Indexed Annuities prepare baby boomers for retirement
According to a recent survey conducted by the Insured Retirement Institute, a number of baby boomers feel that they aren't ready for retirement yet. The report stipulated that 51% of the retiring population believe that they don't have enough money for retirement to live comfortably. 70% of these baby boomers also believe that they don't have sufficient funds to pay for long term care. Even with these existing figures, only a small portion (45%) of baby boomers consult financial advisors and only 58% have already determined the amount they need to retire on.
Because of this, financial institutions and the government as a whole arranged a number of strategies that baby boomers can consider in order to prepare for retirement. One of the many options cited by financial institutions is indexed annuities.
An index annuity is a safe money option because of a number of reasons. Foremost, with index annuities one cannot outlive his or her income stream. This is because indexed annuities are fixed annuities and they offer a stable and steady guaranteed lifetime income. Aside from that, indexed annuities protect you from the downside risks of volatile markets. This is because your principal never lowers down in value which means that you cannot lose the money you place into the annuity.
With indexed annuities, it's not all about risk aversion because your money can also grow with a rising index for up to the interest earning s rate cap stipulated in your contract. Also, with indexed annuities, all the interests you have earned are yours. The interest of the money you placed in the annuity will not decrease due to market volatility or rate adjustments. Also, you will enjoy tax deferred earnings which can give you better returns over the lifetime of the contract.
Indexed annuities are excellent investment vehicles that will prepare you for retirement. However, as with many investment plans, you must not forget to do your homework and seek the assistance of financial advisors or companies to determine the best financial strategies perfect for your financial needs and goals.
Treasury sets up new rules aid 401(k) annuity purchase
It is a puzzling fact that Americans have spent more than $11 for retirement plans and yet millions are still at risk of not having enough money for old age. The government has chosen to be proactive about this so the Treasury department crafted new tools to deal with the problem. These new tools intend to make things easier and cheaper for middle class people to transfer their 401(k) plans to an annuity and have guaranteed monthly payments come their retirement days until they die. "Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security," said Treasury Secretary Timothy F. Geithner.
Aside from Treasury, the Labor Department also had new rules that will inform workers on the fees that financial firms charge in running their 401kplans. This way, they could negotiate better as details and information are conveniently available for them. Over the years, a number of companies have frozen their pension benefits and replaced it with 401(k) plans yet some companies don't run even 401(k) benefits as they don't like the idea of having an annuity business on the side. Unlike employers, insurance companies are eager to sell IRA and 401(k) plans but held back due to tax rules. Because of this, the Treasury are also easing taxes in 401(k) plans to make things more favorable for insurance companies and plan holders as well.
Another rule proposed by Treasury regarding annuities would make it easier for employers to work with annuity providers. This way, they will have to get annuity options at work and not from private financial planners or brokers.
An official at the Treasury department, J. Mark Iwry said that they are hoping that employers foster a "longevity insurance" for their workers. This type of insurance consists of an annuity whose stream of payments does not start until the retiree is well into retirement — say, 80 or 85 years old. The insurance would kick in and supplement Social Security. Like Social Security, the longevity insurance payments would keep coming every month until the retiree's death. But because the policy would pay nothing in the first 15 to 20 years of a person's retirement, it would cost much less than a conventional annuity. Longevity insurance plans are much talked about in policy circles but employers rarely make this available to their employees.
Most employers that offer annuities today provide a choice as to how retiring workers can handle their plans. Its either they will get the whole balance in check or spend the whole amount to buy an annuity. Because tax rules make it hard to calculate the values since the amount is split, the government relaxed those rules to make things easier and more convenient for employers and workers as a whole.
Aside from these, the Treasury also capped the maximum amount of retirement plan money that could be spent on longevity insurance at 25% or up to $100,000. This way, high earners will be blocked from sheltering money and will also minimize any effects on the federal tax revenue changes.
Treasury is also altering the way of calculating minimum distributions and this new method would exclude any money that went to an insurance company to buy longevity insurance or an annuity.
Grandparents intensify their financial support to grandkids
According to a survey conducted by MetLife Mature Market and Generations United, 62% of grandparents provide financial support to their grandchildren. The financial assistance given by grandparents are in forms of cash which is 82%, gifts, 62%, U.S Savings Bonds, 12%, stocks, 4% and life insurance policies, 2%. Aside from these, grandparents also provide support and assistance for grandkids' clothing, educational needs, life events such that of graduation or birthday parties, savings and even with car purchases.
43% of grandparents who provide financial support to their grandchildren would cite harsh economic times as main reason. While some of them are in a financial hardship too, 34% still provide for the needs of their grandkids even if this means having a negative effect on their own finances. With that, most grandparents (81%) would only provide smaller gifts while the other 19% would provide lump sum amount as legacy when they die.
Most grandparents provide financial assistance to their grandchildren but only 36% of them provide financial advice. Giving financial advice is also important because this will teach children the value of early investing and maintaining financial security for their future needs.
The survey found out that grandmothers are more likely to provide care than grandfathers but the majority of them (58%) do this because they love and enjoy what they are doing. Because of this, 30% of grandchildren live with their grandparents full time. Because of this, a number of grandparents today live in multigenerational households as they may have one or two grandchild living with them. While there's a generation gap, the relationship benefits both as they learn and discover new things from one another.
When it comes to bonding and relationship, 54% of grandparents stated that they have very close relations to their grandchildren or a particular grandchild. 21% says that they don't have special relations with any of their grandchild and 23% said they have a special relationship with all of them. This bond and special relationship are aided by constant communication through phone, internet, and personal interaction. Only a few grandparents (9%) enjoy social marketing sites like Facebook as a way to communicate with their grandchildren and 12% says that they enjoy using Skype. To deepen this special bond, grandparents engage in various activities with their grandchildren depending on their ages. Those with grandchildren below 6 years old usually visit them and see them in family gatherings while those who have teenage grandkids would spend time with them doing volunteer work.
Mutual funds and their hidden costs
Investors eyeing to own mutual funds should look into the expense ratio in order to determine how costly the fund is. However, there are a number of added costs that aren't reported in the expense ratio computation and this makes mutual funds two to three times more costly than advertised. One of the reasons why some costs don't show up in the expense ratio is because they are way too complicated to compute. Experts would say that trying to quantify a fund's trading expense is as difficult and painstaking as performing brain surgery. "The average investor can't really even begin" to get a strong grasp on these additional costs, says Richard Kopcke, an economist at the Center for Retirement Research at Boston College who co-wrote a recent study about fees and trading costs of mutual funds in 401(k) plans. "There's just not enough information. Not even close."
In a nutshell, there are actually four main components that one should look into when it comes to costs. These are brokerage commissions, bid-ask spreads, opportunity costs and market impact costs. The simplest costs to understand are brokerage commissions. The Securities and Exchange Commission (SEC) requires 3 years of brokerage costs to be disclosed in a fund's statement of additional information. Some fund firms do their own computation for investors by quoting their commissions costs as a percentage of assets. This way, investors need not do the math themselves. However, SEC doesn't require commissions to be factored into expense ratios simply because these computations could be misleading.
Another cost to look into is bid-ask spreads. Bid-ask spreads deal with the difference between the lowest price at which a seller is willing to sell a security and the highest price a buyer is willing to pay. The gap between them—usually associated with thinly traded securities—is the spread. At any given moment, for example, a security may have a bid price of $96 and an asking price of $100. Say a fund bought that security for $100, and the security's value later rises. If the fund decides to sell the security when the asking price is $110 and the spread has stayed the same, the fund will only receive $106. The spread thus cost the seller $4. Over time, spreads can be a significant cost for a fund that does a lot of trading in less-liquid holdings, such as very small stocks.
Market impact costs and its succeeding result, opportunity costs are usually the largest component that comprises trading costs. Market impact costs occur when a large trade changes the price of a security before the trade is complete. In the same way, opportunity costs emerge when the impact of a trade inhibits a fund manager from filling an order on his or her desired terms, resulting in either a less-favorable price or fewer shares purchased or sold.
It is important that investors quantify the above mentioned costs so that they can devise a plan to add more value to their security selections and trading decisions and make their investments worthwhile.
All about disclosure:
Trading costs other than commissions need not be disclosed according to SEC as this will only create figures that are based on pure assumptions and rough estimates. According to Chief Economist Brian Reid, "requiring funds to disclose total trading costs would not provide adequate means for investors to compare trading costs across funds and could result in investor confusion."
However, some experts say that investors are entitled for this information and some methodology should be developed in order for these figures to come out. "Not having a standard doesn't mean it's not worth doing and not worth coming up with one," says Mr. Kinnel of Morningstar.
Turnover, expressed as a percentage, shows at what rate stocks in the fund have been replaced. This means that while you can't find a fund's total trading costs. You can still get a clue from a standard measure of how much trading the fund is doing.
Why aren’t you saving enough for your future?
According to Shlomo Benartzi, Chief Behavioral Economist of the Allianz Global Investors Center for Behavioral Finance, only 1 out of 10 Americans are saving a portion of their income for retirement and the other choose not to or can't save enough for their future retirement needs. If you are part of the 90% who aren't saving enough then, why?
In order to understand why some people can't allot even a small amount of money for retirement, Allianz Global Investors and Professor Benartzi looked into behavioral science and found 3 main reasons.
1. The need for immediate gratification prompts people to spend today rather than save for tomorrow.
2. Inertia, resisting to take simple steps to achieve certain goals. This deters people from setting up a retirement account or arrange its funding.
3. Some people equate saving to losing money as it takes away something available to spend.
In order to save something for your retirement needs, you should take time to learn more about you and your family's needs as well.
We can help you develop strategies to address these behavioral challenges and help reach your goals as well. We also have actionable ideas and practical tools to help you make better financial decisions.
4% Retirement Rule Dead, Annuities Are In, According to Finke Study
A study conducted by Michael Finke, Wade Pfau and Davaid Blanchett stipulates that financial advisors who are still relying on the classic 4% rule in their client's retirement income are bound to fail. This newly published research is titled "The 4 Percent Rule is Not Safe in a Low-Yield World" and aims to enlighten financial advisors on the adverse effects of patronizing an old rule and apply it in today's highly competitive and harsh economy.
Finke believes that it's impossible for the market for assets in the 21st century to be the same as the market for assets in the 20th century. This is what the present reality looks like yet advisors who follow the 4% rule seem to disregard this fact. "Most planners take some comfort in knowing that a 4% inflation-adjusted withdrawal rate wouldn't cause a retiree to run out of money in a 30-year retirement. What many don't realize is that, portfolio returns during the first years of retirement have a disproportionate impact on failure rates. We estimated what would happen if bond yields and equity returns corrected for a low-yield risk-free rate of return, persisted in the future" said Finke.
Finke and his team looked into the notes made by William Bengen, the planner who formulated the 4% rule and realized that he based his calculations on average real bond return of 2.6% and average real stock returns of 8.6%. However, bond yields as of January 2013 are 4% less than their historical average. With that, advisors must take into account that the real return on risk free investments is negative today. "If we calibrate bond returns to the January 2013 real yields offered on 5-year TIPS, while maintaining the historical equity premium, the failure rate jumps to a whopping 57%," concluding that "the 4% rule cannot be treated as a safe initial withdrawal rate in today's low-interest-rate environment" says one of the authors of the study.
Some advisors challenge this idea saying that today's low rates will eventually climb higher. However, Finke and his co-authors said that even if rates go higher in 5 years, retirees will still face an 18% failure rate and a 32% failure rate should it climb up after 10 years. This is because the current low yield economy changed a lot for the retirement income game and hoping that things will get better in the future is significantly risky and "we're giving people a false sense of security" says Finke.
In order to get by and provide people a more sound investment plan, Finke suggests on giving annuities another look. Some advisors are reluctant to have their clients try annuities because as compared to historical yields, even the best annuities don't seem very competitive. However, deferred and immediate annuity products provide longevity protection and higher yield as compared to bonds. One just needs to acknowledge the fact that they reduce liquidity which then raises the problem of potential health shock in the future.
With that, advisors need to start having a more conservative approach to creating sound retirement income estimates. They need to explain to their clients that if they want the same level of retirement income, they will have to forego early retirement, and perhaps readjust their expected lifestyles during retirement. Aside from that, Finke also advised that "advisors must also think more carefully about constructing a retirement income portfolio that includes safeguards to prevent disaster if a client runs out of money. It would also help if one recognizes all potential risks and take it into account"
Economists Know Why Billionaires are Dumping Stocks
U.S billionaires dump their stocks despite the 6.5% stock market rally over the last three months. Warren Buffet complained about the disappointing performance of huge companies as a result, he is dumping his shares at an alarming rate.
Buffet's lack of faith in future prospects is one of the reasons why he withdrew. Berkshire Hathaway, Buffet's holding company, noted that he had been reducing his exposure to stocks that depended on consumer spending and with the U.S economy depending heavily on this spending pattern, the move is worrisome. John Paulson is also clearing out, he dropped 14 million shares from JPMorgan Chase as well as his entire position in Sara Lee. George Soros, recently sold nearly all his bank stocks and shares in JPMorgan Chase, Citigroup, and Goldman Sachs.
Despite the fact that the real estate prices have finally leveled off and the unemployment rate is stabilizing, billionaires are dumping their stocks from large U.S companies. These people were aware of a recent research study that points to a massive 90% market correction. Robert Wiedemer, an economist and author the work that predicted the Housing Bubble bust, and the chief investment strategist at Standard & Poor's said that Wiedemer's track record demands utmost attention. Wiedemer pointed out that the 90% drop in the stock market is a "worst case scenario" and this starts with the reckless strategy of the Federal Reserve to print a massive amount of money in an attempt to stimulate the economy. "These funds haven't made it into the markets and the economy yet. But it is a mathematical certainty that once the dam breaks, and this money passes through the reserves and hits the markets, inflation will surge," said Wiedemer.
Wiedemer also laid down the reasons on why billionaires like Buffet, Paulson and Soros dumped their U.S stocks. "Companies will be spending more money on borrowing costs than business expansion costs. That means lower profit margins, lower dividends, and less hiring. Plus, more layoffs." This means that no investor will want to own shares with falling profit margins and shrinking dividends. The billionaires have decided to cash out early and have their money safe.
Stocks dead, bonds deader
Money managers from Pimco, Bill Gross and Mohamed El-Erian warns investors for the coming years of slow and low growth in stocks, bonds as well as other financial vehicles and it was seen that a recovery will not be felt until 2022.
Earlier in the summer most people shrugged their shoulders about this forecast from Gross and El-Erian thinking that Corporate America with a newly elected president will unravel trillions of hoarded reserves to stimulate recovery. The same warning was given by Warren Buffet and Jack Bogle back in 2002 and just like what happened to Gross and El-Erian, warnings fell on deaf ears.
To help America's 95 million investors understand the American economy as well as its shifts and markets, they must look into the points cited by Gross and El-Erian. Here's a summary of them:
1. America should stop believing all the misleading notion of a 3% to 4% growth and stop falling in love with a "Goldilocks" economy as well. This means that people should not be complacent and feel that everything is fine and that the markets are stable and bound to a long period of growth. Investors, banks as well as politicians should stop living in denial and realize that today a 2% growth is the new normal.
2. Failure to realize this slow growth will leave investors disappointed with their nest eggs. Should they continue to think that everything is stable and continue with their wishful thinking, they will just subject themselves to a great deal of stress simply because normal growth will become "slow" growth everywhere. This would include consumer spending, jobs, government revenues, stocks, corporate earnings, commodities and even America's role in the world as well.
3. Gross and El-Erian also pointed out that the stock market is slowly becoming a Ponzi scheme as investors will never see a 6% return of investment and would be lucky to get at least 3%. Aside from that, investors are bound to pay a stiff price for cheap money today because everything is dropping – from consumer spending to stock prices and real estate. Because of this, they suggest that investors must "get out of the water now."
4. In order to thrive in this "bad news'' market, investors must look into defensive investing strategies. Investing in a recession that could possibly become a depression can still yield to favorable results for investors should they exercise caution and open their eyes to what's happening and what's the status of America's economy today. Investors must remember that "Almost anything that we do in the future will not be as high returning as what we are used to. All of us should realize that double digit returns are long gone."
5. Investors should avoid long bonds with nations that have big political risks but they must also consider countries with a higher yield for debt such as Brazil and Mexico. Housing and anything housing related are favorable investments vehicles so people can look into these vehicles to gain at least a small amount of return from their investments, or maybe higher should this sector continue to perform excellently. Lastly, Gross and El-Erian pointed out that investors must value safety in all aspects. They must play it safe for now so their actions will not crash right in front of their faces.
Americans Eschew Retirement Plans
With the increasing rate of financial losses, layoffs and income stagnation, nearly two thirds of the American workforce ages 46 to 60 plans to forego retirement as stated by a report from the Conference Board. This percentage today was very far from what the respondent's of the survey planned four years ago wherein 42% of them want to retire at an early age.
According to Gad Levanon, director of macroeconomic research at the organization and a co-author of the report, which is based on a 2012 survey of 15,000 individuals, this increase in workers wanting to forego retirement is mainly caused by a number of factors but mostly because of recession and the downward spiral movement of America's economy.
One of the study's respondent, Matt Stern, age 51 and a former analyst of a Manhattan hedge fund company already met with his financial planner last December to plan for his retirement and the latter said that he could possibly retire at the age 62. However, days after that meeting, he was laid off from work and the fund announced its imminent liquidation. Because of this, his assets went down 10% - 20% from their 2008 peak leaving Stern hunting for a new job and forgetting about his retirement plans. "I might have to prioritize income over whatever calls to me on other levels," such as travel or being involved in nonprofit organizations, Mr. Stern said.
It is a fact that the labor force today has been getting older because of various reasons including longer life span and better health of employees not to mention healthcare services and benefits offered by a number of companies. However, the 62% of workers planning to stay on their jobs was a surprise according to Mr. Levanon. With the stock market slowly recovering and the unemployment rate decreasing it is quite confusing why workers still want to forego retirement when they should be feeling more secure. However, Mr. Levanon also pointed out that a number of middle aged Americans used their savings during those lean years so leaving their jobs now is no longer a viable decision.
The high rate of workers planning to forego retirement is good news for some industries whose workforce will be greatly affected once seniors retire. These industries would include utilities and power companies. However, senior employees can also be expensive for companies both in salary and benefits and they may block the pipeline that can pave way for younger employees wanting to advance their careers.
However, that concern will be misplaced in the long run according to Kevin Cahill, an economist at the Sloan Center on Aging and Work at Boston College because "Keeping older Americans in the work force is a good thing," he said. "Those workers have more financial security, employers have a larger labor pool to draw from, and we have more people to produce goods and services. There may be bumps like the recent contraction in the labor market, but we need to look beyond the short term" he said.