the insolvency for Social Security at least one other change, such as later retirement or revise cost-of-living formulas, is required. A fair guess is that the government will do nothing about Social Security reform until a crisis strikes – and then make panicked, ill considered moves that foresight might have avoided.

Market Correction Coming?

Bryan Guiding FIA BannerWell it’s been quite some time since I reached out to the AST community with a blog post but recent market events warrant me dusting off the keyboard to make sure everyone is at least paying attention.

Over the last month, the S&P 500 has dropped a shade more than 3%. It’s something that happens just often enough to remind people why fixed accounts are great long-term performers. Index annuities over the past couple of years have helped various clients lock in meaningful gains and now the downside protection inherent in those contracts will have everyone breathing a collective sigh of relief.

Profitable days will return but what’s in store before that comes? My Sunday reading uncovered an excellent Market Watch article that talks about three warning signs that have indicated major equities sell-offs in the past. Read the article here.

Apparently those warning signs are flashing brightly now and so I’d like to share with you what those are and what has happened the last six times they have all come together.

The article see those warning signs as excessive levels of bullish enthusiasm, significant overvaluation of stocks and extreme divergences in the performance of different market sectors.

Since 1970 the three indicators have appeared together six times and there are some pretty scary statistics that show what it has meant and why we may see something similar in the near future. Those include:

    • Average subsequent decline of 38%
    • Smallest decline of 22%
    • Current valuation of Russell 2000 at its highest ever level
      • Higher than 2007 bull market and 2000 Internet bubble
    • Increasingly smaller number of stocks that contribute to the current bull market
    • S&P 500 peaked in July with 1.4% growth for the month while Russell 2000 dropped 3.1%
      • Indicator of diverging performance in different sectors

This article by columnist Mark Hulbert uses statistical data to match the current presence of these warning signs to past events. It’s really anyone’s guess what exactly will happen this time. The author seems to believe the Federal Reserve will act to help mitigate the decline and we all know what that means…

Break out the printing press! This alone should keep interest rates suppressed for quite some time so securing good retirement income and conservative growth options will still be a challenge for most.

 I have two questions for you:

First, after several years of strong growth, how will you act knowing a decline may be looming? Since the market bottom in 2009 everyone has been calling for more carnage but nobody knew when it would be. Most bearish forecasts over the past five years have expired only to see more people jumping on the bull market bandwagon. I hung up my securities license several years ago so it’s not my place to give you advice here but I do feel you should know what’s out there.

Second, knowing that rates may well stay on the low side for a while longer, do you understand your options for conservative growth in this market? The secondary market takes the sting out of low fixed rates with yields up to 2% or more greater than other options. And index annuities might seem complicated but they are easier to understand than you think and it really takes the volatility out of a ride with assets you can’t afford to lose.

You always have options and we’re here to make sure you understand those options and help you find what’s best for you. We look forward to having you share your thoughts with us on what your plan is. If there is anything we can do to help we stand ready to assist.

Have a great week!

 

Bryan J. Anderson

Annuities and Inflation- Like Oil And Water?

annuities and inflationMany of our readers are concerned about inflation, and rightly so.  Inflation is a creeping erosion of the purchasing power of the dollar and is like a shadow drag on consumers.  Many consider inflation to be a hidden tax too.

So how can an annuity protect you from inflation?  The truth is, no annuity will protect you per se.  There is really no asset that has guaranteed protection because the future rate of inflation is an unknown.  But used prudently, annuities form an important part of a smart inflation protection strategy for your overall portfolio.  Take a look here at what we wrote a few months ago about how annuities mitigate inflation risk.

But let’s talk about inflation for a moment.  Consider this:

As the cost of goods and services go up, income hopefully goes up too, yet purchasing power may remain flat or trend down.  Standards of living may not rise with income, yet tax receipts increase as incomes increase.   The dollars earned and the taxes paid go up, yet people do not feel any better off.  In this way, inflation is a shadow tax on quality of life.

Benefits of Inflation:

So who benefits from inflation? Inflation favors borrowers.  If you borrow a dollar today and use it for some constructive purpose or spend it, and inflation is 3%, it will only cost you $.97 in today’s terms to pay off that dollar one year from now.

Multiply this by trillions, and you can see that the government is the biggest beneficiary of inflation.  As they borrow and spend, the dollars used in the future to repay that debt will be easier to come by and worth less than they are today.  Of course, the government plays by its own rules and creates money out of thin air so can create new dollars when needed if they ever intend to repay the debt.

But for normal mortals, borrowing and buying assets that may appreciate with inflation is a smart move.  Take commercial real estate for example.  If you borrow $1 million and buy an asset that produces $50,000 a year net income, and your debt service cost you $40,000 a year, you have $10,000 to spend.  Hopefully you purchased a fixed rate mortgage…

But over time, that net income may rise to $100,000 per year, but your debt service remains constant at $40,000 per year.  Your spending income from the property increases, while you’re expenses stay relatively flat.

Of course, commercial real estate has different risks associated with it, and depreciation is a real erosion of the asset that requires maintenance dollars to keep up.  Tenant credit risk, maintenance, real estate taxes, utilities, interest rate exposure, and a host of other variables all contribute to make real estate a more risky play.

For average homeowners, long-term fixed rate mortgages today are such an incredible value in the 3.5% to 4.5% interest rate range that it is easy to see homes once again becoming a store of household wealth.

Annuities and Inflation:

Annuities will not protect you from inflation.  But inflation can be estimated and accounted for to the best of our abilities today.  Looking at historical tables available online here, you can see inflation over a very long data set since 1913.

Since 1913, inflation has averaged 3.3% per year.  Since 1990, and has averaged 2.7%.  Since 1970, which includes galloping inflationary years, the average is 4.4%.  And of course, this is based on the CPI –U index, which is a limited measure of consumer prices.  Not all things go up in price relative to purchasing power every year, some things go down, and others go through the roof like healthcare.

So how do you deal with inflation?  The most reasonable way to address it is to use a reasonable assumption like 3% and make sure your income in retirement increases by this amount to at least keep your purchasing power constant.  This will not be exact, but it is a prudent way to start.

Here is a quick table showing $60,000 per year income and what is required to maintain purchasing power with a 3% inflation out to year 100 starting from age 49.  The rows in green skip forward many years just to save space.

Inflation And Income

Income needed to maintain $60,000/ year purchasing power given 3% inflation over 52 Years

When using annuities, many of our clients use deferred longevity income annuities to produce lifetime income starting in the future.  For a 49-year-old in this example, an LIG contract that starts paying at age 85 should produce $173,000 of income per year to keep purchasing power constant.  Buying an LIG contract today that only pays $60,000 starting in 37 years will leave you way below your needs.

Another prudent way to use annuities to protect yourself from inflation is to pick the highest yield annuity you can find and put the least amount of money into it.  By giving you some degree of protection and guaranteed income, you then free your remaining assets to be used in more aggressive growth strategies and you remove pressure from your remaining assets to produce income.  We detailed this here:

Inflation and Annuity Summary:

Don’t let the fear of inflation freeze you in inactivity.  Annuities form an important floor of income and remove pressure from remaining assets, so in the annuity protected portfolio may very well be much safer and more resilient than a portfolio heavy on bonds that carry intense principal risk in a rising rate environment.

Retirement Income… Or Leave It To The Kids?

Society Of ActuariesOne of the major challenges we face when helping people plan for their retirement is balancing the pressing need for lifetime income with the desire to leave an inheritance.  These goals are both laudable, but not always compatible.

Inheritance planning presupposes an excess of assets- that is, you have more than enough for yourself and can afford to leave something to your heirs.  Heirs too can mean kids, grandkids, or your favorite charity or younger spouse.  In any situation, though, retirees need to plan for their own needs first.

What could be worse than becoming a burden on the ones you love instead of leaving them a nest egg?

Poor planning can leave you short of money in a long retirement, and if you’re sacrificing your own needs or relying on others to take care of you while simultaneously hoarding your savings, you’re not doing yourself or your caregivers a service.

Now, the flip side of that coin is that spending recklessly is also a risk.

So where is the balance?

A new study by the Society of Actuaries offers some dense but useful reading on the topic.  Not surprisingly, it echoes many of the facts you will find on this site, namely:

Each retirement income solution has its pros and cons, and the amount of retirement income delivered to retirees depends significantly on their choice of a retirement income generator. Because there’s no “one size fits all” retirement income solution, retirees will need to make calculated tradeoffs when considering the amount of retirement income they need based on their individual goals and circumstances.

A few more gems from the report:

  • Given improvements in life expediencies, the money set aside for retirement may need to last a long time — potentially 20 to 30 years or more. But many retirees are not prepared to manage this critical task on their own. Furthermore, there’s much uncertainty around how long an individual retiree will actually live.

  • Market volatility complicates the challenge of managing savings in retirement. Since 1987, there have been four major market meltdowns. With retirements potentially lasting 20 to 30 years or more, it’s prudent for retirees to expect and plan to survive more meltdowns in their future.

  • Many employees don’t know how to calculate the amount of savings that’s needed to generate lifetime retirement income. They often guess at this amount, and usually they guess too low. This results in retirements sooner than financially prudent based on the amount of retirees’ savings.

  • There’s also evidence that retirees are doing a poor job of managing retirement risks; many lack a formal plan to generate retirement income from their savings, and as a result, they’re planning to spend down assets at an unsustainable rate. Others are under-spending in retirement for fear of running out of money. Surveys show that employees and retirees want and need help generating retirement income.

Summary:

When making your retirement income plans, think of your own needs first- this is not a selfish act, but a compassionate one.  If you truly care for your heirs and family, you’ll not become a burden to them and will be able to supply your own needs.

Retirement annuities might not be the ONLY answer, but they are a very useful tool in the toolbox.  For a portion of assets, they do handily eliminate the risk of outliving your money, and offload that longevity risk onto an insurance carrier.  It’s worth considering.

Your Retirement Goals

A reader wrote in this week.  Like so many, it seems this person has a hard time knowing where to start, and this is unfortunately a very common issue we run into every day.  But not to fear! A few simple questions can get you on the right track

Yes, I read your annuity report. I have a person telling me I should buy a variable annuity and also bonds.  I have another person who is retired from the business and says not to buy any annuities or bonds.  He says I should only buy no load mutual funds which have mostly natural gas and energy stocks.

 We wrote back with the following:

You can listen to 20 people and get 20 opinions.  They are just opinions at this point- some people like Ford, others Chevy, and others Toyota.  It’s all opinion, and without knowing what you want or need, it’s all static and noise that hurts you much more than helps you.

You might want great gas mileage… but if you’re talking to a pickup truck guy, he’ll tell you you are nuts to want a Prius.

The only important opinion at this point is your own.  If you sit back and determine the outcome you desire, there are likely several ways to achieve that goal.  Each will have varying pros and cons, and until we – you and whoever you are talking with- know what you need, any discussion of bonds vs annuities vs mutual funds is also just static and noise.

The best way to find out what is right for you is to ask yourself a couple questions.  We’d be happy to help if you could give us a little info on your situation and desires.  Here are a few questions to get started:

  1. What is your current age and when do you plan to retire?
    1. ______________________________________________
  2. Are you looking for joint or single life coverage?
    1. ______________________________________________
    2. Spouse Age:______________________________
  3. What is your base level of income needed in retirement?
    1. ______________________________________________
  4. How much guaranteed income do you expect from other sources?
    1. ______________________________________________
    2. The difference between what you need and what you expect is the income gap that needs to be filled.
  5. Therefore, your Income Gap/ Minimum Guaranteed Income amount needed is:
    1. ______________________________________________
  6. How long does this income need to last?
    1. ______________________________________________
  7. You may be seeking appreciation or future lump sums, or want to leave an inheritance, and not need income.  If so, let us know what you are seeking here:
    1. ______________________________________________
  8. What is your State of residence?
    1. ______________________________________________

Now we have a starting point, or a Retirement Income Goal Statement.  It’s critical to get to this point, because everything falls into place once you know where you want to go.

Ready to set your retirement plans on the right track? We look forward to hearing from you!

Top 5 Facts About Annuities And Taxes

There are often questions about annuities and taxes.  This brief guide will walk through a few of the top questions we receive.  Be sure to consult your own tax advisor for specific issues and clarifications.

Q: How Are Annuity Payments Taxed?

A: The basic rule for annuity taxation (i.e., “amounts received under an annuity”) is that the purchaser’s investment is returned in equal tax-free amounts over the payment period.  Tax is assessed on the earnings portion of each payment received. Each payment contains a portion that is return of principal and is nontaxable, and a portion of income, which is taxable income.

Q: How Is The Interest Income and Return Of Principal Portion Of A Payment Calculated?

A: For non-variable annuity contracts, this basic rule applies: Divide the purchase price by the total expected return.  This is called an “exclusion ratio”.  When you apply this exclusion ratio to each payment, you can determine the portion that is taxable, and the portion that is excluded from income.

For example, if you purchase a single lump sum future payment of $200,000, and pay $100,000 for it today,  exactly 50% of the future payment is taxable, and 50% is tax-free return of principal. The same calculation can be made for all period certain payments.

For  lifetime income payments, the IRS allows the use of your life expectancy age to determine the ‘end date’ of a payment stream for exclusion ratio purposes.

Q: If an annuitant dies before a deferred annuity matures or is annuitized into income, is the amount payable to heirs subject to income tax?

A: Yes. An annuity usually provides that the beneficiary will be paid the greater of the premium amount, or the accumulated value of the contract, as a death benefit in the event of the death of the primary annuitant. If there is gain, that gain is taxable as ordinary income to the beneficiary. Annuities are not like life insurance that qualify for tax free benefits to heirs.

That said, Secondary Market Annuities are absolute and certain payments, therefore in the event of the owners death, the payment stream will pass according to their will or estate plans.  The lump sum of un-returned principal will not be accelerated with Structured Settlement Annuities  and SMA’s.

Q: Are there penalties to “premature” distributions of  annuity contracts?

A: In order to discourage the use of annuities as short term tax sheltered investments, the IRS imposes a 10 percent tax on certain “premature” payments under annuity contracts.  This penalty applies to payments that are includable in income- see the exclusion ratio above. There are several exceptions however, the most common are:

(1) Payments made on or after the age of 59.5

(2) Payments made on or after the death of the annuity holder or annuitant,

(3) Payments accelerated to the annuitant if the annuitant has become disabled;

(4) Payments made in a lifetime, immediate annuity contract- there are certain IRS wrinkles here…

(5) There are other exceptions for certain annuities prior to 1982, other exceptions for dividends, and for a series of substantially equal periodic payments (SEPPs) made for the life of the taxpayer.

An important exception to note is that for qualified settlements and Structured Settlement Annuities such as our Secondary Market Annuities, there is NOT a penalty or extra tax assessed.  These are freely available to a buyer of any age.

Q: Are There Tax Implications For Partial Withdrawal and Lowered Annuitized Payments?

A: This may have a few answers depending on the annuitant.   But in general, a ‘free withdrawal’ from an annuity contract will be subject to the exclusion ratio, and once funds are withdrawn and the income payments are lower, the now-lowered remaining annuity payments will still be subject to the same exclusion ratio.

We hope this helps clarify a few questions about annuities and taxes,

Why Are Annuities Safe?

Its all about the money.  Annuities are safe because the insurance company issuing the annuity contract- obligating themselves to whatever specific guarantee you are buying- is in the business of making money and having money available at all times to pay claims.

Insurance companies offer a guaranteed benefit to you, be it life insurance, home insurance, or an annuity.  You chose to do business with them because of their strength and the guarantee they offer you backed by that strength.  They collect premiums from you, invest those premiums, and must have the strength to back those guarantees up.

It’s all about the money- yours to them, then their strength and their money coming back to you.

Their logos reflect this self image- “The Rock” for Prudential comes to mind right away.prudential

You want your insurance  company to be in the money- to always pay when you need them to pay.  You need a rock.

 

You may not know, but Warren Buffet’s fortune is founded on the insurance industry.  Premiums are a source of investment capital to him, and his adroit management of those premiums produced outsized returns for the insurance company (and stockholders) and rock solid guarantees to his insured customers thru Berkshire and GEICO and General RE and many other brands.

Those same insurance carriers that make boatloads of money for Berkshire Hathaway also can easily afford to pay out life insurance benefits to a young insured customer who dies in an accident just a few months after buying the policy…

That’s exactly why the young should own life insurance – to cover the what-if, worst case scenarios of life.  And insurance companies who know mortality tables know they will always come out OK, even when an unfortunate accident happens and millions of dollars in life insurance benefit is paid out on a new policy.

The have the money, they manage it conservatively and they pay when called upon.

And it’s exactly why you should consider annuities. 

People converting assets into income for retirement can and do benefit, every day, from the same mortality table calculations… from the same economics… from the same strong companies…. with annuities.

For Many Financial Advisers, Stocks Become A Hard Sell

Life On An Equities Roller Coaster

Life On An Equities Roller Coaster

This post’s title is taken directly from a Wall Street Journal cover story that left me smiling today.

Stocks hold no allure for me anymore… Since the first day I worked with annuities, I’ve been free of the roller coaster ride of stocks- the gut-wrenching drops in value, the sleepless nights, and the fear of simply not knowing what some rogue computer program run by a kid playing with some institution’s account can do to my real dollars….

All that’s gone now… And not missed for one moment!

I take real pride in helping others find the same security.  And in case you haven’t studied real, long term yields, the rates offered on our Secondary Market Annuities are quite competitive given the safety and security of the assets.

You’re hardly giving up anything in terms of yield, and yet you give up all the uncertainty, fluctuation  risk, and worry.

You may just gain years on your life in the trade!  (It’s a fact that annuity owners live longer on average- but more on that in another post)

Here’s the story of a few poor souls who haven’t yet found the security of a good baseline GUARANTEED income… the kind of income only an annuity can provide.

Financial adviser Jeffrey Smith recently watched a once-confident client scrawl his fears across a legal pad during a discussion of stock investments: “Congressional stalemate,” “unemployment,” “European crisis,” “corruption.”

The client, retiree Nicholas Zerebny, later recalled how his thoughts strayed to Edvard Munch’s “Scream” paintings. In the middle of the page, Mr. Zerebny drew a crude version of the iconic screaming face.

“That’s how I feel right now,” he told Mr. Smith.

For Mr. Smith and other U.S. financial advisers, that anguished cry—real and metaphoric—has become a familiar part of the job.

Since hitting a recession-driven low in March 2009, the Dow Jones Industrial Average has doubled in value. But many ordinary investors remain too fearful to join in the gains.

After two stock collapses in one decade—2000-2002 and 2007-2009—along with scandals, the rise of high-frequency trading and worries over Washington’s ability to rein in debt, Americans are pulling out of the market. Individual investors yanked a net $900 billion from U.S. equity funds since January 2000, according to fund flow tracker EPFR Global. Stocks and stock mutual funds now make up 37.9% of the average U.S. household’s financial assets, down from 50.5% during the height of the tech-stock boom in 2000, according to the U.S. Federal Reserve.

 

Here’s the Source: