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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!

Want a Guaranteed Loser? Try TIPS

Newsweek Inflation ImageBond yields are at all time lows, and with Treasury Inflation Protected Securities, or TIPS, you can go even lower.  You can buy now for a guaranteed loss.

What a world we’re living in!

The issue with TIPS is that the yield is keyed to interest rates AND inflation.  And with both at all time lows, buying a TIPS style bond now means you will be in for a losing ride in real (buying power) terms.

The Wall Street Journal published a good article on the topic, HERE, and it’s quoted below

Would you buy an investment that was guaranteed to lose money?

That is the situation investors are embracing today in the market for Treasury inflation-protected securities, or TIPS—bonds issued by the U.S. Treasury whose value is designed to keep up with consumer prices.

The effective interest rates on TIPS have collapsed to record lows. It is mathematically impossible now for investors to earn respectable returns from any of them, and in many cases they are a lock to lose money in real, inflation-adjusted terms.

This doesn’t mean you should dump all of your TIPS at once. But by selling long-term TIPS and holding only short-term ones, you can lock in your biggest gains today and reduce the odds that you will be stuck holding money-losing investments years from now.

TIPS, which have existed since 1997, are a fine idea on paper. The principal adjusts twice-yearly to take account of changes in the consumer-price index. So for the life of the bond, the investor is guaranteed that his investment will keep up with inflation and earn an additional interest rate, known as the “real return.”

Typically, say analysts, these bonds have usually been considered good value when they have offered a real return of 2% or more a year. That has approximated the average historical return, after inflation, of regular bonds.

Yet today’s TIPS yield a fraction of that.

The 30-year TIPS today offers a real return of inflation plus 0.5% a year. For TIPS coming due within the next 10 years, the real return is negative: Your investment is guaranteed to leave you poorer, in real terms, than you are now. A five-year TIPS today locks in an interest rate of inflation minus 1.4% a year. Over the life of the bond, investors will lose 7% in real terms.

Paul Winter, a 20-year veteran of the bond market now working as a fee-only financial adviser in Salt Lake City with $30 million under management, considers all TIPS a poor investment.

Yet they remain popular. FRC, a Boston firm that tracks the mutual-fund industry, says U.S. investors own at least $145 billion worth of TIPS through funds that specialize in them. The amount of TIPS in circulation has risen 50% in five years to $850 billion, according to the U.S. Treasury.

Investors have been buying TIPS in recent years for two reasons, say analysts. Some are looking for a better alternative for their short-term money than cash, which is earning almost 0%—and less than inflation. Others are looking for long-term protection against the risk of surging inflation.

Investors seeking short-term alternatives to cash should stick to short-term TIPS, preferably those that mature within five years.

The Federal Reserve, trying to kick-start the economy, is keeping short-term interest rates at zero and is taking action to drive down long-term rates as well. For savers, this means regular bank deposits, money-market funds and short-term Treasurys effectively lose them money each year. Short-term TIPS, while ugly, might be less so than the alternatives.

There is an argument for using TIPS as a safe-haven alternative to Treasurys. “If I buy nominal Treasurys right now, I can basically earn 0% in a 3%-inflation environment, so I’m losing 3% in real terms per year,” says Carl Friedrich, chief investment officer at Piermont Wealth Management in Woodbury, N.Y., which has $130 million under management.

By comparison, he says, some TIPS don’t look so bad.

Investors seeking longer-term protection against inflation should also stick with short-term TIPS. Even though long-term TIPS might offer higher real rates of return, they are much more volatile, Mr. Friedrich says. If interest rates rise across the economy, he says, those longer-term bonds could fall sharply in price.

“If you’re going to take a position in TIPS,” Mr. Friedrich says, “keep the maturity at the short end, ideally no more than five years.”

Logically, owning long-term TIPS will probably work out well only if the economy plunges into a multidecade deep freeze or bursts into rampant runaway inflation. In either scenario, one can expect plenty of volatility ahead—and many opportunities to earn better rates of return than half a percent a year.

The smart move now is to cash in gains on long-term TIPS.

Bonds are like seesaws: The yield falls as the price rises. TIPS yields have collapsed as their price has risen. The longest-term bonds, which are the most volatile, have risen the most. The February 2040 TIPS has risen 40% in price since it was issued three years ago. Investors are sitting on some hefty capital gains.

So it makes sense to cash those in. As an added bonus, the gains, assuming the bonds have been held for more than a year, will be taxed at a maximum rate of 23.8%. The annual income from the bonds, if held, will be taxed higher as ordinary income.

Investors still looking for long-term protection against the risks of high inflation in the future might find better value in real estate, such as in investment properties, and in commodities, both of which look cheap compared with their long-term averages.

4% Rule Under Fire- Again

4pctThe often-quoted ‘4% withdrawal rule’ that mainstream investment managers use as a guideline ‘safe’ withdrawal rate for a portfolio has come under fresh fire.

The volatility of the last few years should have already given most conservative investors enough heartburn to not stake their life savings on this faulty rule of thumb.  But new research is showing just how disastrous bad advice can be.  We’ve written about this flawed approach before as well.

The 4% Rule Background

The ‘4% Rule’ isn’t really a rule.  Rather, it’s an asset withdrawal rate promoted initially by a retirement planner named William Bengen.  The theory states that a safe retirement withdrawal rate starts out by drawing down just 4% of your portfolio and adjusting up only for inflation.  Testing against 75 years of historical stock and bond prices shows the probability of failure – meaning, the chance of running out of money in a 30 year retirement, at an acceptably low probability of about 6%.

Where It Falls Apart:

In its day, the “Rule” made sense, but that day was 1994.  The US had strong market performance year over year in the preceding decade, and portfolios grew at a solid rate even with withdrawals.

Well along comes the Tech Bubble, a Black Swan event, and then a Flash Crash, computerized trading, the lost decade of the 2000’s, the banking crisis, international currency crisis, and the real estate crash.  Oh yeah, THAT awful decade….

Retirees looking to their assets for income, and carrying their own longevity risk, saw portfolio values decimated, and at the same time were forced to sell securities while they were down for income.

Welcome to Reverse Dollar Cost Averaging- Getting kicked while you are down.

Well in case you didn’t already know from common sense, you can’t pull money out of a depreciated portfolio and expect it to bounce back and stay on track indefinitely.

The Case for Annuities:

I probably don’t need to belabor the point that annuities are MADE for times like this- quite simply, you buy security and safety of income, and offload major risks like longevity and loss of principal on a strong insurance institution. That’s all there is to it.  How we put together a plan for you depends on your needs and assets, so get started by giving us a call today.

 4% Rule- New Research

New research from a distinguished trio of academic and research economists has driven a new nail in this coffin.  Michael Finke, Wade Phau and David Blanchett have re-run the economic simulations that Bengen initially based his finding on with TODAY’s actual reality of low to negative real (after inflation) bond yields.

Instead of a 6% probability of failure, today’s rate environment produces an astounding 57% probability of portfolio ruin.  Remember, ruin means running out of money- kaput, no groceries, no roof over your head.  Does that sound a like a good way to spend your final years?  At 57%, this is almost a certainty of failure!

Here are several quotes from the Author’s excellent new study (Available Here):

The safety of a 4% initial withdrawal strategy depends on asset return assumptions.  Using historical averages to guide simulations for failure rates for retirees spending an inflation-adjusted 4% of retirement date assets over 30 years results in an estimated failure rate of about 6%. This modest projected failure rate rises sharply if real returns decline.

As of January 2013, intermediate-term real interest rates are about 4% less than their historical average. Calibrating bond returns to the January 2013 real yields offered on 5-year TIPS, while maintaining the historical equity premium, causes the projected failure rate for retirement account withdrawals to jump to 57%. The 4% rule cannot be treated as a safe initial withdrawal rate in today’s low interest rate environment.

Some planners may wish to assume that today’s low interest rates are an aberration and that higher real interest rates will return in the medium-term horizon. Although there is little evidence to support this assumption, we estimate how a reversion to historical real yields will impact failure rates.

Because of sequence of returns risk, portfolio withdrawals can cause the events in early retirement to have a disproportionate effect on the sustainability of an income strategy. We simulate failure rates if today’s bond rates return to their historical average after either 5 or 10 years and find that failure rates are much higher (18% and 32%, respectively for a 50% stock allocation) than many retirees may be willing to accept.

The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio.

As Pfau (2010) showed, the success of the 4% rule is partly an anomaly of the US historical data. In most other countries sustainable initial withdrawal rates fell below 4%. We find there is nothing inherently safe about the 4% rule. When withdrawing from a portfolio of volatile assets, surprises may happen. This study demonstrates that when we recalibrate our assumptions for Monte Carlo simulations to the current market conditions facing retirees, the 4% rule is anything but safe.

We also show that a 2.5% real withdrawal rate will result in an estimated 30 year failure rate of 10 percent.  Few clients will be satisfied spending such a small amount in retirement.  It is possible to boost optimal withdrawal rates by incorporating assets that provide a mortality credit and longevity protection.  Pfau (2013), for example, estimates that combining stocks with single premium immediate annuities, rather than bonds, provides an opportunity for clients to jointly achieve goals related both to meeting desired lifestyle spending, and to preserving a larger reserve of financial assets. In the absence of some added income protection, there is a high likelihood that low yields will require planners to rethink the safety of a traditional investment-based retirement income plan.

A Happy New Year? Not For Bonds

WSJ bond prices chartA recent Wall Street Journal article highlighted the Russian Roulette investors are playing in the bond markets.  The slightest upward tweaks in interest rates sends bond prices falling… and when prices fall, you lose money if you have to sell.  Bond buyers nowadays need to be making a ‘yield to maturity’ play, and plan on holding whatever they buy for the duration.

Case in point:

In the first two days of the year, prices for the benchmark 10-year Treasury have tumbled, sending the yield above 1.9% intraday Thursday, the highest level in eight months.

The article continues along with this intriguing piece:

The sudden moves have put investors and analysts on guard. Some are beginning to question whether Treasury yields, which have been stuck between about 1.60% and 1.80% for the past six months, may kick higher. Some wonder if they may even soon surpass 2%, a level they haven’t breached since last April. Many investors have been reluctant to bet against long-term Treasurys, in large part because the Fed has been such a big buyer of the debt and because intermittent shocks over the past few years—from worries about the U.S. economy to Europe’s debt crisis and troubles in the Middle East—have consistently sent investors scurrying to Treasurys for safety.

That has helped propel the bull market in Treasurys into a third decade.

Read that carefully- the FED is the largest buyer of the Treasury debt, keeping the rates artificially low and stable, and propelling a bull market in treasuries into a third decade.

Snake, eating its own tail?  How long can the charade last?

In a totally unrelated section of the paper, Rich Karlgaard, an excellent write at Forbes, had a WSJ editorial about Ponzi schemes.  He focused on Herbalife, but I suspect his keen and penetrating intellect could rip the Fed/Treasury farce apart.  We might not like what he has to say however.

Read Rich’s article here- it’s good.
A Short Seller Takes on a Vitamin Vendor

 

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:

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!

Tax Talk- Did You Forget April 1st?

Most people consider April 15th to be the only tax deadline they need to worry about, or the 17th if we’re talking specifically about this year. Well if you are withdrawing money from a qualified retirement account then April 1st is not a day you should forget either.

April 1st of the year following when you turn 70 ½ is the day you are required to take a minimum distribution from your tax-deferred retirement account. This is imminently important for those who are currently in that age bracket but it definitely should not be overlooked by those who are several years away. There’s a great article here from Smart Money that covers the basics of what you need to know.

You see, whether you need to take those withdrawals this year or not, any planning you do for the future needs to be done with RMDs in mind. IRAs and such are great for tax deferred saving but when it comes time to convert those assets into retirement income of any kind there are plenty of special nuances that must be considered when planning an income strategy.

First of all, add up all qualified assets and get an idea of how big your RMDs will be. This can be done using some simple formulas mentioned in the article and we’re here to guide you through it if you need to boil it down to exact numbers. Then you need to consider how those numbers match your plan for distribution of assets throughout retirement. Once you figure out how much you’ll be required to take you can design an income strategy that is flexible enough to keep you within IRS rules.

Other than that there are a couple of things that are important to mention…

First, if you are planning on taking systematic withdrawals from a traditional management portfolio then you need to carefully consider how your assets will be affected by a market slump. It will happen and when it does you’ll still be required to take RMDs which will only depress your account further. Do remember when we talked about Reverse Dollar Cost Averaging? It may be well worth another read.

Second, deferred income annuity contracts can be adversely affected as well. If you plan on parking money in a deferred annuity with guaranteed income rider past age 70 ½ you may still be required to withdraw money from your account before you had originally planned. This will decrease the amount of guaranteed income you can expect to take in the future. Tread lightly and take all factors into account before you commit to a long-term strategy with qualified assets.

No matter how you are planning to distribute your assets for retirement income, careful and exact calculations are necessary. I don’t care if you are age 55, 65 or 75 this is something everyone needs to think about. All planning should be done with every known variable in mind. There are plenty of unknown variables to worry about so the last thing you want to do is be blindsided one day by something you should have taken care of long ago.

One thing’s for sure, the day of RMDs is coming so get your ducks in a row now.

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

Consider Long-Term Care Insurance

Perhaps one of the best ways to protect and conserve wealth in retirement is to purchase a quality long-term care insurance policy. My intention here is not to spout a litany of statistics right now but suffice it to say that research has shown that a large percentage of retirees will need some form of care assistance in the future. And with costs already high, that will have a significant impact on your lifestyle if and when that day comes.

In this weekend article from the Wall Street Journal, you’ll see an overview of what’s available in the current long-term care market. Traditional LTC policies are the most common but now care features have been added to life insurance and annuity contracts as well. Although many insurance companies are exiting this unpredictable market the wide range of available options can make the search for a suitable solution fairly difficult.

Now at Annuity Straight Talk we don’t sell long-term care insurance but we do understand how best to choose what’s right for you. Given the fact that we have an intention to help people with all facets of personal finance in retirement, we have in place a network of fantastic advisors we’d be happy to refer you to. With this available you’ll get the same opportunity to search the entire market for long-term care that you get with us when trying to find the best retirement income options with annuities.

I highly suggest reading the article referenced above and then contact us if you’d like a little assistance without sales pressure. In time we’ll likely add some useful information on understanding and selecting a reasonable amount of long-term care coverage. Until that happens feel free to give us a call or send an email with specific questions or comments about your situation.

As with anything, we stand ready to assist so don’t pass up the opportunity for a little free education and advice.

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

How to Control Health Care Costs

Health care costs are without a doubt one of the greatest unknown factors we typically deal with when helping people decide exactly how much income is needed in retirement. Sure, Medicare will cover many of the costs for retirees past age 65, but what if you’d like to retire before then? And even if Medicare foots most of the bill, gap insurance is usually necessary to reach the full coverage desired.

This doesn’t even consider the fact that many changes have been proposed to the Medicare system. Most proposals I’ve seen, however, are designed to affect only those currently under the age of 55 but who knows what kind of changes will actually pass both houses of Congress and receive Executive approval.

A recent article from Yahoo Finance covers some things everyone can do to limit health care expenditures. Although it’s an article that talks generally about limiting costs for all people there is likely something useful for retirees specifically. Read the article here.

With legislation constantly changing and the new health care bill itself hanging in the balance, it can be extremely difficult to have any level of certainty going forward. With everything you have to be concerned with funding for the next several decades, thoughts of rising health care costs can be quite unsettling. It seems as though you’ll have to become a student of the system in order to get the coverage you need most efficiently.

For starters, review the article mentioned above to see if anything makes sense in your specific situation. Every situation is different and that goes for both retirement income and health care so solutions for you in particular probably deserve individual attention. If you need help wading through the process, give us a call. We’re great at digging into the details and stand ready to assist.

Take care and have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

How Safe is the Secondary Market for Annuities?

The question of safety of the Secondary Market is one  we receive frequently, especially after sending out a list of currently available offers that pique reader interest.

Quite simply, we like  structured settlement secondary annuities  because  they offer the highest yield and highest level of safety available to consumers for retirement income purposes.  They are not the simplest  transactions for buyer or agents to complete, and they are not appropriate for all situations.  For example, for older investors,  other types of annuities may have more benefits in flexibility or longevity protection.  However as planning tools with excellent  yield and safety, they simply can’t be beat.

Be sure to reference our post on the difference between Structured Settlement Annuities  and viatical (life insurance) transactions

 So now that you know why we like them in general, the question remains, is this market for real and how safe is it?

Secondary market annuities can more specifically be called structured settlements in technical terms. A structured settlement originates when an individual wins a settlement- this can be a car accident, medical malpractice, or any other sort of award.

The settlement essentially takes the same form as an annuity contract that is available to anyone who invests retirement assets with an insurance company- it’s a promise by a highly rated carrier to make a series of future payments to the individual.

In this case, rather than an individual buying those future promised with a premium (AKA an annuity), in a settlement, the losing party in the case settles their obligation by transferring a sum of money to satisfy those future payments. The sum is transferred to an insurance company who then shoulders the future market risk and court-ordered obligation to make specific payments. The winning party- usually an individual- enjoys this income stream tax-free per IRS regulations.

However, circumstances change for people, and sometimes they wish to sell their future payments for a lump sum. This is where our ”Secondary Market Annuities” originate.

Because of this slight difference in origination of funds in the settlement, there is one critical difference that separates primary market from secondary market annuities. In addition I’ll add two other reasons that will show clearly why the secondary market is a much SAFER investment.

Safety Factor #1

An insurance company becomes party to a structured settlement as part of a final court order in a lawsuit. In the unlikely event that this specific insurance company fails in the future, an existing court order compelling the company to make payments would place that liability among the company’s most senior debt obligations. And that means it gets paid out ahead of all other company liabilities. The insolvent insurance company would be held in contempt of court for failing to make payments according to the terms of a structure settlement. The stream of income provided to you via the secondary market annuity would not be affected nor have to wait for further bankruptcy or liquidation proceedings.

Safety Factor #2

And now for the somewhat less critical but also quite relevant…

Each state has an insurance guaranty fund that covers the guarantees of insurance policies and annuities for insolvent insurance companies who can’t make payments. Let’s assume your state guaranty fund covers $100,000 for annuities but you need to invest quite a bit more money to cover your retirement income needs. Within the primary market, no matter what you decide to invest, you may only be covered to the maximum limit of $100,000.

By using the secondary market, you are subject to the guaranty limits of the state where the contract was initially issued, not necessarily your state of residence. Structuring an income portfolio in the secondary market typically requires multiple deals to complete. It is quite probable that each contract will have originated in a different state, which affords you the total protection of all states involved rather than simply the limits offered in your current state of residency.

Safety Factor #3:

The risks in an SMA are generally transactional in nature- meaning, it has a risk of not closing due to the seller changing their mind or the court not approving the transfer. In both of these cases, there is no financial consequence to you if the case fails, and your deposit is fully refunded.  This happens in about 1 in 10 cases where generally a court disallows the seller from selling due to the seller’s personal situation.

Other risks in an improperly handled SMA transaction are that a payment stream could be already committed or not transferable. Our process eliminates that risk as our outside counsel reviews and will not release purchase funds until a thorough checklist is complete.

Thus the three key items that ensure legal safety are:

  1. Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell,
  2. Court order changing the payee to you,
  3. Acknowledgement letter or stipulation agreement after the court hearing from the Issuer naming you as the new payee of the specific payment stream you purchased.

Not surprisingly, these three key pieces are what must be in place before your funds are released to a factoring company and seller, and are what constitute our closing book after a transaction is complete.

Safety Factor #4:

And finally we’re going to talk about a safeguard that is inherent to any sound retirement income plan. Any advisor worth their salt will advise you to spread your assets between several different insurance companies. While this is a great recommendation, it rarely happens because most salesmen are lazy and benefits can vary greatly between carriers to the point where it puts you at a financial disadvantage.

Because a typical case involves multiple Secondary Market Annuities, purchasing contracts in the secondary market virtually assures that you will place assets in several companies with no sacrifice to average yield or overall performance.

Summary:

A retirement income portfolio based on secondary market annuities thus offers unparalleled safety of 1) credit quality, 2) seniority status among the issuing company obligations, 3) rock solid legal review, and 4) diversity of carriers.

If you’d like to explore this profitable yet extremely safe opportunity for your retirement income plans, we’re ready for your call.

Annuity Straight Talk

1-800-438-5121

Low Rates Expected Until 2014

Arguably the most damaging effect of low interest rates is the impact it has on people approaching retirement and looking for more safety. Traditional safe havens such as CDs pay very little interest in relation to the time commitment required. And I’ll admit that selling annuities in this climate is challenging to say the least.

Several articles available have pointed to recent Federal Reserve meetings that indicate plans to keep interest rates near zero through 2014. That means we likely have nearly three years of the same issues to deal with.

The article linked here mentions all objectives behind keeping rates low for the foreseeable future, most notably an attempt to keep long-term rates low in order to spur economic investment and growth. While this may be a useful step toward reversing the economic lull of the past few years it sure doesn’t give the retirement investor a lot of options.

So, how does a person develop a reasonable game plan in this environment? For every individual there is a balance between different strategies and products available to accomplish each goal. Here are a couple of options:

Guaranteed Lifetime Income Products allow you to achieve a base level of guaranteed income in the future. By doing this with a portion of your assets your future income needs are met and additional assets can be used to pursue greater returns with less risk to your overall portfolio.

Short-Term Index Annuities allow you to keep assets safe for the time being with greater potential to outpace currently low interest rates. Short time periods are key so that you are able to reposition assets when the economic climate changes.

Secondary Market Annuities offer safe money yields that stand above historical average interest rate levels. This presents a unique opportunity to achieve substantial growth while maintaining high levels of safety.

These three options show just a few of the ways you can take positive action against the dismal conditions that exist. Just remember the idea is safety in combination with growth. The last thing you want to do is go backwards.

Feel free to call us for a straightforward talk about how you can improve the outlook for your retirement income plan.

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

On Cashing Out In Retirement

Retirement Annuities

Retirement Annuities

The tools used to maximize pre-retirement asset accumulation are not the tools of retirement  income generation.  Maximizing retirement income is just outside the scope of expertise  for most traditional advisors and individuals because  of the biggest unknown: life expectancy.

An  individual seeking to maintain full control over their money, and setting their own withdrawal rate,  is carrying their entire longevity risk on their shoulders.  And an advisor that recommends a withdrawal rate or a stock / bond allocation to a client is making that client shoulder their entire longevity risk perhaps unknowingly.

This excellent article looks at various ways people consider using their assets in retirement.  It’s worth reading in its entirety, but what is fascinating is that annuities rightfully get their mention at the top of the list as a smart allocation for a portion of your assets.  This is uncharacteristic for main stream media, which  usually scoffs at annuities.

How to Cash Out in Retirement

A look at four strategies that could help make a retiree’s savings last a lifetime

By ELEANOR LAISE

There’s no rest for retirement investors. They spend decades worrying about the best way to put money into their accounts—and then they have to find the best way to take it out.
While saving for retirement can be tough, finding the right way to spend down your nest egg may be an even bigger challenge. Francis Kinniry, a principal at Vanguard Group, discusses some spending strategies with WSJ’s Eleanor Laise.

It’s a problem that’s starting to hit home for the oldest baby boomers, who turn 65 this year. Many don’t have traditional pension plans to dole out steady paychecks for the rest of their lives. They have to figure out the best way to pull money from retirement accounts so that they get a livable income each year—and the money doesn’t run out too soon.

And that means they have to account for a host of factors that are impossible to predict. “You can’t control how long you’ll live, which is a huge determinant of retirement income,” says Francis Kinniry, a principal at Vanguard Group. “And you can’t control the markets.”

Many people are dealing with the uncertainty by simply working longer. But for those who were looking forward to a more retiring retirement, there’s fresh hope.

Financial advisers are rethinking retirement-spending rules of thumb and coming up with new withdrawal strategies that help clients maintain their standard of living regardless of the stock market’s ups and downs. And financial-services firms are introducing new products to turn lumps of retirement savings into steady income without requiring people to lock up their money in an annuity. (Annuities, of course, may still be a good retirement-income solution for some people.)

Making the Case to Buy an Annuity

Below, we explain various strategies for spending down retirement savings. But don’t feel compelled to choose one and follow it for a lifetime. The key to developing a successful strategy is flexibility, retirement experts say. Given all the variables in retirement spending, advisers suggest that investors regularly revisit their approach rather than religiously following a preset path. Those who are willing to make small adjustments along the way will run the smoothest course through retirement.

Regular readers of Annuity Straight Talk should smile at this line, above. Flexibility has always been one of our guiding principles, together with Profitability and Safety.

Reviewing the 4% Rule

Faced with the question of spending in retirement, many financial advisers fall back on “the 4% rule.” With this approach, investors withdraw 4% of their retirement balance in the first year of retirement, or $40,000 from a $1 million portfolio. The dollar amount of the withdrawal is adjusted each year to keep up with inflation, and the remaining portfolio is rebalanced to the desired mix of stocks and bonds.

See how long a $2 million portfolio might last.

Different investors may follow different versions of the rule, such as initially withdrawing 5% or 6%. That initial withdrawal amount can have a major impact on the strategy’s success. Assuming a mix of 60% stocks and 40% bonds, an investor initially withdrawing 4% has a 10% chance of running out of money at age 97, according to T. Rowe Price Group Inc. With a 6% initial withdrawal, he has a 10% chance of running out of money at age 82. Many advisers have settled on 4% as the “safe” initial withdrawal rate.

The 4% rule helps manage two big risks in retirement: longevity and inflation’s tendency to gnaw away at your purchasing power, says Stuart Ritter, a financial planner at T. Rowe Price.

The rule also has the allure of simplicity, and at least in the short term, it gives investors steady amounts of spending money each year. The problem, critics say, is that this approach matches a rigid spending rule with an investment portfolio that can bounce all over the place. Given strong markets, investors may wind up with lots of money to leave their heirs. Given weak markets, they could run out of money halfway through their retirement.

“This is a prescription for getting people into serious trouble,” says Laurence Kotlikoff, economics professor at Boston University.

The 4% rule should be viewed as “a starting point,” Mr. Ritter says, adding that it “gives people the ability to adjust along the way.”

Getting Flexible
Another simple approach to retirement spending is to withdraw a set percentage of the portfolio each year.

Unlike the 4%-plus-inflation rule, this approach automatically adjusts an investor’s spending in response to market performance: If the portfolio grows, the withdrawal is larger; if the portfolio shrinks, the withdrawal is smaller. And investors will never completely run out of money.

Of course, that means there can be major fluctuations in the amount of spending money from one year to the next. Given that many people want to maintain a steady standard of living in retirement, those ups and downs can be stomach-churning.

Vanguard suggests a more flexible version of this strategy. Aim to withdraw a set percentage of the portfolio each year, but place upper and lower limits on the dollar amount, based on the prior year’s spending.

For example, an investor may decide that he’ll withdraw 4% of his portfolio each year, but he doesn’t want his spending amount to change more than 5% from one year to the next. Let’s say he took out $40,000 from his $1 million balance last year, and this year strong markets have boosted his portfolio to $1.1 million. A strict 4% withdrawal would give him $44,000 in spending money this year, but given his 5% spending band he’ll limit his withdrawal to $42,000.

This is “a middle-of-the-road approach,” says Vanguard’s Mr. Kinniry. Spending levels remain relatively steady year to year, but the strategy also responds to changes in investment performance, helping the portfolio last through retirement.

The bands around the dollar amount of spending don’t have to be symmetrical, of course. Mr. Kinniry suggests allowing for more flexibility on the downside than on the upside. For example, you might cap the year-over-year increase in the withdrawal amount at 3%, so that in a good year you keep more of your profits in your portfolio—but if your investments take a beating allow withdrawals to fall as much as 5% or 10%. If markets perform poorly, “you don’t want to compound” the effect on your portfolio by taking a large withdrawal, he says.

Let’s again assume that the investor took $40,000 last year from his $1 million portfolio. But this year his investments fell in value to $850,000. A strict 4% withdrawal would be $34,000. With a maximum 5% drop in the dollars he withdraws compared with last year’s $40,000, he would take out $38,000. With a 10% maximum drop, he would take out $36,000.

Build a Solid Foundation

To build confidence that a portfolio will sustain a lifetime of spending, it helps to take a page from the playbook of defined-benefit pension plans, advisers say. With this approach, investors should think of each year’s spending as a liability that must be matched with a chunk of your portfolio.
The best match for those liabilities is a bond ladder, advisers say. With high-quality bonds such as Treasurys maturing in each year of retirement, creating a “spending floor,” investors can feel confident their future spending needs will be met.

Umm…. Might I introduce Secondary Market Annuities??? These fantastic fixed income investments are of comparable credit quality as the best bonds, yet with yields in the 5-6 and even 7% range….  Hello!! Opportunity is Knocking!

Pouring all your money into bonds, of course, can reduce your portfolio’s growth potential. But it’s possible to create a mix of steady income, upside potential and some longevity protection by starting retirement with a blend of 80% bonds and 20% stocks, says Jason Scott, managing director of the retiree research center at investment advisers Financial Engines Inc.

With bonds to meet your basic spending needs, “you’re not subject to the vagaries of the [stock] market for that spending,” Mr. Scott says. And if the equity allocation does well, investors can use the stock-market proceeds to extend their bond ladder further into retirement or raise their spending floor. So payouts won’t drop when the stock market falls, but they can rise when stocks are rallying.

You can read the rest of the article here.  Annuity Straight Talk focuses on the maximum profitability portion of your Safe Money allocation- get the most income with the least risk.  Come talk to us and see what we can do for you.

Rest Easy in A Crazy Market

Just how much volatility can you take?

The stock market swings are just sickening- it's become so wild that you almost want to laugh, until you realize it's people's life savings in the death throes. Massive evaporation of wealth in an afternoon, followed by a roaring rally to bring us back to square one…

And while those 20% rallies in a few days do wonders for our portfolio balance, what does it do for the mind?   Is this the retirement you dream of? I bet it's not.

Most people nearing retirement envision a life of ease, with enough income to support their needs and to finally take it easy.  Now, if  you dream instead of revising your standard of living by 20-30% on a weekly basis, by all means stay in the equity markets.… 

This week (11/7/11) the Wall Street Journal has a fascinating roller coaster of a chart to consider-

Now this is hard to see, so I have a larger size image- just CLICK THE LINK HERE.

Look at the swings in value- a $100,000 portfolio on June 30th 2011, up to $101,846 by July 22… and down to $84,766 August 8th.  Come on.  It's just too much to bear.  Please- do yourself a favor and disregard the funds, ETF's and stocks my beloved Journal tacks on to the chart.  Find a refuge in something safe.

Some highlights of the article:

October's surge helped many mutual funds bounce back from recent lows. It was also a vivid reminder of what has become a fact of life for stock investors: It's crazy out there. And it seems to be getting crazier all the time.

If the market's roller-coaster ride has caused you a lot of heartburn, this might be a great time to do something about it, before another slide is just one too many.

One too many swings indeed. 

If you didn't learn your lesson before, learn it now: When your current stock exposure makes you queasy, take advantage of rallies to trim it back to a level—perhaps to around a third of your overall holdings—where you won't be tempted to bail out the next time the Dow Jones Industrial Average plummets 400 points.

The tortoise and hare fable teaches us that slow and steady win the race.  Mainstream media wants you to believe that buy and hold = slow and steady.  This is no longer true.

Retirees can not face a future where their net worth swings 10-20-30% in a few days, and their income therefore swings with the market.  Many plans and dreams are built and budgeted on income- plans like housing, trips, groceries, basic living costs. 

Can you stomach cutting your basic living costs by 30% because your stocks are down?  Skip Christmas for the grand-kids because your portfolio is down?

There is a better way to ensure your income.  It's not a '4% rule' or an allocation strategy or an ETF, or anything your stockbroker will talk to your about. 

This is an old line, but it's never been more true-

You insure your home, you insure your health, and you insure your life…. Why not insure your retirement??

 

Annuity Straight Talk is ready when your are to discuss your retirement income planning needs.

800-438-5121

Article Source: WSJ

Why I’m Bullish On America!

In recent years, people let fear dictate their financial management decisions. Much of the news today is filled with stories of crisis after crisis. Any rational person should hesitate when making a financial decision that holds significant implications over the next several years or even decades.
 
But this week I’d like to take a break from the bad news and financial despair to share a little information that will give a reason to be positive about the future of our economy. So instead of talking about how America is in decline and what dismal implications that has for our lifestyle going forward, I’m going to share with you several reasons why America is and will continue to be the greatest nation on earth for years to come.
 
Let’s go back to early August of this year when the US congress was scrambling to raise the nation’s debt ceiling so we wouldn’t default on our financial obligations. In the days following that ‘crisis’ Carl Delfeld of InvestmentU.com gave us the following reasons to be not just positive but downright excited about America’s future.
 
  • America is still the leading manufacturer in the world, with 22 percent of global manufacturing primarily in advanced, capital intensive manufacturing. American manufacturing workers are eight times more productive than Chinese workers.
  • The American economy is still three times the size of China’s, even though its population is about one-fifth its size.
  • The market values of Exxon and Apple alone are greater than the market value of the entire Shanghai stock market. America’s multinationals are dominant, representing 47 of the world’s 100 largest companies by market value. Meanwhile, 15 of China’s 20 largest companies are owned and run by the Chinese state.
  • America is the world’s third-largest exporter (just a hair behind China and Germany) and its upside potential is enormous. Only two percent of America’s small- and medium-sized businesses export at all right now.  About two-thirds of our trade deficit is due to Chinese and energy imports.
  • America remains the world’s agricultural king, accounting for 20 percent of global trade. It has twice the arable land of China (25 percent desert) and its farms are the most productive in the world. By contrast, in India 60 percent of people are in agriculture, but the sector accounts for only 15 percent of GDP. About 40 percent of India’s crops spoil on the way to market due to poor infrastructure.
  • The United States has 28 percent of the world’s coal reserves and Louisiana alone has four times the proven natural gas reserves of China.  The United States has twice the fresh water of China, while China’s annual carbon emissions are already twice that of America.
  • America is still the No. 1 destination of foreign direct investment. On a cumulative basis, it has four times that of the U.K. and six times that of China.
  • America continues to play its role as a global talent magnet. Fifty-two CEOs of S&P 500 companies and 72 CEOs of Inc. 500 companies are foreign born. About 30 percent of Silicon Valley start-ups were founded by immigrants. Let’s keep it going.
 
Put plainly and simply, this is a great country! It has allowed us all to chase our full potential without restraint. Do we have challenges to overcome? Absolutely, but that’s no reason to abandon the principles that got us to this point. As you approach retirement put your faith in those same principles and I promise you will not be disappointed.  Read Carl Delfeld's post here.
 
Thank you for your continued loyalty and have a great week!
 

Bryan J. Anderson

Family Feuds: The Battles Over Retirement Accounts: Wall Street Journal Article

This alarming article in the Wall Street Journal is an eye-opener.  401K and ERISA rules are complicated- I find it astounding that even after specifying your children as your 401K beneficiary in the plan docs and in writing, that your wishes can be thrown out in court and your assets awarded to a second spouse rather than your designated recipient.  For estate purposes, the 401K is treated as the SPOUSE's property, not yours….

However, the same set of regulations will allow you to cash out your 401K entirely without spousal consent… ' A Giant Loophole" as the article states.

Then to top it off, the same ERISA regulations even attempt to usurp your pre-nuptial agreements….

I'll refrain from commentary on the legislative system that produced this mess.  Suffice to say, it's quite an eye opening discussion.  Be sure to retain good counsel to ensure that your wishes are not only written down, but that meddlesome regulation does not interfere with your plans.

The article can be found here– it's well worth keeping for reference, but for your convenience I've quoted it below.

Stock-market turmoil once again has Americans worrying about their 401(k)s and individual retirement accounts. But families can be blindsided by another aspect of these accounts: confusing rules about who is entitled to the assets in circumstances such as the account holder's death.

As the amount of money stashed in 401(k)s and individual retirement accounts has grown, so has the number of court battles over who's entitled to that money following divorce or death.
Related

    What You Need to Know About Beneficiary Forms

Take the case of Leonard Kidder, who worked at Cajun Industries, a privately owned secondary dwellings Perth company in Baton Rouge, La., for nearly 20 years. The carpenter-turned-superintendent named Betty Kidder, his wife of 41 years, the beneficiary of his 401(k) account in the event he died before her.

As fate would have it, Betty died first, so Leonard updated his account paperwork, naming their three adult children the beneficiaries of the 401(k).

Eventually he got remarried, to Beth Bennett Kidder, and was on the verge of retiring. Six weeks later, at the age of 66, he died.

When Mr. Kidder's children from his first marriage tried to claim the assets, reasoning they were the ones named on the most recent beneficiary form, they were rebuffed by Cajun, which ended up asking a court to determine the rightful owner of the money. Under the terms of the company's 401(k) plan, if an employee dies, the employee's spouse has the right to the account assets, unless the spouse waives that right in writing. (That priority for spouses springs from federal law.) Beth Bennett Kidder had never signed such a waiver.

The new Mrs. Kidder filed a motion for summary judgment, and the matter eventually ended up in federal district court in Baton Rouge, which this year awarded the approximately $250,000 in the account to her, disinheriting the children.

"I think Leonard Kidder would be shocked," says Charles Dirks III, the Baton Rouge lawyer representing the children, who are appealing. "It is a trap, an absolute trap" for an individual such as Mr. Kidder, he says. Neither Cajun nor Beth Bennett Kidder would comment.
'Labyrinth of Rules'

As the amount of money stashed in 401(k)s and individual retirement accounts has grown, more and more families are finding themselves locked in battles over who has rights to the assets, especially in cases involving divorce and remarriage.

According to Cogent Research LLC, a Cambridge, Mass., research and consulting firm, IRAs and 401(k)s now account for roughly 60% of the assets of U.S. households with at least $100,000 to invest.

"That's where most of the wealth in America ends up," says Ed Slott, a certified public accountant in Rockville Centre, N.Y. "But what most people don't realize is it's surrounded by this complex labyrinth of rules," he says, so when "key questions are not asked, people make mistakes, and many times it involves their life savings."

The patchwork of federal and state laws governing these plans is partly to blame. "Even the best attorneys and accountants are bedeviled by it," says Edwin Morrow III, a lawyer with KeyCorp's private-banking unit in Dayton, Ohio.

Here are some key rules governing retirement accounts, and lessons from financial professionals on how to navigate them as families grow and change:

Spouse Gets Priority

Rule No. 1: With 401(k)s, your spouse is the presumed beneficiary of your account upon your death—regardless of who is listed on the beneficiary form—unless he or she previously consented to your naming someone else beneficiary. These plans are governed by the federal Employee Retirement Income Security Act, or Erisa. Under this law, plans can provide for those spousal rights to kick in immediately, or no later than a year after the marriage. This general rule cannot easily be circumvented with a prenuptial agreement. Only a spouse can waive the right to 401(k)-plan assets—those who are engaged cannot.

If you are contemplating remarrying and are concerned about providing for children from a prior marriage, consider rolling your 401(k) to an IRA, where you have more latitude to name beneficiaries of your choosing, says Mr. Slott.

Rule No. 2: If you are single when you die, your 401(k) assets pass to the person designated on your beneficiary form—regardless of what your will says or what other agreements you made before your death. The U.S. Supreme Court has said so.

William and Liv Kennedy called it quits after 20-plus years of marriage. As part of their divorce agreement, Liv waived her rights to any benefits under William's DuPont Co. retirement plan. William never remarried. He also never changed the beneficiary designation on his retirement account from Liv.

When William died, a dispute arose between Liv and the couple's daughter, Kari Kennedy, over who had the right to the funds in the DuPont plan.

After conflicting rulings in the lower courts, the Supreme Court agreed to hear the case and in a unanimous decision in 2009 held that the person named on the beneficiary form gets the money—even if that person happens to be the employee's ex-spouse, and even if that ex-spouse waived any right to the money in a divorce agreement. Kari Kennedy was disinherited.

The lesson: If you get divorced and your ex-spouse gives up any claim to your 401(k), update your account paperwork with the name of your new beneficiary, says Mr. Slott.

Seeking More Latitude

Rule No. 3: With IRAs, which are subject to state law, you generally can name anyone you like as the beneficiary, with or without your spouse's consent. (Certain restrictions apply in community-property states.)

Wayne Wilson married Katherine Chandler in 2000. Two years later he opened an IRA at Charles Schwab Corp. and named his four grown children from a prior marriage as beneficiaries. Three years after that, at the age of 65, he died.

His wife tried to claim the IRA assets, arguing they had originated from Wilson's Siemens AG 401(k) plan.

But last year the U.S. Court of Appeals for the Ninth Circuit awarded them to the children, ruling that spouses have no Erisa rights to IRA benefits. Robert Olson, the Los Angeles lawyer representing Ms. Chandler, says his client asked the court to rehear the case, arguing that the decision results in a "stunning loophole" affecting the retirement security of "millions of unsuspecting American spouses," but her request was denied.

What if you designate your spouse as your IRA beneficiary and later get divorced? Under most states laws, the designation would become null and void upon your death, unlike with 401(k)s, says Robert Keebler, a CPA in Green Bay, Wis. Your assets will pass according to the default plan laid out in the IRA document—typically to your estate if you are single, he says.

If you actually want your ex-spouse to inherit your IRA, you must fill out a new beneficiary form indicating so, says Natalie Choate, an estate-planning lawyer at Nutter, McClennen & Fish in Boston.

Rule No. 4: Workers generally don't need a spouse's consent to cash out a 401(k) or roll it to an IRA when they change jobs or retire. Although employers may impose such a rule, the vast majority do not, as there is no federal law requiring them to do so, says Amy Matsui, senior counsel at the National Women's Law Center, which advocates improving spousal protections for 401(k)s and IRAs.

"It is an enormous loophole," says Ms. Choate.

What it means, she says, is that once you change jobs or retire, there is usually nothing preventing you from spending the money on a trip to Tahiti or rolling it to an IRA and leaving it to the gardener, rather than your spouse.

To be sure, most states have laws ensuring that a spouse cannot be totally disinherited. These rules might guarantee that your spouse will receive at least one-third to one-half of your estate. But, says Ms. Matsui, this is cold comfort to spouses who have little retirement savings of their own, perhaps because they interrupted a career to care for children.

Here's the original article: Family Feuds: Who Inherits the 401(k) or IRA? (online.wsj.com)

The Best Annuities- Barrons Top 25 Picks

Asset Allocation on Wikibook
Asset Allocation Image via Wikipedia
Annuities are making news again and last week Barron’s decided to outline the reasoning consumers use to justify a purchase.  It’s all about safety for those who have experienced shocks in the market.  The related article also gives a list of the five best annuities in each of five categories.  In the end you’ll get a solid list of what Barron’s considers to be the best products on the market according to fees, past performance and company stability.  Read the article and see the list here– be sure to click the image of the list of quality annuities.
 
What is the primary characteristic of this list?   You’ll notice the first priority is the credit rating.  It’s imperative to understand that annuities are insurance, and are designed for the safe and low risk allocation of your portfolio.  The credit quality of the issuing company is of paramount importance then.  You will definitely find higher payouts and rates than on this list but as you dig in, you will nearly always find lower quality credits. 
 
Have you honestly analyzed your portfolio and your retirement income needs?  Most investors are accustomed to an asset allocation that is appropriate for accumulation.  But for investors approaching retirement, this often results in an inappropriately large allocation to stocks and even riskier classes of bonds.  Aligning your portfolio with your current and future needs is the first step in finding the right retirement income allocation- look for a future post on a useful exercise to help in this step.
 
Now, for the next comparison, please open this page– it's our secondary market annuity available inventory.  Notice the yields and the names of the insurers who make these payments.  These carriers have the same incredibly high credit ratings as Barron's top picks, but your yield is much better.  Why? Simply because the discounted purchase price available to you translates into a higher yield.  That's why we thump the table on Secondary Market Annuities- they are an incredible value, of high credit quality, and available most likely for only a limited time to individual investors. We'd be happy to help you do due diligence on the credit or specific contract terms of any specific secondary annuity you are interested in.  
 
With so many products on the market, there are likely many annuities that are comparable to the Barron's list.  As long as you understand how to compare different products you should have no problem finding one with the best mix of benefits for your situation.  Since most of you have read The Annuity Report, you know what it takes to do that kind of analysis and find an advisor that puts your needs first
 
We stand ready to assist and hope you will consider this opportunity in the secondary market annuity marketplace as well in your search for high yield safe investments.

Is Your Adviser Still Right for Your Retirement? Smart Money

As I started reading this Smart Money article it seemed to be similar to the dozens of writings I read each week in search of information that will benefit your retirement analysis. It didn’t take long to realize that several points made relate directly to information from our pension series that was recently completed. I’d like to point out the similarities to add weight to my pension analysis and give you the opportunity to see it from a different angle. Read the article here.

 
This article relates directly to the 3rd installment of the pension series- Why Traditional Planning Doesn’t Work for Retirement Income. It talks about how money managers have been focused on general investment strategies that don’t work the same way while distributing assets.
 
While the value total return managers have added to personal finance is without question, strategies need to be shifted in whole or part depending on what stage you are in life. Asset allocation is a very specific formula based on several individual factors. Your diversification across all asset classes is and should be much different than it was 20 or 30 years ago.
 
Here are a few key statements that echo the analysis in the pension series…
 
While you are working, a regular paycheck allows you to ride out market volatility- the key here is to realize that you’ve had steady income while saving for retirement. That gives you flexibility with investments so periodic volatility doesn’t affect your lifestyle or spending patterns. Income in retirement should be no different.
 
Once you retire, you can’t afford to wait for bear markets to recover- with a majority of assets exposed to market risk, you’ll no doubt see disappointing performance at some point. That will mean constant spending adjustments to keep from running out of money.
 
Diversified portfolios work if you have a long time horizon and don’t need the money- the lower your income needs are in relation to your level of assets, the more shock your portfolio can absorb. Regardless, taking withdrawals from a battered portfolio is never an efficient way to manage money as it forces you to sell assets at rock-bottom prices during bear markets.
 
The job of financial management in retirement is more difficult when trying to plan for income, tax reduction and assett growth regardless of market conditions. It’s not really that much harder but does take a different line of critical thinking.
 
In order to get the most from your advisor, the article offers a few good questions you need to ask:
 
                How will you produce income in retirement?
 
There are far too many associated risks with simply attaching a withdrawal rate to savings.
 
                What happens when the market enters a down-cycle?
 
With proper guarantees in place, lifestyle adjustments won’t be necessary during inconvenient market periods.
 
                What is my probability of success?
 
Consider how your retirement income portfolio would have performed in the past. Also take note of what your investment experience has been in the past. You’ve experienced long-term growth but also experienced disappointing losses. Be sure to design a plan that takes all contingencies into account.
 
Accumulation strategists have been focused on long-term asset growth that comes with volatility that produces favorable results over several years or decades. Retirement income planning requires more stability and although specialized planning strategies are gaining more traction, common advice is still dominated by traditional accumulation philosophy. It’s critical to consider the difference as you work toward making individual plans.
 
This article does make it sound like income planning is more technical but the actual products and strategies you use are much simpler. It’s just not that hard. That’s because those products deal with contractual guarantees, not projections and shouldn’t scare you away with simplicity. Technical language certainly doesn’t lead to a higher probability of success. Maybe it’s time for someone who gives it to you straight.
 
Is my age an issue for you? Many people have expressed reservations so I’ll confront that right now. It shouldn’t be… by choosing an advisor who is of similar age, you are dealing with another individual who wants to retire as well. What’s he going to do when you call him in 15 years with a problem?  My guess is you’ll get a successor who is my age, giving the same advice the mentor taught… buy low, sell high and be patient, the markets will recover.
 
That’s not my game. If it’s not yours then maybe it’s time we had a meaningful conversation.
 
Thanks for your time and have a great week!
 
Bryan J. Anderson
800.438.5121

[email protected]

Private Pension Series Recap

Over the past several weeks we’ve taken an up-close look at how pension income is the central core of a retirement income plan.  The purpose of the series is to highlight the important considerations to address when crafting a private pension plan of your own to convert a lifetime of savings into an income stream that will fully sustain you in the years ahead.

I’d like to revisit the main points of this series before getting we jump into into the specific proactive step.  So, here’s a snapshot of what we covered based on excerpts from the series.

Part I:  The Value of Pensions

Why is a pension such a good thing?

Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement.  Now there are several challenges to contend with that will decrease the power of that cash flow but that’s precisely the overriding benefit.  A stable base of income will allow more flexibility with other assets so you can focus more on growth to provide adequate funds for any obstacle you meet in the future.

The importance of guaranteed income is further reinforced when you take into consideration the various challenges that make retirement planning difficult.  So we continued with…

Part II:  Financial Threats in Retirement

The intention here was to outline the issues that will threaten a poorly crafted plan.  When working to plan for longevity risk, market volatility and inflation the actions you take now must be calculated and deliberate for the following reasons…

No one knows how long each of us will live which makes it difficult if not impossible to determine appropriate spending levels.  No one wants retirement income to be subject to the whims of Wall Street.  No one has a clue what a dollar will buy in 20 or 30 years.  That’s why everyone needs and should want a stream of guaranteed lifetime income.  The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

The importance of planning for these threats is apparent and traditional asset management has long been considered to be capable of meeting the challenge.  In the name of prudent decision making, a closer examination of that line of thinking is mandatory, which led us to the following post.

 

Part III:  Tradition Asset Management Doesn’t Work for Retirement Income Planning

I’ll never ask you to take my word for it.  In this installment several studies were offered as a reference that allowed me to conclude with this statement:

The biggest problem to this [Traditional Asset Management] approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely longevity risk, market volatility and inflation.  It all depends on the mood of the market, and not just now but every day for the next 20 or 30 years.  If you had a choice, when would you like your retirement income to be reduced?  I vote never.  I’ll repeat myself; the traditional approach to retirement income planning has absolutely no guarantee of success.

There is a stark contrast between the methodologies, risks and benefits of asset management and income planning that denotes a necessity to approach each of those targets from a different angle.  That led us to the solution in the next post.

Part IV:  The Pension and Annuity Answer

Again, several academic studies were provided to give you a solid base of knowledge to use in this important decision making process.  Here’s what they had to say:

These studies combined speak directly to the central point of The Pension Series which highlights the benefits and necessity of guaranteed income.  In essence, cover your basic expenses with a source of guaranteed income you can’t outlive.  Annuities allow you to do that more efficiently than any other asset class which allows you to allocate additional assets to optimize portfolio growth over time.  Continued portfolio growth gives you the flexibility to ride out market corrections and makes additional funds available to provide for financial emergency or future inflation.

That brings us right back to the beginning where we looked at the variety of benefits you will receive after securing a source of guaranteed lifetime income… stable cash flow through retirement, flexibility and growth with additional assets.  It’s not only the safest route to take but also the most profitable.

The Next Step: Design Your Own Private Pension

Now it’s time to find the most efficient source of income for your situation.  It’s never as simple just picking a product.  There are a wide array of considerations that need to be made for your specific situation.  This is a serious task that takes more time and consideration than a 'product salesman' can offer.  In the next post I’ll detail those considerations so you can get started on the path to long-term security.

Be on the lookout tomorrow for a set of guidelines you’ll want to follow when designing your private pension.

Thanks for your time… have a great day!

Bryan J. Anderson

800.438.5121 [email protected]

Traditional Asset Management Doesn’t Work For Retirement Income Planning

After taking a week off to organize my thoughts and clear a pile of paperwork, I decided to take a course from WJB Training Bolton. We left off at the point of covering the major threats a portfolio will face through retirement and now it’s time to look at the traditional approach to conquering those challenges. 
 
It should come as no surprise that asset accumulation strategies fail to offer the kind of assurances everyone needs when it’s time for those assets to support you entirely. Even still, traditional management strategies will have a place in a well-balanced portfolio, just not the leading role that the major management firms would like you to believe.
 
As you work and save for retirement you’ll no doubt alter investment strategies to adjust to the constantly changing economic environment. Over the years the typical advice has led people to save incrementally, use dollar cost averaging, buy low/sell high and shift toward more stable fixed return assets like bonds and treasuries as retirement approaches. Regardless of how that advice has worked for you, there’s good reason to suggest you may want to diverge from that path, at least in part, when it’s time to withdraw assets.
 
As luck would have it, this great article on the subject was published in the Wall Street Journal last week. Recommendations based on complex computer models have always suggested it’s safe to withdraw 4% to 5% of a portfolio for income. The equities markets return 10% in an average year so over time your income should increase to combat inflation and as long as the balance increases you’ll never run out of money no matter how long you live. 
 
Seems easy enough, right? Well, for various reasons that strategy hasn’t performed to plan when put into practice. The first red flag is the ‘probability of success’ attached to a strategy when the computer spits out your numbers.
 
Why the probability of success? In realistic terms, market fluctuations will require income adjustments and constant changes to spending patterns to stay on track. No one knows for sure what will happen so there’s no guarantee for success only a statistical chance. Sure the market may average 10% in the long run but volatility affects you differently when withdrawals are needed for income, regardless of whether the market is up or down today.
 
A Vanguard study noted in the article further asserts the point this way: If investors are relying on either gains in the stock market or bond-market yields to make their money last, "then investors must either accept continuous, relatively smaller changes in spending or else run the risk of having to make abrupt and significantly larger adjustments later."
 
In essence, suffer now or suffer more later. That may not be the kind of worry-free retirement plan you’re looking for. Find the Vanguard study here.
 
Furthermore, new variables that take into account market conditions at the time of retirement are given no consideration in current models. Low interest rates and high stock valuations create a double whammy. Low interest rates mean that the bond yields your portfolio will need to meet projections aren’t available in the current market. And currently high stock valuations increase the probability of a market correction that could spell early disaster for the most carefully designed market based retirement income plan.
 
The biggest problem to this approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely longevity risk, market volatility and inflation. It all depends on the mood of the market, and not just now but every day for the next 20 or 30 years. If you had a choice, when would you like your retirement income to be reduced? I vote never. I’ll repeat myself, the traditional approach to retirement income planning has absolutely no guarantee of success.
 
Yes, if assets are sufficient, continued market participation will lend many benefits in retirement but could come at a steep cost if the majority of your assets are exposed. While you are working, current spending depends on your paycheck and market dips are affordable because you don’t need that money right now. Spending in retirement shouldn’t be any different. Income assets and growth assets should be held separate so you can get the most from both.
 
Separation of powers, so to speak, is an easier approach and will yield more for your future benefit. Next week I’ll come full-circle and talk again about how the pension-approach will alleviate much of the uncertainty when too much weight is given to an algorithm. Computers don’t care about your finances but I do.
 
Stay tuned for next week’s continuation of this series as I get to the point of it all.
 
Take care and have a great week!
 
Bryan J. Anderson

800.438.5121 [email protected]

Financial Threats In Retirement

Welcome back to the second installment in the pension income series where I plan to name the threats to your portfolio while drawing retirement income.  It is very important to understand the various challenges you’ll face over the long run and plan accordingly so your retirement years are smooth sailing.  For the most part these are things you already understand but haven’t yet figured out how to check them off the list.

Last week this series began with a brief introduction to the value of pension income- a steady, guaranteed stream of cash flow through retirement.  Guaranteed income is the shield you’ll carry into battle when you face the threats we’ll talk about this week. 

Any of these individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all.  If you are just joining us follow the link at the top of the page to read last week’s post.

Without further ado, here we go… The biggest challenges to maintaining a certain standard of living in retirement are longevity risk, market volatility and inflation.  Sounds like a nasty list, doesn’t it?  Recognizing the problem is the first step and the first step is always the hardest.

Longevity Risk- Of all the ways this can be defined, in regards to you and retirement income, longevity risk simply refers to the risk of outliving your assets.  While this could be the scariest issue of all it is probably the easiest to problem to solve and will lessen the impact of all other threats.  This directly relates to last week; if you have guaranteed lifetime income you know you’ll never outlive a paycheck.  As I wrote last week, “without guaranteed income, you could be relegated to constant worry over appropriate spending levels.”  Negative investment performance could be devastating to your lifestyle, but can be eliminated by a guaranteed source of income.

Market Volatility Risk- Market volatility can mean the difference between a happy retirement and a stressful retirement.  Market volatility can have devastating consequences, especially when it hits a portfolio when you are close to retirement.  One IRA statement I reviewed the other day showed a meager 1.76% annual yield after more than 20 years of saving and investing.  This is dismal performance, especially when it’s just a few years from retirement.

In my post on “Reverse Dollar Cost Averaging” I detail how the market fundamental of steady incremental investment helps while accumulating assets, but works against you while distributing assets.  How do you escape this trap?  Guaranteed lifetime income.  Converting accumulated assets to pension-like income is essential, because the income stream provided is consistent and future market corrections have no impact on current spending levels.  When you have the security of guaranteed income, you put yourself in a position of strength and can wait to withdraw extra cash when markets recover, and reduce the immediate effects of volatility.
 
Inflation Risk- This one is tricky.  As they say, a dollar just won’t buy what it used to.  Now I don’t care what anyone says, there is no action you can take today that will protect you from inflation tomorrow.  Even laddering strategies with any type of financial vehicle subject you to giving up potential interest while waiting to invest or draw income from the next tranche of assets.  In economic circles that is called lost opportunity cost.  The key to beating or at least mitigating inflation is to remain flexible.  Lock in what you need now and let your money grow for tomorrow so it is available to provide what you need in the future.

This all fits together and comes back to one simple theme:  guaranteed income protects you and allows you a choice in retirement.  No one knows how long each of us will live, which makes it difficult if not impossible to determine appropriate spending levels.  No one wants retirement income to be subject to the whims of Wall Street.  No one has a clue what a dollar will buy in 20 or 30 years.  That’s why everyone needs and should want a stream of guaranteed lifetime income.  The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance, and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

In the next part of this series I’ll examine the traditional approach to the subject of retirement income to talk about the stark differences between management for asset accumulation vs. asset distribution.  It’s time to unlearn everything you’ve been taught.
 
Thank you and have a great week!
 
Bryan J. Anderson
800.438.5121

[email protected]

 

The Value of Pensions

Over the next several weeks I plan to roll out a sequence of emails that, when finished, will represent a new section of the website meant to help individuals design a retirement income strategy from the privacy of home. We’re going to call it the AST Private Pension Center. The goal is to show the value of using various types of product allocation to achieve maximum financial output through retirement. 
 
Plenty of academic studies have been done that can be pieced together to provide mathematic, scientific and economic facts to support the conclusions of the process. It’s my job to bring all the relevant information to one place for your benefit.
 
For starters, let’s talk about the value of pensions. As time passes, fewer people receive the benefit of an employer pension and those that do still exist are rarely able to meet the needs of retirees. True defined benefit pension plans have slowly been phased out over the last few decades in favor of defined contribution pensions, which are mostly comprised of 401K and IRA accounts. This shouldn’t be news to anyone.
 
Where retirees of yesteryear could rely on a former employer to issue a guaranteed income for life, the tables have turned and now put the responsibility of retirement funding squarely on the shoulders of the individual. In the new age of trimming expenses to maximize share values, pension liabilities were simply too expensive to keep on the balance sheet.
 
The expense to corporations of carrying pension liabilities denotes a direct indication of the underlying value of a guaranteed income stream. Honestly, without a pension, how do you know whether you’ll have enough money?
 
Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement. Now there are several challenges to contend with that will decrease the power of that cash flow but that’s precisely the overriding benefit. A stable base of income will allow more flexibility with other assets so you can focus more on growth to provide adequate funds for any financial obstacle you meet in the future.
 
Without guaranteed income you may well be relegated to constant worry over appropriate spending levels. Negative investment performance could potentially cause a major lifestyle change and the use of bonds or similar vehicles to preserve assets may not achieve the growth targets necessary for optimal performance or future cash flow.
 
The absence of pension-like income leaves far too many unanswered questions. And the biggest question is without a doubt how long you’ll live, also known as the risk of longevity. Since no one knows for sure how long each of us will live, it’s impossible to determine a sustainable spending rate without a portion of assets being dedicated to a lifetime stream of income.
 
Let’s recap this brief introduction to the value pensions…
 
The majority of current and future retirees are personally responsible for income in retirement. Because of the various challenges including longevity risk, inflation and market volatility, a guaranteed base of lifetime retirement income is essential to creating an adequate plan. Pension income will give you the flexibility with remaining assets to pursue the market growth needed to provide future funding sources to take care of any challenges that arise.
 
Next week I’ll continue with the next email in this sequence that is intended to name the threats to your retirement portfolio and how pensions will provide the benefits needed to financially rise above any future challenge you’ll face.
 
Stay tuned for the next email in this series and thanks again for your continued loyalty.
 
Have a great week!
 
Bryan J. Anderson
800.438.5121 [email protected]

Pages

How to Design Your Own Private Pension

"View in Wall Street from Corner of Broad...

Over the previous pages, we’ve taken an up-close look at how pension income is the central core of a retirement income plan.  The purpose of the series is to highlight the important considerations to address when crafting a plan to convert a lifetime of savings into an income stream that will fully sustain you in the years ahead.  I’d like to revisit the main points of this series before we jump into the specific proactive step.

So, here’s a snapshot of what we covered based on excerpts from the series.

Part I:  The Value of Pensions

Why is a pension such a good thing?

Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement.

A stable base of income allows more flexibility with your other assets.  With a guaranteed baseline income secured, you can focus on growth with the other assets to overcome any financial obstacle you meet in the future.

The importance of guaranteed income is further reinforced when you take into consideration the various challenges that make retirement planning difficult.  So we continued with…

Part II:  Financial Threats in Retirement

There are definite threats with a poorly crafted plan.  When planning to overcome longevity risk, market volatility, and inflation, the actions you take now must be calculated and deliberate for the following reasons…

No one knows how long each of us will live which makes it difficult if not impossible to determine appropriate spending levels.

No one wants retirement income to be subject to the whims of Wall Street.

No one has a clue what a dollar will buy in 20 or 30 years.

This is why everyone needs and should want a stream of guaranteed lifetime income.

The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance, and additional assets are accessible foe emergencies or for when you realize that paycheck doesn’t accomplish what it could years ago.

The importance of planning for these threats is apparent, and traditional asset management has long been considered to be capable of meeting the challenge.  In the name of prudent decision making, a critical examination of that line of thinking is mandatory, which led us to the following post.

Part III:  Tradition Asset Management Doesn’t Work for Retirement Income Planning

I’ll never ask you to take my word for it.  In this installment several studies were offered as a reference that allowed me to conclude with this statement:

The biggest problem to this [Traditional Asset Management] approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely:

Longevity Risk

Market Volatility

Inflation.

Your income therefore all depends on the mood of the market, and not just now but every day for the next 20 or 30 years.

If you had a choice, when would you like your retirement income to be reduced? I vote never.

I’ll repeat myself: the traditional approach to retirement income planning does not work as it has absolutely no guarantee of success.

There is a stark contrast between the methodologies, risks, and benefits of asset management, and the needs of income planning.  That requires an individual to approach each of those targets from a different angle, which led us to the solution in the next post.

Part IV:  The Pension and Annuity Answer

Again, several academic studies were provided to give you a solid base of knowledge to use in this important decision making process.  Here’s what they had to say:

These studies combined speak directly to the central point of this ‘Pension Series’ which highlights the benefits and the necessity of guaranteed income.1) Cover your basic expenses with a source of guaranteed income you can’t outlive.

Annuities allow you to do that more efficiently than any other asset class, and frees you to allocate additional assets to optimize portfolio growth over time.

2) Continued portfolio growth with a guaranteed income safety net gives you the flexibility to ride out market corrections and makes additional funds available to provide for financial emergency or inflation.

That brings us right back to the beginning where we looked at the variety of benefits you will receive after securing a source of guaranteed lifetime income.  This is primarily a stable cash flow foundation through your entire retirement, coupled with flexibility and growth in  additional assets.  It’s not only the safest route to take but also the most profitable.

Now it’s time to find the most efficient source of income for your situation.  It’s never as simple as just picking a product.  There are many factors that need to be addressed for you specifically.  This is a serious task and you deserve more than what a basic ‘product salesman’ can offer.

Are you ready for a set of guidelines to follow when designing your private pension, and get on the right path to long-term security?

Click on to the final installment to design your own private pension….

The Pension and Annuity Answer

The Pension And Annuity Answer

The Pension And Annuity Answer

We have covered the value of pension-like income stream, and looked at the basic issues every investor will face as they attempt to put in place a solid retirement income plan. We also looked at the financial threats investors face in retirement as well as the unpredictability of the traditional management approach to income planning.

The next step is to explain how pension- like income offers benefits critical to ultimate retirement security and maximum lifetime profitability. It is often overlooked that something as simple as a pension can form the foundation of a truly optimal asset distribution strategy.

Pension-Like Income

If you don’t expect to receive a pension from your company or employer, don’t worry, few people do these days. But several different types of annuities offer all the characteristics of the pension. The most important characteristic is that many of the risks we discussed are carried by another entity and income continues for life, however long that may be. Both pensions and annuities fit those criteria.

To illustrate the point I’ll reference two studies, one from Wharton and one from Ibbotson that will show not only the importance of a source of guaranteed income but also the benefit of minimal probability of failure that comes with it.

This Wharton study starts off with a bold statement claiming, “Retirement security is the central policy concern of our time.”

Although this is a weighted comment deserving clarification in a separate article, I firmly agree. The findings of the study also do a good job of qualifying this assertion throughout. We covered the basis of this assertion at the beginning of this series when we noted the change from employer-sponsored defined benefits to employee- funded defined contribution plans for retirement planning over the past few decades.

The authors remind us of the fundamental danger with the diversion from defined benefit plans.

In defined contribution plans the risk of outliving one’s assets is shifted from employer to employee and equally important the investment risk has been shifted to the individual.

When the individual bears all risk for performance of a retirement income plan it is difficult to determine appropriate spending levels. As such, the real point of the Wharton study was to explore the asset allocation options that retirees face when left with a lump sum of savings at the onset of retirement.

A review of previous literature in the paper reveals further studies that document the benefits of using guaranteed annuities.

“In 1965, Menahem Yaari demonstrated under a restrictive set of assumptions that full annuitization was the optimal asset allocation for retirement savings. For full annuitization to be optimal, he assumed that consumers were expected utility maximizers.”

In short, if you want to spend as much money as possible your best bet is to annuitize every penny of your life savings. Those results were echoed more recently…

Davidoff, Brown and Diamond (2005) have shown in an elegant proof that the original results of Yaari hold true under a significantly less restrictive set of assumptions.

Limitations Of The Study:

While full annuitization may be the best way to ensure that you can enjoy maximum expenditure, it represents a major emotional leap for most people. Full annuitization means giving up control of your money entirely.

More importantly, a major assumption of each of those studies is that the model leaves no remainder for heirs. Full annuitization also decreases future flexibility which I feel should be the central focus of a good retirement income plan.

Middle ground is most certainly found with partial annuitization and responsible preservation and growth of remainder assets. The benefit here is that you can guarantee to cover future living expenses while also retaining flexibility to meet changes in the future.

How to Retain Flexibility:

That leads me to the Ibbotson study which states,

“…a GMWB will improve overall retirement income levels without increasing income risk levels.”

For clarification, a GMWB  stands for Guaranteed Minimum Withdrawal Balance and is nothing more than one version of a pension-like annuity and represents the specific product used for comparison.

Ibbotson was able to model several different portfolios with or without the use of a guaranteed income annuity. The findings are as follows:

With a guaranteed income annuity there was…

“…little to no chance of income reductions, greater chance of income increases and greater opportunity for long-term portfolio growth.”

And…

“…all portfolios when combined with GMWB had higher average income and lower average risk than stand-alone traditional mutual fund portfolio.”

What Ibbotson was able to prove is that a guaranteed annuity will protect your baseline while allowing you to maintain maximum future growth potential. The annuity decreased total risk across the entire portfolio even when remainder assets were invested more aggressively. Guaranteed income truly offers security and prosperity throughout retirement.

These studies combined speak directly to the central point of our series which highlight the benefits and necessity of guaranteed income.

1) Cover your basic expenses with a source of guaranteed income you can’t outlive. Annuities allow you to do that more efficiently than any other asset class, and free you to allocate additional assets to optimize portfolio growth over time.

 

2) Continued portfolio growth with a guaranteed income safety net gives you the flexibility to ride out market corrections, and make additional funds available to provide for financial emergency or inflation.

I can’t make it simpler than that. The mainstream financial media may have you believe that designing a retirement income plan is supposed to be complicated. What several mathematic, scientific and economic studies have proven is that the answer has been around for hundreds of years.

And that’s the pension and annuity answer.

But, there’s still a little work to do…

Click on to see how it all ties together….

Traditional Asset Management Does Not Work For Retirement Income Planning

10 Year Average Returns Are Not A Safe Guide F...

10 Year Average Returns Are Not A Safe Guide For Retirement Income Planning

Now that we know the major threats a portfolio will face through retirement, it’s time to look at the traditional approach to conquering those challenges.

As you work and save for retirement you are taught to be flexible and adjust to the constantly changing economic environment. Over the years the typical advice has led people to save incrementally, use dollar cost averaging, buy low/sell high, and shift toward more stable fixed return assets like bonds and treasuries as retirement approaches.

These asset accumulation strategies fail to offer the kind of assurances investors need when it’s time for those assets to support you entirely. These traditional management strategies will have a place in a well-balanced portfolio, but not the leading role that the major management firms would like you to believe.

Regardless of how traditional asset management advice has worked for you to date, there is good reason to diverge from that path, at least in part, when it’s time to withdraw assets.

As luck would have it, this great article on the subject of the 4% Withdrawal Rule was published in the Wall Street Journal recently. And This Recent Post explores the topic further.

In summary, recommendations based on complex computer models have traditionally suggested it’s safe to withdraw 4% to 5% of a portfolio for income. The equities markets return 10% in an average year so over time your income should increase to combat inflation. As long as the balance increases you’ll never run out of money no matter how long you live…..

Seems easy enough, right? Well, for various reasons that strategy hasn’t performed to plan when put into practice. Recent market performance models now put safe withdrawal rates at just 1.5% to 2% of a portfolio, or recommend drastically reducing consumption in bad years.

The first red flag is the ‘probability of success’ attached to a strategy when the computer spits out your numbers.  And most distressing is the sheer random, insecure nature of a total reliance on the markets….

The Problems With Probabilities:

When you put your faith in a system with a low probability of success, market fluctuations will require income adjustments and constant changes to spending patterns to stay on track.

As we understand from the previous page, there are numerous financial threats in retirement.   And with a statistical model, there is no guarantee for success, only a statistical chance. Sure the market may average 10% in the long run but volatility affects you differently when withdrawals are needed for income, regardless of whether the market is up or down today.

The Vanguard study noted in the article further asserts the point this way: If investors are relying on either gains in the stock market or bond-market yields to make their money last, “then investors must either accept continuous, relatively smaller changes in spending or else run the risk of having to make abrupt and significantly larger adjustments later.” Feel free to download read the Vanguard study here.

In essence, suffer now or suffer more later. That may not be the kind of worry-free retirement plan you’re looking for.

Furthermore, new variables that take into account market conditions at the time of retirement are given no consideration in current models.

Low interest rates and high stock valuations create a double whammy.
Low interest rates mean that the bond yields your portfolio will need to meet projections aren’t available in the current market.

And currently high stock valuations increase the probability of a market correction that could spell early disaster for the most carefully designed market based retirement income plan.

So what is “probability of success”? In realistic terms, it is the chance of failure.  When it comes to retirement income and taking care of your basic expenses, failure is unacceptable.  Why expose yourself to probability risk at all?

The biggest problem to this approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely, Longevity Risk, Market Volatility, and Inflation.

Your income therefore all depends on the mood of the market, and not just now but every day for the next 20 or 30 years.

If you had a choice, when would you like your retirement income to be reduced? I vote never.

I’ll repeat myself: the traditional asset management approach to retirement income planning does not work, because it has absolutely no guarantee of success.

It is true that if assets are sufficient, continued market participation will lend many benefits in retirement.  But this participation could come at a steep cost if the majority of your assets are exposed.

While you are working, current spending depends on your paycheck, and market dips are affordable because you don’t need that money right now.

Spending in retirement shouldn’t be any different. Income assets and growth assets should be held separately so you can get the most from both.

Separation of powers, so to speak, is an easier approach and will yield more for your future benefit.

Next I will come full-circle and talk again about how the pension-approach will alleviate this unacceptable ‘probability of success’ that is inherent when too much weight is given to an algorithm. Computers don’t care about your finances but I do.

Carry On To See The Solution…..

The Financial Threats In Retirement

Retirement

Retirement Threats

It is critical to understand the various financial threats in retirement that you will face over the long run and to plan accordingly so your retirement years are smooth sailing.  For the most part these challenges are things you already understand, but most likely you do not know how to solve them.

Previously, we looked at the value of a guaranteed, pension-like income.  A steady, guaranteed stream of cash flow through retirement.  Guaranteed income is the shield you’ll carry into battle when you face the threats we’ll talk about.

Any of these threats individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all.

Longevity Risk

Longevity risk simply refers to the risk of outliving your assets.

While this could be the scariest issue of all, in reality, it is probably the easiest to problem to solve and will lessen the impact of all other threats.

Solution: If you have guaranteed lifetime income, you know you can never outlive a paycheck.  As I wrote previously, “Without guaranteed income, you could be relegated to constant worry over appropriate spending levels.”  Negative investment performance could be a devastating blow to your lifestyle.

That risk can be eliminated by a guaranteed source of income.

Market Volatility Risk

 Market volatility can mean the difference between a happy retirement and a stressful retirement.  Market volatility can have devastating consequences, especially when it hits a portfolio when you are close to retirement or early on in retirement.  One IRA statement we recently reviewed showed a meager 1.76% annual yield after more than 20 years of saving and investing.  This is dismal performance, especially when it’s just a few years from retirement.

In my post on “Reverse Dollar Cost Averaging” I detail how the market fundamental of steady incremental investment helps while accumulating assets, but works against you while distributing assets.  How do you escape this trap? Simple…

Guaranteed Lifetime Income

Converting accumulated assets to pension-like income is essential, because the income stream provided is consistent and future market corrections have no impact on current spending levels.

When you have the security of guaranteed income, you put yourself in a position of strength and can wait to withdraw extra cash when markets recover, and reduce the immediate effects of volatility.

Inflation Risk

This one is tricky.  As they say, a dollar just won’t buy what it used to.  Now I don’t care what anyone says, there is no action you can take today that will fully insulate you from inflation tomorrow.  Even laddering strategies with any type of financial vehicle subject you to giving up potential interest while waiting to invest or draw income from the next tranche of assets.  In economic circles that is called lost opportunity cost.

The key to beating or at least mitigating inflation is to remain flexible.  Lock in what you need now and let the rest of your money grow for tomorrow so it is available to provide what you need in the future.

Mitigating Financial Threats Summary:

This all fits together and comes back to one simple theme:  Guaranteed Lifetime Income protects you and allows you a choice in retirement.

No one knows how long each of us will live, which makes it difficult if not impossible to determine appropriate spending levels.
No one wants retirement income to be subject to the whims of Wall Street.
No one has a clue what a dollar will buy in 20 or 30 years.

This is why everyone needs and should want a stream of guaranteed lifetime income.

The major benefits are knowing you’ll never run out of income, you’re not dependent on market performance, and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

In the next page we examine the traditional approach to the subject of retirement income to talk about the stark differences between management for asset accumulation vs. asset distribution.  It’s time to unlearn everything you’ve been taught.

Click To Continue…. See How Traditional Asset Management Doesn’t Work….

Immediate Annuities For Retirement Income

The use of immediate annuities for retirement income is easy to understand and well-supported with extensive research.  This is where retirees  go for the highest level of guaranteed income available.

How To Use Immediate Annuities For Retirement Income

In exchange for a lump sum premium you get a guaranteed paycheck for life.  You can look but won’t find a better deal anywhere.  That doesn’t mean immediate annuities come without drawbacks because they do.  Like any other product, the individual situation must call for it- be sure to review the Pros and Cons of Immediate Annuities page

Drawbacks using immediate annuities for retirement income:

Many people are concerned about the fact that payments stop upon death of the contract owner and in some instances that means the insurance company keeps a portion of the initial premium.  If that’s the case, immediate annuity contracts come with additional contract components that guarantee certain payments will be made to heirs.  That will ensure the company at least returns the original amount invested and enough options exist to accommodate the specific desires of each individual planning situation.

Another major concern with immediate annuities for retirement income is that inflation will erode the spending power of fixed payments over time.  As such, most companies offer inflation adjusted payments so income can steadily increase throughout retirement.  As with other benefits, inflation adjustments will cause a lower initial payment. If you are planning on using an immediate annuity for retirement income, the free Annuity Report from Annuity Straight Talk is a great start- just enter your email to the right.

We offer a free Immediate Annuity Report that describes how to use immediate annuities for retirement income in detail and contains a simple calculation table that will give you and idea of where income payments will start.

Variable Annuities For Retirement Income

Over the past decade, insurance and variable annuity companies have added benefits and riders that make variable annuities for retirement income planning much more appealing.

Find Out Why So Many Choose Variable Annuities For Retirement Income

Variable annuities offer a direct investment in the securities market and give individuals the greatest opportunity for asset growth but also the greatest risk. That is precisely why certain guarantees in each contract are so valuable to consumers.

Foremost among these is the future income guarantee that is attached to the vast majority of variable annuities sold over the past few years. Future income guarantees allow the variable annuity contract owner to count on a specific level of future income regardless of how the investments perform.  This is a critical component given the recent economic uncertainty and market volatility.

A guaranteed level of future income is the foundation for an optimal retirement income plan and will enable individuals to be more aggressive with alternate investments where appropriate.

Sign up with Annuity Straight Talk to receive the free Annuity Report, which includes the Guaranteed Lifetime Withdrawal Benefit (GLWB) report that clearly details the features and benefits of variable annuities with guaranteed income riders. Knowing that a certain level is guaranteed for life no matter what happens is powerful.  Annuities are the only private investment that can offer such a rich benefit.  For the right individual, a variable annuity for retirement income that offers guaranteed lifetime income may be the perfect solution.

While we don’t sell variable annuities, this website would not be complete without some information on how variable annuities work and their pros and cons.  While variable annuities do make up the majority of annual annuity sales, we use safer, more guaranteed methods of creating stable retirement income.  It you have a question about an existing variable annuity or want to consider other alternatives such as Secondary Market Annuities or Hybrid Annuities, please Contact Us.

Fixed Annuities For Retirement Income

Because fixed annuities are a simple product, use in a retirement income plan is just as simple.  We’re talking about no more than safe money and tax deferred interest here. Everyone would ideally have a pool of cash for discretionary expenses in retirement.  Most people will likely hold accessible cash in a variety of bank accounts such as checking, savings or CDs.  Fixed annuities, however, carry much greater benefits than bank deposits.

Benefits of Fixed Annuities For Retirement Income:

Checking and savings accounts offer little to no interest accumulation and CDs traditionally pay lower interest rates than fixed annuities.  All interest earned in bank accounts is subject to annual taxation while annuities allow for tax deferred growth.

The pros and cons of fixed annuities are considered in detail on the ‘pros and cons’ page of this site. It is always a good idea to hold a certain amount of cash in a bank so it is easily accessible.  Careful planning can help you determine an appropriate allocation toward greater interest rates and tax deferral in a fixed annuity for retirement income.

Choosing  Fixed Annuities For Retirement Income

Fixed Annuities For Retirement Income are a great option for the right people- find out how to chose the right one for your retirement income needs by signing up as a free member of Annuity Straight Talk, or simple Contact Us for assistance.