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

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 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 care in Perth 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, but the money I spent to buy instagram likes and followers was really worth it so many of you should try it. 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.


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

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. Penny 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:

Muni Bond Tax Breaks On The Table In Cliff Talks

Taxes Lost  To Muni Bonds

Taxes Lost To Muni Bonds


In a stunning turn of  tables, even the tax-free nature of muni-bonds are on the chopping block in  our current buget turmoil.

Many of our readers are heavily invested in Munis so this article wil lsurely be important, interesting and relevant.

Here’s the Source:

And here’s a key summary:

By exempting municipal bond interest from federal taxes, the government creates an incentive for investors to buy them, which helps hold down the borrowing costs of the states, cities and other entities that issue them. Curbing the exemption would likely reduce demand for the bond

Investors are willing to accept lower yields for municipal bonds because their interest income is exempt from federal income taxes and from taxes in the state in which the bonds were issued. In some high-tax areas, such as California, the bonds are also exempt from local income taxes.s, pushing those borrowing costs higher.

Hartford Follow Up- Don’t Leap at Annuity Buyback Offers….Yet….

As a follow up to last week’s article about Hartford offering buybacks on some of its annuity contracts as part of its portfolio cleansing, I thought I’d point you to a WSJournal piece in today’s paper.  It may yet be premature to take annuity buyback offers!

An  annuity owners in the article is in a position that speaks directly to the problem ( And to the very reason people own annuities in the first place)

Pam put $200,000 into a Transamerica annuity in 2000.  Poor fund choices on her part led to losses, and over-generous guarantees by Transamerica led the company to be in a spot guaranteeing her generous payouts.

Her ,account value is just $82,000 after investment losses and her  own withdrawals, but the lifetime income base is 390,000, entitling her to an annuitized payout of $23,490 per year.

Transamerica would love to get that lifetime payout liability off its books, especially as there’s only $82,000 of real cash balance to offset the payouts.

To close the account, they offered Pam a lump sum of $313,200. But the question is, is it a good deal?

Most likely, Pam can’t replace the $23,500 per year with $313,200.  An immediate annuity for a woman in Washington pays just $19,250/ year, less than her annuity guarantee.

Until Transamerica- and Hartford and the other carriers trying to get out of their commitments- at least match the benefits they owe with open market choices available today, investors like Pam should hang tight and wait it out.

The Journal sometimes makes it hard to view old articles by link, so I’ll just quote it below:

Thousands of consumers who paid for lifetime-income guarantees when they purchased the retirement products known as variable annuities are finding themselves in an odd spot: Life insurers are trying to buy back the guarantees.

In early November, Hartford Financial Services Group Inc. HIG -0.28% became the second major insurer to announce a plan to ask some customers to trade in their guarantees, on the heels of a similar offer, just completed, by the Transamerica unit of Aegon AGN.AE +0.23% NV. Some other companies are expected to follow. Meanwhile, the U.S. unit of AXA SA CS.FR +0.24% is wrapping up an offer to buy back certain death-benefit features sold with its variable annuities.

Variable annuities offer a tax-advantaged way to invest in stock and bond funds. The guarantees, sold for an extra fee, promise steady income for the buyer’s lifetime, even if the fund accounts become depleted.

Costly Competition
For years, variable annuities and their guarantees were maligned by many financial advisers because of the fees; the charges can top 3.5% a year of the invested amount. And why pay for a guarantee to protect against a stock-market decline, the naysayers said, when stocks over time inexorably march upward?

But some financial advisers were fans, and their enthusiasm helped make 2007 a banner year for variable annuities, with $184 billion in sales—just before financial markets began sliding with the bursting of the real-estate bubble. Industry executives say the vast majority of those purchases included lifetime-income guarantees, which insurers were then aggressively marketing in what had become a product-feature arms race.

The 2008-09 global meltdown of financial markets demonstrated the value of the guarantees to their owners—and the financial danger to the insurance companies. While most insurers run hedging programs to mitigate those risks, as markets slid, many insurers had to set up bigger reserves for the guarantees, which hurt earnings. They also raised capital totaling billions of dollars, which diluted shareholders’ stakes, to show regulators they could make good on their commitments to consumers.

Hartford’s need for additional capital prompted it to take government aid, since repaid.

Insurers’ stocks continue to be depressed by the exposure they face from the guarantees.

Dodging a Bullet
In announcing their plan, Hartford executives said consumers would be offered a boost to the amount of money in their fund accounts in exchange for canceling the income guarantee.

Hartford’s costs would rise in the short term, but the goal is eliminating long-term exposure that hinges on uncertainties such as stock-market performance and customers’ longevity.
The offers might appeal to some people with pressing cash needs. But many owners are like Pam Tufts, 64 years old, a college administrator in Seattle, who says she bought her variable annuity and its income guarantee from Transamerica in 2000.

She was newly widowed, and the guarantee appealed to her because she didn’t have an old-fashioned pension plan to augment Social Security and other savings. She was concerned about future market drops that could wipe out investment gains and even her principal, she says.

As it turned out, the big tech-stock swoon happened soon after she put about $200,000 into large-cap U.S. stock funds within the annuity. She could take comfort that Transamerica was on the hook to provide for her financial future, even if her stock funds never rebounded.

As of Oct. 1 of this year, Ms. Tufts’ fund balance was still well below her initial investment, at approximately $82,000, depressed both by poor market returns and withdrawals totaling about $30,000 she has made since 2008. She says she aims in a few years to begin collecting an annual amount equal to approximately 6% of a guaranteed “base” amount that recently stood at about $390,000—or $23,490 a year at that level.

Doing the Math
The guarantees are complicated and varied. Under the one bought by Ms. Tufts, in broad terms, her minimum lifetime annual income is tied to a base amount that started out as her original investment. The base was guaranteed to grow at least 6% a year (more if her funds gained more than that) until she began withdrawing money.

Transamerica offered to buy out the contract for 80% of the guaranteed-base value at the time of the offer, or $313,203, according to Ms. Tufts. While the amount was certainly large, she says it took only a few minutes of conversation with her financial adviser, David Moskovitz of the RBC Wealth Management division of RBC Capital Markets LLC, “to come to the conclusion it didn’t make sense for me to take that cash and run, unless I didn’t expect to live very long.” She is in good health, she adds.

Mr. Moskovitz says: “Bottom line, if we took the buyout, I would have to invest the $313,000 buyout in something that would pay an approximate 7.5% in perpetual income to match the guaranteed annual amount of $23,490. In today’s interest-rate world, that is impossible without taking substantial credit or market risk.”

Some advisers estimate that at most about one in five holders accepted Transamerica’s offers, based on their experience with clients. A Transamerica spokeswoman says: “We’re unable to disclose offer and acceptance information.”

As Ms. Tufts concluded, the Transamerica-type offers can make sense to people with ill health who aren’t worried about outliving their savings, other advisers agree. But many buyers of the guarantees have been people in their 50s and 60s seeking the security of a lifetime income stream, and they are comfortable with a highly rated insurance company bearing the risk.

“There is no question that other companies are watching these offers and considering their own offer,” says Scott Stolz, who heads an insurance unit at brokerage firm Raymond James. He says some people’s circumstances can make the offer worth accepting. But in general, he says, insurers “are likely to make an offer that is favorable to them,” rather than the consumer.


Perfect IRA Deal- A Nice Deferred Lump Sum

Today I want to feature a deferred, lump sum investment that is just hard to beat.  We have two similar lump sums, from two different top rated carriers, AIG and Prudential.  Each have the same payment stream.

The AIG deal is this one:

What makes this so special?  Well, compare it to a CD or a fixed annuity.  For an investor with a bucket of cash and time to defer, there are few better ways to position assets today.

Take an IRA for example.  For a 50 year old, an IRA is a bucket of money that you can’t touch until you retire, age 59.5 at the earliest without IRS penalty.  What’s a 50 year old to do? You have to defer for 10 years at minimum…. and if you’re looking to retire at 65, this is a perfectly timed passive and safe investment.

Long term deferred lump sum investments make perfect sense in an IRA where you can’t do anything with the money anyway until you retire.  And concerns about a large amount of taxable income coming in one year are moot when you do this deal in an IRA.  It’s all tax deferred anyway.

Compare CD’s at a paltry 1.5 % rate, taxable annually… Fixed annuities at about 3%…. Muni bonds at 2% to 4% and susceptible to principal degradation if rates rise… and compare to Treasuries at 1%… ish.

These yields are you other ‘safe’ money options.  Why wouldn’t you seriously consider a fantastic  lump sum deferred deal like the one above that has a guaranteed price, and guaranteed payout, fixed and defined terms, and a great rate?

We’re waiting for your call- 2 of these are available today, one from AIG and one from Prudential.  800-438-5121.

Longevity Insurance In The News

longevity protection annuityLongevity Insurance is one of the best ways to guarantee lifetime income AND take advantage of the higher yields offered by Secondary Market Annuities.  It works like this:

Assume we are talking about a 65 year old California man with $1M assets who need $5000/ month for his essential living expenses

Step 1: Purchase a lifetime income guarantee policy, sometimes called Longevity Insurance, to give you  enough income but starting at age 85.  Rates vary regularly but recent quotes for a 65 year old California man paid over $6000/ month  per $100,000 of premium.

Step 2: Now that the lifetime income/ longevity risk of outliving income is taken care of, the remaining $900,000 in assets can be positioned for maximum yield to last a defined period of time.  And Secondary Market Annuities are the single best way to get a high yield in a guaranteed, fixed term investment.

With longevity – the biggest unknown – out of the way, the rest is easy!

We have relationships with the major carriers in the longevity marketplace, so if this strategy strikes a chord with you, please give us a call.  We can make it happen.

Here’s a recent WSJ article on the topic as well:

In recent months, insurers including Massachusetts Mutual Life Insurance, Northwestern Mutual and New York Life Insurance have introduced these products.

In February, the Treasury Department issued a proposal to make it easier for people to buy so-called longevity insurance products—which start payments at, say, age 80 or older—in 401(k) and individual retirement accounts.

Economists say it can make sense to put a small portion—for example, 10% to 15%—of your nest egg into such a policy upon retirement to protect yourself from running out of money from age 80 or 85 on. But insurers including New York Life and Northwestern Mutual say that with pension plans falling by the wayside, a growing number of buyers are purchasing these policies in their 50s as a way to secure a pension substitute in their 60s and beyond.

“In 2008, people saw their 401(k) balances get decimated. Now, they want certainty,” says Tim Hill, a consulting actuary and principal who specializes in annuities at actuarial consulting firm Milliman.

Hartford Heads for The Exits In Variable Annuities

The Hartford insurance company is making strategic decisions to exit the annuity business, especially variable annuities.  Industry watchers have long known that variable annuity guarantees made several years ago exceed return expectations, so it’s only a matter of time to see some of these carriers scale back.

Why are they getting out of the annuity business?  two primary reasons- 1) over generous contracts are ‘out of the money’ for the company, and 2) low rates means writing new business is even more risky.

Pervasive low interest rates in the market make it hard to keep pace with the benefits promised.  Insurance companies just like individuals are yield starved, so older contracts promising 7-8-or 9% annual returns are untenable in a 4% rate environment…. and new contracts promising much lower returns may STILL be hard to stay ahead of the game with

What’s it mean? Is Hartford going under? Not likely.  Hartford in particular is under pressure from John Paulson, an activist hedge fund investor, to simplify and streamline its businesses.   And even though they may not be writing new policies and may be trying to buy back variable annuity policies, The Hartford will be in the annuity business servicing existing contracts for many years to come.

My verdict is this: there’s nothing to fear with a Hartford policy if you have one or are consider a secondary market annuity backed by Hartford, even if the company is not writing new business.

If you are considering a new annuity, be extra sure that the credit union checking account quality of the issuing company is as strong as you can find.  This is a tempting marketplace for lower tier companies to grab market share with compelling benefits…. but if low rates prevail for many years, will that B rated company be able to pay out all you are promised today? Don’t make a long term bet on a shady carrier.

Here are two recent articles and a quote on the topic. and

Hartford Financial Services Group Inc. (HIG) is offering to pay some clients to give up retirement products as Chief Executive Officer Liam McGee works to reduce risks tied to stock market declines and free up capital.

Holders of some variable annuities, which guarantee payouts, would be offered cash to give up the contracts, McGee said yesterday in an interview. The offer will be made to holders representing 45 percent of the Hartford, Connecticut- based company’s net amount at risk on the contracts, he said.

Hartford is “examining every single possibility we can reasonably consider to accelerate the runoff of the book,” McGee, 58, said on a conference call with analysts today. “There’s no stone that’s being left unturned.”

Insurers are scaling back from variable annuities as low interest rates and stock market declines weigh on their profits. MetLife Inc. (MET), the largest seller of the contracts last year, said Oct. 31 that sales fell by 46 percent in the third quarter as it cut benefits. Axa SA (CS)’s Axa Equitable and Aegon NV’s Transamerica said this year they are offering to pay clients to reduce risks tied to variable-annuity guarantees.

Can You Sell The House And Travel The World In Retirement?

World Retirement Map

In today’s Wall Street Journal we have a fantastic article on a totally unorthodox retirement plan.  Instead of worrying about your dream home, or cashing out of your suburban home for a rural property in retirement, Lynn and Tim Martin cash out of California, put their precious possessions in storage, and hit the road.

Years later, their retirement is less expensive, more enjoyable, and more exciting than anything they imagined.

The Martins spent several years traveling the world, renting homes or apartments in Mexico, Paris, London, or wherever their heart desired.  They are not extravagantly wealthy or foolhardy.  Rather, they enjoy getting to know a new place, and taking the time to explore the back roads.  Sounds like a wonderful retirement plan, and they’re doing it on far less money than it would take to live a lifestyle similar to that which they left behind in California.

The Wall Street Journal article is well worth your time, if only to expand your mind.

The Let’s-Sell-Our-House- And-See-the-World Retirement: 

How one couple walked away from all they owned and are putting down new roots— one country at a time.

You can Read It Here:

Prospects For Stocks Are Dim Says WS Journal

The title really does say it all- “Prospects For Stocks Are Dim” says Tom Lauricella of the Wall Street Journal.  It’s hard to chart a course in this turbulent market and the risks are just too high for most investors.  Individuals can not afford to take the risk of losing principal, and it seems those risks have never been higher.

With record low interest rates, bonds  carry immense risk to principal if interest rates rise.  As value moves opposite to yield, a rise in yield will vaporize principal faster than a stock market crash.

And stock market crashes seem to be more the norm than the exception anymore.  Respected money manager Ben Inker of GMO in Boston is quoted in the article below saying:

“Corporate profits are at all-time highs and we don’t think that is sustainable,” Mr. Inker says. That, he adds, suggests stocks are more expensive than investors realize.

As a result, over the next seven years “we don’t think the stock market is priced to deliver a lot of returns,” says Mr. Inker. “Maybe you will keep up with inflation.”

Faced with such high risk times, volatile options, and low expectations from even the best managers, why not make a smart, safe, insured bet on quality annuities, especially our Secondary Market Annuities which can routinely yield high 5% to 6% range.

What’s not to like?

Here’s the full article below-

Prospects for Stock and Bond Returns Are Dim


Source: WSJ 

When it comes to expecting stocks to provide them with any kind of decent return, many investors are throwing in the towel. After all, it’s been years of back-and-forth swings in their portfolios.

Meanwhile, the double-digit returns on bonds over the last 25 years have investors piling into fixed-income investments in record numbers—even as many money managers and analysts warn that investors shouldn’t expect those kinds of returns to continue.

It’s an especially confounding time to be sketching out expected returns on a portfolio, with both stock and bond markets buffeted by significant and unusual forces that could play out for many years to come.

A Grim Five Years
The outlook for stocks stretching out for the next five years or more would seem to be grim, thanks to entrenched fiscal and economic woes in the U.S., Europe and Japan. The U.S., for one, continues battling stubbornly high unemployment and the lingering effects of the housing collapse.

At the same time, some argue that the Federal Reserve’s unprecedented efforts to pump money into the financial markets will eventually lead to a flare-up in inflation. That would send interest rates higher and lead to a nasty bear market for bonds.

Throwing fuel on that fire was the Fed’s decision earlier this month to expand its effort to effectively print new money and prop up the economy. The Fed said it would make an additional $40 billion per month in bond purchases until the unemployment situation materially improves.

But those same efforts by the Fed are keeping the bond bull market alive by capping interest rates and, at the same time, feeding investor demand for riskier and higher-return investments, such as stocks.

In the face of entrenched investor skepticism, the U.S. stock market has staged a powerful rally in 2012. The Standard & Poor’s 500-stock index is up 16% so far this year.

This convoluted backdrop has sparked a vigorous debate over the kind of expectations investors should have for stocks and bonds. Keep in mind that returns are measured by more than just changes in bond or stock prices. What matters is total return—plus stock dividends or bond interest.

Attracting considerable attention have been particularly gloomy arguments from famed bond-fund manager Bill Gross, of Pacific Investment Management (Pimco). Mr. Gross believes bond returns will likely drop to 2% a year on average and stocks will gain only 3% to 4% a year.

Though it may seem like a meaningless debate among the talking heads on financial television networks, expectations matter for individual investors. “They’re a critical component to strategic asset allocation, establishing tolerance for risk and thinking about how asset classes interact” within a portfolio, says Joe Davis, head of Vanguard Group’s investment strategy group.

For Shawn Rubin, a financial adviser at Morgan Stanley Smith Barney, return expectations are central to conversations with clients about their asset allocation and rebalancing strategies.

Often, investors “underestimate the lumpiness of returns and how frequently riskier investments have 5% or more of paper losses,” he says.

Another issue is coaxing investors to think about expected returns in relation to inflation, and not just on a nominal basis. For investors whose primary goal is to avoid having inflation erode the value of their savings, “right now, you don’t need a lot of return to achieve that goal,” says Mr. Rubin.

Take the debate over bond returns. Hal Ratner, an asset-allocation specialist at Morningstar, is among those who think bond returns will dwindle in coming years. He notes that on a short-term basis, investors owning U.S. government bonds are effectively losing money once inflation is factored in.

“That makes you think, ‘Should I really buy government bonds?’ ” says Mr. Ratner. “But in the event that something bad happens [in the stock market], we know that they will protect your portfolio…like buying insurance.”

So for investors with a shorter time horizon, bonds, even with minimal returns, still can act as a cushion should the rest of your portfolio lose money. “Time horizon is absolutely critical,” says Mr. Ratner.

On the stock side of the equation, the calculus gets a lot more complicated.

For starters, expectations are often colored by recent experience, especially a negative one. In the case of stocks, they’re shaped by the financial crisis, even though the S&P 500 has returned more than 6.5% a year for the last 10 years once dividends are factored in.

“For investors, the last 10 years don’t feel like they’ve been up 7%, what they feel is what they felt [like] in 2008” when stocks collapsed, says Lisa Emsbo-Mattingly, director of asset allocation at Fidelity Investments.

Fidelity’s asset-allocation group, which sets the investments for the firm’s target-date retirement mutual funds, believes that over the next five to 10 years, U.S. stocks can generate average to slightly-below-average returns—roughly in the neighborhood of 6% a year.

This forecast is based on expectations that the U.S. economy is not mired in a Japan-like extended recession and will be able to post moderate—though below historical trend—growth of about 2%. Add in the productivity of U.S. companies and strong corporate balance sheets, and Fidelity thinks earnings growth should be able to power better future returns than many investors are currently expecting.

Expensive Stocks
Ben Inker, co-head of the asset-allocation group at money manager GMO, takes a different approach, putting more weight on stock valuations compared with the outlook for corporate profits.

“Corporate profits are at all-time highs and we don’t think that is sustainable,” Mr. Inker says. That, he adds, suggests stocks are more expensive than investors realize.

As a result, over the next seven years “we don’t think the stock market is priced to deliver a lot of returns,” says Mr. Inker. “Maybe you will keep up with inflation.”

Still others take a different view of stock valuations. On balance, “valuations are close to average,” says Vanguard’s Mr. Davis. “That would suggest…returns that range in the high single digits.”

Important Retirement Income News Roundup

First, we featured our Social Security Solutions planning tool last week and had quite a few folks call in to get a copy of their report. We were inspired to get this reporting tool for clients from this article in the Journal, and we’ve been very happy so far. Give us a call and get your report run too!

Fiscal Cliff: More and more news in the coming months will be about the fiscal cliff we are racing towards. With a presidential and many congressional elections in full swing, you can be sure that nothing substantial will be accomplished by Congress in the next 6 months. Unfortunately, this means the Bush tax cuts are likely to expire in a swirl of name-calling, posturing, and general incompetence in Washington. Be prepared for a massive change in estate tax laws, among many other unpleasant shifts.

Americans are learning more about the “fiscal cliff” approaching at the beginning of next year, when tax rates for families and small businesses are set to spike and new taxes in President Obama’s health-care spending law take effect. But unless there’s real change in Washington, we’re also headed for a steep “regulatory cliff” that could compound the damage.

Tax Laws: Here’s another article that for once looks at the brighter side of tax law- the annual exclusion available to individuals of $13,000 per recipient. With the sunset of the high estate tax thresholds a possibility, more and more retirees are likely to possess taxable estates. A family home worth $500,000 and a portfolio of $750,000 puts you over the limit, if the Bush cuts sunset in 2013…

Given the uncertainty surrounding next year’s taxes, here is a reassuring thought: One of Uncle Sam’s most useful tax benefits isn’t expiring, shrinking or otherwise under threat after 2012.

Family Financial Planning: Retirement planning often involves some unpleasant things like mediating family disputes. This article helps you start thinking about divisive situations you can avoid. Think long and hard about how you want your affairs and estate handled, while you can. I can say from personal experience that as romantic as the idea sounds, property owned by siblings after a parent passes neither gets the use it should, nor offers the happy ‘get together’ space the deceased often envision. Have a conversation before you leave a well intentioned but unworkable situation behind.

Parents, it’s time to be an adult when it comes to talking to your kids about your late-in-life planning,a nd awesome way is by getting the best pool tables for your kids to learn with and have time at the same time.

Many times the burden of managing a parent’s deteriorating health or financial situation means an adult child has to step into their parent’s shoes.

But parents often can accomplish more by stepping into their former role and taking the lead. Doing so can head off divisive—and costly—family feuds.

Enjoy the last weeks of Summer!

Is Your Home Equity Optimized?

Home equity has been unreliable  recent years.  Too many used home equity as an ATM, and the real estate downturn has left many realizing the folly of their ways with homes worth less than their mortgage.

However while  most of the visitors to this site have significant equity or paid off homes, most are only considering their homes as an asset to be utilized far in the future when they downsize.

I’d like to propose another way of using your home today, and capitalizing on the unbelievably low interest rates in the home mortgage market.

For many people with good credit, home loans can be obtained in the 3% to 4.5% range.  It doesn’t really take a rocket scientist to realize that investing money borrowed at 3.5% into a new investment yielding 5 to 6% is a good deal.

Consider these four current offers (as of 8/2/12): each one offers a solid cash flow, as well as lump sums.  Depending on how much money you borrow from your home, the income stream can be used to pay your mortgage, even pay it off.  This leaves you a lump sum that matures in the future as essentially free money.

Home Equity Secondary Market Annuities

The Genworth case is a perfect example.  It pays $4800/ month for 306 months, then pays $550,000 lump sum.  At 4% interest, you could borrow $1,005,413 on a 30 year home mortgage with payments of $4800/ month.   Theoretically, you could borrow the entire purchase price of $922,969, pay the mortgage off with the income stream, and be left with $550,000 at the end of the term.

Now, jumbo mortgage rates, your risk tolerance, and other factors may make this specific amount of borrowing not advisable.  But let’s say you have $550,000 to invest, and a paid off home worth $1M.  You could easily borrow $400,000, and rates on 15 year mortgages are as low as 3.5%.  The payment on this is 15 year mortgage is just $2860 per month.

Then, combine your mortgage proceeds and your available cash to purchase the $922,969 Genworth case yielding 5.5% over 28 years.  Utilize $2800 of the monthly income from Genworth for your mortgage payment, you are still left with $2000 month of income for the first 15 years.  Your house is paid off after 15 years, and your income from Genworth jumps to $4800 a month for another 10.5 years.  As a super bonus, you also have a $550,000 lump sum windfall- your entire invested principal is returned in full, and meanwhile your enjoyed 15 years of $2000/ mo and 10.5 years of $4800/mo.  That is a superb investment.

Utilizing home-equity in this way is very safe, as your mortgage payment is directly offset by your new income source, and the investment that you make yields a higher rate of return than your debt costs you.  There are home mortgage interest tax deductions to take into consideration as well that may make this even better.  For retirement investors looking to safely utilize home-equity, a strategy like the one described above is hard to beat.

It just so happens that we currently have four similar cases to the Genworth case that all would suit this strategy.  Each includes significant income streams and a lump sums.  For investors with home-equity, you owe it to yourself to make lemonade out of this lemon of a low rate environment.

Don’t let these low rates go to waste.  Grab some cheap mortgage money, and give us a call to secure one of these fantastic income with lump sum Secondary Market Annuities. In most cases, we can make arrangements to hold cases while your refinance is processing.

Free Social Security Optimization Report

Social Security can be devilishly complicated to optimize. But it forms the core of a guaranteed lifetime income strategy.

In the past it’s been hard to make accurate recommendations because the rules of Social Security are complicated. So we have recently started using an online tool from

Social Security

With just a few pieces of info, the tool produces a comprehensive report tailored to you that shows you the optimal and most lucrative time to take Social Security.

This report is normally $125, but for a limited time we’re offering it free to new customers as we work it into our practice.

If you have been resisting calling us, now’s a great chance for us both – get yourself a $125 value for free, and we’ll give you an award winning, customize report on your personal, optimal Social Security strategy.

Give us a call at 800-438-5121 today!