An Article to Share - "The Case for Income Annuities"

An article I would like to share with you taken from the Wall Street Journal...
Click here for original article link.

By JEFF D. OPDYKE

Strategies outlined in a new study could sharply lengthen the amount of time a nest egg survives in retirement.

The study, soon to be released by the University of Pennsylvania's Wharton Financial Institutions Center, finds that so-called income annuities can assure retirees of an income stream for life at a cost as much as 40% less than a traditional stock, bond and cash mix. The study was co-sponsored by New York Life Insurance Co., which sells annuities.

Income annuities are insurance contracts designed to pay back not only a return on investment, but also a portion of the original principal with each payment. The payout occurs over your life expectancy, but if you live longer, you continue to receive payments. Those who die earlier than their life expectancy effectively subsidize those who live longer.

What it means is that retirees who need a nest egg of, say, $1 million, can live the same lifestyle with as little as $600,000 in an income annuity. Looked at another way, $1 million in an annuity will currently generate about $86,000 a year in income for a healthy 65-year-old male, while the same amount invested in a traditional securities portfolio would currently generate between $40,000 and $50,000 annually, depending on the annual withdrawal rate.

That news could offer hope for the millions of workers about to retire with inadequate retirement savings.

"At 65 years old, you're going to need money, on average, until you're 85," says David F. Babbel, an insurance and risk-management professor at the Wharton School who co-wrote the paper with Craig B. Merrill, an insurance and finance professor at Brigham Young University. "But the problem is that 'on average' means half of the people will need continuing income between the ages of 86 and maybe past 100. That's where [retirement-income planning] breaks down."

To ensure that you have a stream of income that lasts for as long as you breathe generally requires an inordinately large beginning value -- and even then, there is no guarantee your account won't run dry, depending upon your ultimate spending needs in retirement.

An income annuity is the only asset class the two professors found that most effectively addresses the risk of outliving your nest egg, because it generates a permanent stream of income, unlike a typical nest egg of stocks, bonds and cash. Meanwhile, the study notes, investors who place retirement wealth in mutual funds "are subjected to greater risk, typically higher expenses, and returns that are unlikely to keep pace with annuity returns, when investment risk is taken into account."

Yet the study also found that consumers have been tepid buyers of income annuities to this point. Many worry about costs, illiquidity in a financial emergency and the bad reputation the industry as a whole is often saddled with because of well-chronicled and dubious sales tactics with some variable annuities.

Prof. Babbel says the insurance industry is addressing these issues by building new contracts that are inexpensive, allow access to cash and don't have the problems associated with other types of annuities. The best strategy, Prof. Babbel says, is to invest enough in an annuity early in retirement to cover basic fixed costs. That allows you to invest the remainder of your portfolio more aggressively.

As seen in the Wall Street Journal.

-Tom

IRAs Can Be the WORST Asset to Inherit

When I speak of IRA's, I am referring to any type of retirement account that has not been taxed.  This is referred to as "qualified money."

What confuses most people is that we have at least five kinds of taxes.  Most of you may only think of income taxes when we are discussing these accounts, and the rules are: by December of the year in which you turn 70 1/2, the IRS requires that you take a mandatory distribution based on a life expectancy factor each year from now on for the rest of your life.  Many grumble about this because if you have accumulated a significant amount (even if you have multiple "qualified" accounts), your required mandatory distribution can be significant, and may even push you into a higher tax bracket.  Hah, that was not the theory behind saving in these accounts in the first place.  The idea was, in retirement you should be in a lower tax bracket so the distribution would not affect you as much.  Many people find that with the combination of pensions, social security checks, investment income, and interest income coupled with the fact that you may no longer have deductions like mortgage interest, or dependents - your tax bracket has not gone down at all.  Some even may see an increase.

Well, this is only one area of concern that most of you are well aware of.  What is usually not stressed enough is the fact that many of these IRA accounts will not be spent down to zero, many even continue to grow even with required minimum distributions.  What is left when you die is a totally taxable account in your name that will now also be subject to Federal Estate Taxes & New Jersey Inheritance Tax (may be different for your state.  So you see, you have triple taxation.

Right now the Federal exemptions are $5 million for an individual and $10 million for a couple for the next two years only. No one thinks the exemptions will remain that high come 2013.  So If you don't plan on dying now, you don't have to ignore this.  NJ taxes can be 11-16%.  Often times your heirs escape the Federal but get creamed by the state.

There are several strategies that can be implemented to offset this rape of your retirement accounts.  It is imperative to do the proper planning to allow for the efficient transfer of these assets to your heirs.  "Stretching," also known as "Multi-generational IRAs" may soften the blow of the income tax problem, but this strategy does not eliminate or reduce the estate tax, both federal and state, problem.

Reach out to us if you'd like to have an independent analysis of your IRA and find out what may be an appropriate strategy to pass on this money in your individual circumstances.

Please don't pay more tax because you failed to plan for the inevitable.  You worked hard for that money!


"Lady Fi"

Kathy

The End of QE2: Major Policy Shift Ahead

The shift, and it is imminent, will not change the larger trend, but it has the potential to be quite disruptive over the short term.  The fundamentals that have caused so much pain and economic woe over the last ten years or so remain intact.  If anything, they've gotten worse.  We've gotten currency debasement, not just in the U.S., but especially in the U.S. Dollar, which is not just any currency, but the world's reserve currency.

We've got a truly mind-boggling expansion of the reach of government into all aspects of society and the economy, with all that implies in terms of regulation, taxation, controls over investments and finance, impact on personal liberty, and so forth.  By recognizing this destructive trend for what it is, investors can position themselves to avoid the worst, and to profit.  Think safety and tax - deferral here.

There is growing evidence that in the next month or two, we will head into a very dangerous period.  The Fed has been extremely supportive of the U.S. government's insane spending, polluting its own balance sheet by buying up toxic loans by the hundreds of billions and by pumping enormous quantities of cash into the money supply.

You don't have to look very hard to understand why we have seen some small recovery in the economy, much of which has been driven by the financial sector that has been the recipient of so much - it was bought and paid for by the government working hand in glove with the Fed.

But there is about to be a fundamental change in this arrangement.  It appears that the Fed has decided that it's time to take a step back from its' monetization - or quantitative easing (QE) as they now term it - in the hopes that the market will step in to fill the large gap it will leave.  They can't know how that's going to work out, but if they don't stop pumping money into the economy, they never will know if the quantitative easing has worked.

The problems that made the economy stumble in 2008 have not been solved.  As I said before, most have gotten worse.  Have the impossible levels of sovereign debt and trillions in unresolved bad mortgages embedded in the balance sheets of Fannie, Freddie, the banks and even the Fed been resolved?  Hardly.  Is there any real sign coming out of Washington that the deficits will be substantively tackled?  You don't have to be as active as a skeptic as I to understand that the deepest spending cuts being discussed don't even scratch the surface of the $1.5 to $2 trillion deficit.  As for the $60 trillion or so in deb and unfunded obligations, forget about it.

The U.S. government and the governments of most large nation-states are fundamentally bankrupt.  In time, they will have to default on their obligations. While there will be some overt defaults, I expect most of them to follow the path of least resistance, which is to try to inflate (inflation) the problem away.  Now is the time to think safety, guarantee of principal, guaranteed income for life, and tax deferral.  Call us, we can help!

Tom

Don't Assume You Are Too Old For Life Insurance

Many of the effective strategies that can be used today to transfer your wealth, reduce tax burdens and to arbitrage as asset into becoming a larger net asset to your heirs may involve the use of life insurance.  Thankfully, the IRS has not attacked this financial vehicle yet if it is used properly.

When you think of life insurance, what may come to mind is protecting your family to be able to cover a mortgage or provide a college education if you should die too young.  However, even though you may no longer worry about these things when you reach your 50's, 60's or 70's, there are many other applications of life insurance.

It is detrimental to assume you are not healthy enough, are too old, or that it would just be too costly.  Insurance companies have realized that people are living longer, even without perfect health, and they have adjusted their mortality tables and premiums accordingly.  You may find that it is not as expensive as you thought.  In addition, a thorough audit of any existing policies as well as your investments, may uncover hidden equity that you did not realize you had.  This can sometimes be used without inflicting and additional financial burden on your budget.

Acceptance also varies greatly among different carriers.  For example, some may be more lenient towards diabetics, while others may be better suited for cancer survivors.  Each company determines what their risk pool of insureds needs to be for them to be profitable.  And you want the company to be able to pay the claim, right?  So a profit margin is important, just like any other business.  I think it is important to mention here that all  insurance companies are required by law (in every state they do business in) to keep a certain amount of surplus and cash reserves.  They are also highly regulated as to what they are even allowed to invest in to be sure they will be able to fulfill their promises.

You may want to allow us to do an independent audit of your current situation to see if there is a viable solution that you may be overlooking. As always, we are at your service.

"Lady Fi"

Kathy

Updating Beneficiaries is Critical

There are several things you may not realize about the importance of updating your beneficiaries.  Just because you may have a will or a trust, and you have listed beneficiaries and percentages, this may not happen with all of your assets.

For example, an IRA may list your oldest son as the contingent beneficiary.  Your will may state that your three sons and one daughter are to share equally in the disposition of all of your assets.  You incorrectly assume the IRA will be included in the pot and be divided accordingly to your wishes.  It will not! The IRA beneficiary designation will take precedence and the other children will be left out of this part of their inheritance.  You may say that your oldest knows that he is supposed to share equally, and even if that actually comes to pass (but remember, there is nothing legally binding him to do so), he is still 100% liable for the taxes on the IRA distribution.  There is no way for him to share that with his siblings.

This happens all too often.  We see life insurance policies whose beneficiaries are deceased.  We see CDs that have a POD (Pay on Death) designation - and they get paid only to the person/persons named, leaving others out - it doesn't matter what your will says.  Annuities work the same way.  They are legal contracts and will supersede a will to inherit the money, thereby inadvertently disinheriting your current spouse or children?  Could get really ugly.

So please.  Regularly check and update all life insurance, IRAs, 401ks, any retirement plans, all annuities, bank accounts, and even brokerage and mutual fund accounts.  You may have "TOD"- transfer on death instructions on your accounts.  It would be a shame to have your assets go to an unintended party, accidentally eliminate a loved one, or have the asset tied up in probate.  All of these potential problems can be avoided very easily.

If you are unsure if you have structured your intended beneficiaries correctly, let us help you.  It could save a lot of money, and more importantly, a lot of unnecessary heartache.

"Lady Fi"

Kathy

Why Are Gas Prices Soaring?

If you're like most people, you probably cannot understand why gas prices are so ridiculous, and continually escalating.  A natural gut reaction is to assume the oil companies are just being too darn greedy.  Perhaps you buy into the media sensationalism and blame the crisis in Libya for affecting oil supplies.

Well, the bottom line is, both assumptions would probably be wrong.  You see, oil is just too juicy of a commodity.  It has nothing to do with supply and demand (yet).  It has everything to do with the financial market for the oil.  In other words, investors and speculators who in essence bet on the performance of the oil exchange-traded funds, or even the swing of particular oil stocks who are actually ratcheting up the price of gas. Make it look scarce, prices go up.  Oops, it's not scarce, prices go down.  Lots of money to be made on either play if you know what you are doing and get the timing down right.

The average Joe, he is just a dumb cluck who doesn't know he is getting played.  I'll admit, the world does have a major problem ahead with our super-dependence on oil, but that does not affect the roller-coaster of current prices looming out of control.  Like many hardworking or out of work families don't have enough to worry about just putting food on the table or keeping their home right now!

The "players" need to get a social conscience and think a little about their fellow man.  Not everyone knows how to or wants to play the game.  Some of us just want to be able to earn an honest living the old-fashioned way.  Work for it.
-Lady Fi

Kathy

Bucket Strategies Provide a Pot of "Safe Money"

Using bucket strategies for Retirement Income planning has become more popular in recent years and the reason is pretty simple: Dividing a portfolio into separate pools or buckets each with varying investment objectives, works.

The basic concept is to separate the investment money from the dollars that need to stay liquid.  With the global financial crisis driving home the value of a predictable income stream, techniques to provide investors with a pot of "Safe Money" that generates secure income as well as a pot or pots of money set aside for growth should be a part of every retirement plan.

There is a debate among academics and throughout the financial planning community over the optimal number of buckets to be used in the strategy.  But regardless of whether the portfolio is simply split in two or divided in half a dozen or more separate pools, the one constant is the presence of a bucket dedicated to between two and five years of safe liquid income.

As with all bucket strategies, the idea is to keep the longer-term pool in a position to be able to fund the near-term cash bucket which provides the retiree with a steady pay check.

We know that as a retiree, they can't afford to sell investments in a down market, but if you have three years worth of income put aside in January 2008 you would have been ok.


To find out more about this strategy call our office at (732) 364-5462 and ask for Kathy or Tom.


Tom

What Is Really Important to You?

Let's all agree on one thing. Life is short. Too short.

Although you may worry about having the right investments, having enough income to last you through retirement, and staying healthy as long as possible, these concerns may be secondary to what is really important to you, which of course will be different for all of us.

If you were able to accomplish all of these things, how would you feel? Successful, secure, free?

I recently read a great book written by a colleague, Bill Bachrach, titled "Value-Based Financial Planning" in which he encourages you to find out whats really important to you and "build" on that.  "What [does] having enough money mean to you?" Is it freedom, then what's important to you about freedom? Keep building on your answers until you've gone through about 7 steps. Identifying what it is that you are really seeking will allow you to develop a plan to get there and be able to live a great life.

If you'd like us to help you identify what matters wost to you we would be honored.  Besides, it's fun and enlightening.  My husband and I recently went through this exercise and some of the answers surprised us.  We now have a much clearer vision of what we want our lives to be, both individually, and as a couple.  Try it, it will give you peace.  I promise!

-Lady Fi


Kathy

DREAM A LITTLE DREAM

Times may be scary and the road ahead frightening, but don't let anything take away your dreams.

Sometimes you get so bogged down with fear and negativity that is fed to you on a daily basis, you begin to feel like your dreams are just that - dreams.

Don't give up!  When you are so entrenched in your daily life, it is often hard to see the forest through the trees.  What you may see as impossible, another may see as probable.  Take a step back and gain a fresh perspective.

You have no idea how thrilled I am when I tell someone that they can afford that second home in two years, or that they can open that coffee shop after retirement that they've been thinking about for a while.

Retirement is about beginning a whole new chapter.  Have you thought about how you would like it to read?  Many of you may just think about the end of your working days, not the beginning of your new story.

With a carefully crafted distribution plan for your retirement savings you may be closer to realizing that dream that you think.

We're really good at this, so give us a call if you need help.

Lady Fi

-Kathy

Are Bonds Really That Safe?

Many investors put their money into bonds for the safety and predictability of income.  Now, more than ever, it is a good time to visit the risks that are associated with bonds but rarely discussed.

A major concern with any type of bond is the default risk.  This is the likelihood that the issuer, usually a local government or a major corporation, will fail to live up to its obligation.  Along with the default risk, is the market is concerned that the issuer may default, the bond's price is likely to suffer as the market adjusts for a potential default.

Municipal bonds are issued by local governments to generate revenue that is used to finance local and state governmental spending.  Even though these bonds offer a low rate of return, investors have traditionally chosen them for safety that they offer, along with the tax exempt status.  The problem that we are facing today is that states are not the only ones facing a budget crisis - many cities and counties are on the verge of bankruptcy.  This has the potential to sink the entire municipal bond market if defaults do indeed begin to occur.

A problem that refuses to go away is the housing crisis.  Municipalities rely heavily on property taxes for revenue.  Assessments continue to fall, which reduces the property taxes and reduces the amount of revenue for municipalities.  Industry observers have noted that many big cities are at risk of going bankrupt in 2011.

In addition to the default risk, bonds also carry significant inflation risk.  Should inflation pick up steam again and head higher, the interest payments as well as the principal will be less valuable.  In addition, bond prices traditionally fall when interest rates rise, and interest rates tend to move higher when inflation rates move higher.

Another risk to take into consideration with bonds is something labeled "call risk." Call risk only pertains to bonds that have a callable feature.  In this situation, it is the issuer's discretion to purchase the bond back from the bondholder.  This is typically done when interest rates are substantially lower than when the bond was originally issued.  The issuer retires the bond with the higher interest rate, and reissues a bond with the lower interest rate, thereby reducing the cost of debt.  While this is a good scenario for the issuer, it can wreak havoc on planning out an income stream for the investor.

For alternative strategies to provide income while maximizing risk, call us at Family Focus Financial Group at (732) 364-5462.

Tom