Interest Rates will Stay Low for HOW LONG???
As reported yesterday the Federal Reserve, recognizing the economy continues with it’s anemic disposition, declared it will attempt to help the economy by holding interest rates down for 18 months longer than previously announced. The Fed will hold rates down in an effort to spur the economy, in affect rewarding borrowers while punishing savers.
The plan now is for the Fed to keep short term rates near zero until late 2014, a continuation of the policy that began as shock therapy in the winter of 2008 and continues as a a six year campaign to spur spending by consumers. This action rewards consumers with low interest rates on mortgages and credit cards, while at the same time punishing savers and those on fixed income with punishingly low rates and low resultant income. With today’s CD rates at ridiculously low historical levels ie: the 1 year average today is .67% (that’s .0067) and the 5 year rate at a whopping 1.59% (.0159). On an after tax basis these rates are UGLY, then throw inflation into the mix and the returns go negative.
According to the talking heads on cable, ”to cope with the low rates, Retirees on fixed income typically have 4 basic courses of action:”
- Deplete Principal – use principal combined with interest to meet income needs.
- Cut back on expenses – look for areas where discretionary and, in some cases, mandatory expenses can be cut.
- Accept interest rate risk – accept potential interest rate risk by looking to longer maturities for better rates
- Accept Market risk – look to the market for more income and accept the risk of principal loss for the prospect of better returns.
They left out risk transfer. In lieu of accepting all the risk, investors -with a portion of their nest egg – can transfer some risk. Transfer some of the risk to an Insurance company via Annuities.
- Fixed Annuities
- Indexed Annuities
- Variable Annuities
- Immediate Annuities
These Annuity products and the Income Benefit riders available on the first 3 make a lot of sense in this low interest rate environment. An environment that, by all appearances will continue for a number of years…..
If you have not looked at these Insurance products recently, or as is the case I most often see, have a bad feeling about annuities in general for some reason you can’t put your finger on, then it’s time to look again and educate yourself. It’s time to see if any of these products make sense for you. There are a multitude of these products available and they all have their idiosyncrasies. I’d sit down with an advisor who has a firm grasp of Annuities, all 4 types, and is intimately familiar with the riders that are available with them, how they can work in concert with a well diversified investment portfolio and can explain the pros and the cons of each.
At Payson Financial we work with individuals 10 plus years from retirement who are doing their pre – retirement planning as well as those currently retired. We offer all types of annuities together with other investments. Give us a call and schedule a complimentary consultation to see if an Annuity makes sense for your situation.
Indexed Interest, a Seperate Asset Class?
I just finished reading a new book by JR Thacker titled “Index Interest, The Missing Asset Class”. In the book Mr. Thacker does a good job of explaining what Indexed Interest is, what financial products use Index Interest and the benefits and detraction’s of Index Interest. It is a well balanced approach to Indexed products and a welcome narrative on the subject in today’s environment. Mr Thacker covers how the different index products are built and reveals some of the purported complexity of the products. The Index Interest Products he covers include Indexed CD’s, Market Linked CD’s, Indexed Annuities, Indexed Life Insurance, Structured notes, Indexed Notes and Principal protected notes to name a few. He then goes on to explain how indexed interest products fit into ”Modern Portfolio Theory”,a popular theory much used by financial Advisors and Individual investors alike to theoretically create diversified investment portfolios.
He also spends time in the book explaining Annuities in greater detail, and the difference between Deferred and Immediate annuities, as well as the substantial differences between Fixed, Fixed Index and Variable annuities.
With investors, especially retirees and pre retirees, looking for some stability and certainty in their retirement plans, principal protected financial products like Indexed CD’s and Indexed Annuities are becoming more and more in demand. This is one reason sales of Indexed Annuities, one of the products mentioned, are increasing at a substantial rate. Another reason, according to a recent article in Investment News – The leading news source for financial professionals, is the fact that the large Wirehouses are warming to the products and are beginning to allow their Advisors, Brokers and Reps the ability to offer their clients Indexed Annuities. As this trend progresses, you will see less uneducated, maligned and misleading articles being written in the press about these products. That is both good and bad. While Indexed Interest products are good products for the right reason, they are merely tools. And as such, the tool needs to be able to fit the job.
An analogy I like to use is going into a hardware store to buy a hammer because you need to nail some boards on a fence at home…. The hardware store happens to specialize in plumbing supplies and as such they have a tool that they know will drive nails, and they sell you a pipe wrench. Now I know you can drive a nail with a pipe wrench, but it will take an awfully long time, you will bend a bunch of nails that will need to be pulled out and you will wear out your wrist in the process. The question is, is there a better more suitable tool that I can get? The answer is unequivocally yes, but you must go the proper supplier to get it…… You need to go to a hardware store that offers all the construction tools and supplies, not one that is limited. The same holds true for financial products and services.
In closing, Mr. Thacker’s book is a well written educational read on Index Interest products, their design, benefits and detractions . if you are looking for balanced information on these products and how they can fit into a balanced investment strategy I highly reccomend it. If you’d like a copy of “Index Interest – The Missing Asset Class ” or a copy of the “Wharton Financial Institutions Center for Personal Finance white paper entitled Real World Index Annuity Returns” that Mr Thacker refers to in the book, send me an email with your contact information or give me a call.
The Changing Outlook on Retirement
For the majority of Americans, the outlook for retirement has changed substantially. This change is a direct result of over a decade of economic turmoil and uncertainty.
With the state of the industrialized world in the chaotic state that it is in, Investors worldwide are trying to cope with the “sea change” of the world’s economies. This sea change is having substantial effect on retirement outlooks and to be truthful retirement realities.
Over the past 11 years, since the 2000 tech bubble crash, Boomers have seen an investing environment that has been a rollercoaster ride extraordinaire. And, like a roller coaster, the ride is filled with times of exhilaration as well as times of sheer terror. The hope is, at the very least, that you get off the ride at a time that is best for you, or at the end of the ride you end up back where you began. This is not the case for many. The S&P 500, widely regarded as the single best gauge of the U.S. equities market, has averaged .31% annually since 2000. That is an average of three tenths of one percent from Jan 2000 to date for those who adhere to the much touted “buy and hold” mentality. So $100,000 in an investment that mimicked the S&P 500 over the same period and that was held for the same term would have a value of $83,257.34 on Oct 3 2011.
This economic turmoil is coupled with an unprecedented evaporation in the value of, what for many is their largest asset, their homes. A value that has not started to recover, and in a recent survey of bank risk managers, among bankers surveyed, 49 percent said that recovery would not occur until 2020 and 73 percent believed mortgage defaults would remain elevated for at least five more years.
These two substantial financial events coupled with the fact that Americans are living longer, health care costs are skyrocketing, daily living costs continue to increase, and the need to depend more than ever on the retirement nest egg are causing a “sea change” in the outlook for many on retirement.
With the changing outlook on retirement and in the midst of this financial turmoil, Annuities have emerged as a market safety net. Continue reading
Annuities and Insured Retirement Solutions…..
As the financial markets continue to grapple with the economic turmoil here at home and abroad, individual investors and savers are eyeing all of their options. Over the past several years, Annuity sales have taken off. Both Fixed and Variable Annuities have seen sales increase according to current numbers reported by both LIMRA and the Insured Retirement Institute (IRI). Industry wide Annuity sales for the second quarter were 60.4 Billion, up 10% over the second quarter of 2010. Approximately 1/3 of the sales represent Fixed Annuities while 2/3 represent Variable Annuitiy contracts.
Why?
Annuities provide guarantees, plain and simple. With 10,000 Boomers turning 65 every single day for the next 18 1/2 years, facing the prospect of a longer retirement in a troubled economic environment, guarantees are in high demand! These same Boomers have seen their 401k’s (those that have them) take substantial hits from the markets. For some, the values of their homes have declined by more than 40%. They have seen 2 years where there have been no inflation increase to Social Security payments. They are watching health care costs skyrocket. They see the costs of most everything around them going up and are concerned about inflation. The concern over “outliving the money”, according to several polls, is the number one fear of Boomers. So, guarantees using Insured Retirement strategies including annuities are more popular than ever.
The real question is, “when you consider an annuity, what is the guarantee you are looking for?” and better yet “what annuity or type of annuity will provide me with the guarantee I desire and at what cost?” And “why is this contract better than the alternative?” These are the questions to ask yourself and your advisor. If your advisor can’t answer these questions, or does not want to answer them…find another advisor. It’s your money!
I don’t believe there are any bad annuities, but there are certainly bad expectations of annuities sold and bought. Take some time to be your own advocate!
Retirement Income Planning
As Baby Boomers continue their march to and through retirement, the need for Retirement Income Planning grows with their numbers. A small number of Investment Advisors, Wealth Managers and Financial Advisors are taking note and focusing their practices on Retirement Income Planning, positioning them to be the resource for this group.
Retirement Income Planning requires focus on these 4 specific areas.
1, Life Planning – What will your life in retirement look like? Where will you live? What will you do?
2. Budgeting – How much money will you need in retirement? What are your mandatory expenses (things like food, utility bills, insurance premiums, health care costs etc.)? What kind of discretionary expenses do you see occurring (travel, entertainment, the extras in life)?
3. Account Management – What accounts do you have currently (401K, IRA, Roth IRA, Annuities, CD’s etc)? Are they positioned to best meet your needs? Should they be re-allocated?
4. Portfolio Management – Is your portfolio positioned to meet your needs within your risk tolerance? Do you have a combination of equity, debt and longevity Insurance? Are you utilizing all the financial products available to diversify amongst financial products, or just diversifying within the debt/equity positions? Are your assets positioned in such a way to guarantee, at a minimum, an income stream for life to accommodate your mandatory expenses?
The Retirement Boomers face today and into the future is a different retirement than past generations. Today’s retiree faces the prospect of a substantially longer retirement, due to increased mortality. Peng Chen, Morningstar’s President of Investment Management in a recent article states “Roughly half of retirees live longer than their life expectancy”. The number one concern for retirees today is “Outliving the money”. With retirements lasting longer than expected, a fresh, conservative approach is needed to deal with this concern.
Sleep Insurance….
In this economic environment, advice abounds…..
If you read magazine, newspaper or internet articles, listen to the talking heads on radio or TV or have a conversation with your neighbor you will hear all kinds of advice. Avice like:
- “Bonds, move to bonds in this environment” or
- “Modern Portfolio Theory suggests you have a greater percentage of bonds to equity exposure” or
- “Stocks are way oversold, now is the time to buy on the dip” or
- ”Pull all of your money out of the market and put it in CD’s, Life Insurance, Annuities or in a can in the backyard”.
It seems there is plenty of advice about what investment/product should be utilized by everybody as a blanket statement. I don’t agree.
Here is what I suggest: Do some soul searching and determine what allows you to sleep soundly at night. Better yet, identify what keeps you up at night, what do you wake up worrying about, if it’s where you are invested, or where your savings and or retirement accounts are do something about it. Sit down with your advisor and share your concerns, If your advisor can not calm your fears by explaining his rational or perhaps doesn’t appear to be listening, change advisors. It’s not about your advisor, it’s about you…. It’s your money, your life and your future. If you haven’t done so already, it’s time to get some sleep insurance…….
Stocks Plunge 3%!
What is happening?
The markets took a substantial drop today, with the S&P down 10% from the April highs. The question is how farther down is the market going?
If you have not already done so, now is the time to review your positions, ask questions and take action if warranted.
Most importantly, educate yourself…..
US Municipal Bonds, once Hot now Scary!
Phillip Inman
Guardian.co.uk, Thursday July 28ty 2011
US municipal bonds may tip cities into bankruptcy
• Jefferson County, Alabama, poised to default on loans
• Downgrade threat to Maryland, New Mexico, South Carolina, Tennessee and Virginia
Alabama’s Jefferson County was last night poised to become the largest municipal bankruptcy in US history after a three-year battle with creditors over a $3.2bn (£1.9bn) loan.
The local authority, possibly the first of many US counties and cities to default on loans, convened a special session to consider terms for a settlement or a 30-day extension to talks. Councillors were also asked to assess whether bankruptcy is the best option after a failure to find a settlement since 2008.
Jefferson county, home to Alabama’s largest city, Birmingham, has found itself teetering on the brink after talks broke down with creditors, including the investment bank JP Morgan Chase. A previous extension to talks on the $3.2bn sewer bond expires tomorrow.
Jefferson heads a list of municipal borrowers that could find themselves in deep financial trouble in the next few years.
Earlier this week, five states were notified by the credit-rating firm Moody’s that they were in danger of losing their AAA ratings because of their reliance on federal revenue, mainly from locally based offshoots of government agencies.
Maryland, New Mexico, South Carolina, Tennessee and Virginia were placed on review for possible downgrade following Moody’s warning to the US government that it faced losing its AAA rating because of the inability in Washington to raise the debt ceiling.
California, New Jersey and about 44 other states have spent much of the year trying to close a $130bn budget gap. These gaps come on top of large fiscal shortfalls in 2009 and 2010, following a collapse in tax revenues following the rise in unemployment and a drop in property taxes.
Dealing with Retirement Withdrawals in a Bear Market
I was reading an article on Yahoo Finance this morning, where the author discusses the potential pitfalls of making withdrawals from a retirement account in a “Bear” market. He discusses the math needed to maintain the principal and, in reality, attempt to avoid the number one concern for retirees today – outliving the money! It’s interesting to note the bulk of his article speaks of Monte Carlo assumptions, variable withdrawal rates, equity/bond exposures and then at the end, as an aside, he mentions annuities. He indicates annuities are expensive, but only speaks of one type of annuity, A Single Premium Immediate Annuity. I am curious how he does the math to justify the statement that Immediate annuities are expensive…. I would bet running out of money, for most people, is a lot more expensive!
That being said, what if there was an annuity contract out there with an income rider that, at age 60, guarantees 4 1/2 % of the income account value*, for life!!! That’s for the life of both husband and wife! In addition, should you decide to defer taking income, the income account value* is guaranteed to grow at a specified rate (depending on the company) between 4% – 8%. And how about a rider with the possibility of keeping up with inflation? The good news is there are contracts available with some or all of these options available……. the question is are they a good fit for your situation? Give us a call to find out more……..
* Very Important to understand the difference between the Contract Value and the Income Account Value (aslo referred to as Guaranteed Minimum Withdrawal Base, Income withdrawal value etc.)
Annuity guarantees are backed solely by the financial strength of the issuing Insurance Company. This article is a summary of available contracts only. Call for Company and contract specifics. Not all contracts and features are available in all states and are subject to change.How would you like to allocate your accumulated wealth?
How much of my money is really safe?
Checks And Balances TV
