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There’s no such thing as a “silver bullet” for retirement August 11, 2015

Posted by forwardfinancialplanning1 in Annuities, Retirement Savings.
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This country has a looming retirement crisis which will become more evident as more baby boomers (and eventually Gen X and Gen Y’ers) retire.  People are living much longer than previous generations yet many have nowhere near enough accumulated wealth to carry them through a potentially lengthy retirement.

Our so-called “leaders” in Washington talk about this issue frequently and like most politicians, they love to propose “painless” solutions to the problem.  Many, including our current President have suggested that more widespread availability of annuities would solve the problem.  And not surprisingly, purveyors of these products have chimed in as well.  A recent quote from Cathy Weatherford, President of the Insured Retirement Institute (the annuity provider’s trade group) claimed that a current Department of Labor proposal to amend the definition of “fiduciary” (as it relates to financial advisors) would, “limit access to annuity products at a time when we should be encouraging and promoting lifetime income strategies as a source of retirement income that cannot be outlived.”

Well, it is very obvious that “having a source of lifetime income that can’t be outlived” is a wonderful thing.  However, the proponents of these clean and simple solutions never tell you the whole story.  Purchasing an annuity that will cover the spending requirements of the average American household will require a great deal of money—far more than has been accumulated by the vast majority of American workers.  The average 401k balance is well under $50,000 and even the segment aged 50-60 averages less than $200,000.  A quick check at http://www.immediateannuities.com illustrates that $200,000 utilized by a 65 year old female to purchase an immediate annuity generates the princely sum of $1088 each month.  And, of course, using the entire $200,000 for the annuity purchase would leave the average 401k (aged 50-60) holder with nothing else in reserve and many years to live.

So, take a jaundiced view of these proposed “silver bullet” solutions to the impending national retirement challenge.  We would all be better served if we heard the truth.  Fidelity Investments Senior VP, Doug Fisher told it like it really is when he said, “Annuities are meaningless if savings are ‘practically zero””.


“You don’t know what you don’t know…” December 4, 2014

Posted by forwardfinancialplanning1 in Annuities, Financial Planning, Retirement Savings, Retirement Spending.
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One of my best friend’s favorite euphemisms is, “you don’t know what you don’t know”. He is generally using this to describe peoples’ “clueless” behavior in various situations and circumstances. While his frequent utterances usually give us something to laugh about, a recent study by the American College is no laughing matter.

In the Retirement Income Literacy Survey, researchers found that respondents posted an average score of 42% on the 38 question quiz and only 20% achieved a passing grade of 60% or better. Despite this demonstrated lack of knowledge, 97% of survey participants rated themselves as either “knowledgeable” or “somewhat knowledgeable” about saving for a comfortable retirement.

The results of the entire research project can be found at:
http://www.theamericancollege.edu/ricp-retirement-income-survey/index.php ).

We knew somebody was picking up the tab……… April 4, 2014

Posted by forwardfinancialplanning1 in Annuities, Economic Conditions, Fixed Annuities, Investing-General, Retirement Spending.
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I’ve had numerous conversations over the past few years with clients who are puzzled by US Federal Reserve policy. Several have commented that the Fed seems to be “creating money” out of thin air. They recognize that there are no “free lunches” in the real world and many wonder, “Will there be repercussions somewhere in the system?”

As is always the case, there are repercussions, and National Bureau of Economic Research President, James Poterba “nailed it” with a recent research release. Poterba estimated that a 65 year old who wanted to pay for retirement with annuities tied to bonds needed 24% more wealth in 2013 than he would have needed in 2005. Academics can argue all they want about central bank policy. but this observation definitely “hits home” for retirees.

Ask your agent to provide you with “all of the facts” September 30, 2013

Posted by forwardfinancialplanning1 in Annuities, Fixed Annuities.
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Being a financial planning firm, it’s important that we keep up with the activities of other providers of financial services. We have several insurance agents in our area who actively promote equity indexed annuities as the panacea for all retirement needs. Their sales pitch relies heavily on appealing to emotion (i.e. investor fear) and they make ample use of the words “safe”, “protected” and “guaranteed” in their promotional efforts. One of the local purveyors is fond of saying, “If something sounds too good to be true, that doesn’t mean it isn’t true.” (Words which make me reach to hold on to my wallet). While it is a fact that equity index annuities offer guarantees made by the insurer, this safety comes at a price. Many savers are currently lamenting the price of “safety” in their FDIC/FSLIC insured bank deposits with interest rates at rock bottom levels. If they really understood the price they were paying for an equity index annuity “guarantee”, they would certainly think twice before purchasing.

The following is a paragraph extracted from the September issue of the American Association of Individual Investors (AAII) Journal. The AAII is noted for its objectivity in that it accepts no advertising revenue in pursuing its mission to advise and educate its membership. The article was written by Stan Hancock, a nationally noted expert on annuities of all forms. Note that Mr. Hancock referred to equity indexed annuities as “fixed” annuities, in that they are locked to an index with a capped call option on the same.

Mr. Hancock writes, “A phrase I came up with to remember concerning fixed index annuities is ‘the upside to a FIA is that there is no downside, but the downside to an FIA is that there is very limited upside.’ Built-in commissions on fixed index annuities are very high (as high as or higher than variable annuities), which is a primary reason these are being pushed by your local agent. Opportunity cost needs to be fully understood with this over-hyped and mis-sold product. The average annual return of fixed indexed annuities over the last five years is 3.27%, so this is not a strategy that is going to compete head to head with pure market returns even though most agents sell it that way. The 3.27% average return pretty much validates the correct expectations of the product.”

Note that during this same five year period, the S & P 500 has more than doubled, which makes the 3.27% average annual return of these products an extremely expensive “guarantee” when viewed as lost upside opportunity.

Supplement to February 15 Posting February 20, 2012

Posted by forwardfinancialplanning1 in Annuities, Fixed Annuities, Retirement Savings, Retirement Spending.
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How bad is the savings shortfall cited in the February 15 posting?  According to the Employee Benefits Research Institute (EBRI), 56% of all workers have less than $25,000 in savings for retirement.  And, 54% of retirees report that they have less than $25,000 saved.  Finally, the EBRI found that 42% of retirees say their current level of debt is a problem.

Maybe the EBRI can call across town in DC and advise the Treasury and Department of Labor that their annuity proposal may not even qualify as “a drop in the bucket”.

Excuse me if I’m underwhelmed February 15, 2012

Posted by forwardfinancialplanning1 in 401k plans, Annuities, Fixed Annuities, Retirement Savings.
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It must be an election year.  The US Treasury has just proposed new rules regarding the use of annuities within employer sponsored retirement plans such as 401k’s.  The purpose for the relaxed rules is that most employers have resisted adding an annuity as a distribution option from their defined contribution retirement plans.  Because the plan sponsor is held to a fiduciary standard and must comply with a myriad of Department of Labor regulations, most have avoided offering annuities in the belief that either they were going to be too expensie, or more importantly, that they would be held liable for an imprudent selection of annuity providers.

The Treasury and the Department of Labor are trumpeting these rules as a wonderful solution to the impending retirement crunch for the Baby Boomers. Treasury Secretary Timothy Geithner hailed the plans as a solution whose time has arrived by stating, “When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings.  Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security.”

Sounds great, huh? Baby Boomers’ retirement problems solved!!!   Somehow they forgot to mention that the average 401k balance for a mid-fifties employee is in the $50-75,000 range, depending on whose statistics you’re citing.  Unfortunately, that’s going to provide an immediate annuity payout of a couple of hundred bucks a month.  And, with interest rates sliding downward due to the hyperactive money creators at the Federal Reserve Bank, the lump sum will provide even less of an income stream as rates continue to fall.  Somehow, these clarifying facts never make it into the press releases.  The politicos can take all the victory laps they want in DC but the fact still remains that there’s a major societal problem looming and they are simply putting fingers into the leaking dam.

Equity Index Annuities—Read this first May 30, 2011

Posted by forwardfinancialplanning1 in Variable Annuities.
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Equity Index Annuities are promoted as a “have your cake and eat it too” investment.  Their sales hype claims that an investor can reap a substantial portion of the upside of the return of the stock market without being exposed to its volatility.  Of course,  the selling party usually doesn’t spend a lot of time emphasizing the healthy commissions they’ll receive, nor do they laud the multi-year surrender charges you’ll be exposed to with these financial instruments.

You can rest assured that the sales person will never call your attention to the following article that appeared in the April 2011 edition of Financial Planning magazine.  Check it out at http://www.financial-planning.com/fp_issues/2011_4/diy-annuity-2672150-1.html

Make sure you read it before being convinced that Equity Index Annuities are the greatest financial innovation ever created!

How’s your financial literacy?? April 25, 2011

Posted by forwardfinancialplanning1 in Annuities, Financial Planning, Life Insurance, Long Term Care Insurance.
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Here’s yet another on-line survey to test the nation’s financial literacy.  Sponsored by Northwestern Mutual Insurance, it can be found at:  http://financialmattersquiz.com.  As always, they reveal some serious gaps in our population’s general knowledge of financial concepts.  Nonetheless, it’s fun to see how you stack up against the country as a whole.  This one appears to be a bit skewed towards insurance products—not surprising since it’s sponsored by an insurer.  However, it does give us another good opportunity to benchmark our financial savvy.