On the Radio with Author Mike Egan

Monday on Financial Impact Factor Radio, we had Mike Egan, author of "Your Stronger Financial Future: The Eight Essential Strategies for Making Profitable Investments". This book takes the time to rearrange your thinking about the world of finance around us and in doing so, arrange it so that we can systematically confront fear and presumption and get on with our plans for retirement.

Listen to internet radiowith

Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

This Show was for Boomers: On the radio with Steve Cooperstein

On Monday, we had Steve Cooperstein on the Financial Impact Factor Radio show with Paul Petillo, managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer. Steve's recent book was the topic for today's show: “Implications of the Perceptions of Post Retirement Risk for the Life Insurance Industry: Inside Track Marketing Opportunity, But Requiring Focused Retooling”.

It may have been written for advisors and academics and the insurance industry, but in doing so it offers us some interesting insights into how these folks think about us: the end user. Did I mention that Steve is an actuary?

 We talked to him about annuities and Long Term Care Insurance, the impact both of these products have on all age groups, what is wrong with them and how they can be improved. We solved a great deal in the hour we had together!



   

Listen to internet radiowith

Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

Baby Boomers: Are Your Denying a Time when You will be "Old Old"?

Baby Boomers face all sorts of challenges when it comes to retirement. Are we ignoring the most obvious of those challenges when we refuse to think that we will one day be old - not just older, but old old.

It is a relatively well known phenomenon amongst the soon-to-be retired. You are jettisoned from your 401(k) with a large chunk of money, a lifetimes' worth of hard earned cash. You are forced to make a decision about what to do with it. Kept in its present form would require you pay taxes on it as it is. Rolled into an IRA allows you to hold off on distributions, possibly until you are 70 or begin to take money out. But some folks fall into the annuity trap.

This choice, the annuity, in whatever flavor you are sold by the insurance company is often picked when the newly retired person does so in the midst of what would be a bear market.

For those not versed in that term, this a period of lower stock prices; the reverse of which would be a bull market. Most folks fall back on the same logic, perhaps not fully tested or vetted, that retiring in a down market is hardest on your retirement account because you have far less than you might have has had you retired when the market was on the upswing.

On paper it might look bad. But the bear market might be your friend, especially if you are the counterintuitive type not prone to believe the conventional wisdom. What is the conventional wisdom? To be upfront, something I disagree with in most cases in large part, because I don't think pat formulas work. We evolve and so does our thinking. Why, if that is true of us and we are the markets, do we insist on being harnessed by stringent parameters?

Because they provide comfort, a point of reference, a goal. No matter what name you assign them, they are prevalent and with so many personal finance and retirement "gurus" saying the same thing, you tend to fall lockstep into the same thinking. Withdraw 4% you chant and you will never run out of money.

I've disputed this notion in the past as not very wise or thoughtful. Two things helped me arrive at this conclusion. Long before Susan Jacoby wrote her new book about old age (Never Say Die: The Myth and Marketing of the New Old Age, Pantheon Books), which provides a no-hold-barred look at the distinct, perhaps inevitable slide the human body takes on its path to death, I was suggesting that we might live longer but what will living longer mean. Oh, we may live to 85, but our arrival signals the end of cognitive independence for more than half of us.

She blames the baby boomer, the reinventor of what life is as the culprit in this thinking. We may have changed the way our youth unfolded and we may have upset the norm throughout our working careers. But when it comes to old age, it doesn't matter whether you have some sort of can-do attitude, you won't be able to change what is going to happen to you. You may envision a life of vigor and vitality, volunteerism and travel. We all need something to keep us moving forward. But Jacoby says we are ignoring the hard facts of life. We'll still get old. And with age comes the maladies of that time. Still there and still the same unsolvable mysteries.

So we will reach a point somewhere in the future - and the odds are in favor of this thinking - when you will no longer be the person you are right now. The years that you believed would be full and vital are now gone and you are collecting in the form of equal - possibly inflation adjusted - income that you can't spend. You scrimped in the early years of your retirement, downsized, even counted every penny. And then later in life, it doesn't matter. My suggestion was to start out big and taper back. Perhaps gradually easing back from a 6-7% withdrawal rate in the first ten years of retirement to a paltry 2-3% by the time you are 80 years old.

The result would be more or less the same with you using the money in the early years to do what you thought you could do and scaling back as your new sedentary lifestyle takes hold, an inevitability we can't avoid. "Young old" is easy to imagine. "Old old", not so much.

But the choices we make right at the moment of retirement may have a greater impact on how well that retirement is financed than we may have previously thought. Those bear market retirees, the ones who graviate towards annuities more so than their cohorts who retire in the midst of a bull market, may end up doing better over a longer period than their more optimistic cohorts.

I am of course referring to the studies done by Wade Pfau, an associate professor at the National Graduate Institute for Policy Studies in Tokyo who has suggested that retiring during a bear market is actually the best case scenario. His thinking is that a bear market provides more upside potential than a bull market would. On this point, he may be right. Our penchant to follow the herd during a bull market gives the impression that markets will always go up.

And there is some proof that for a time, they will. There is also proof that if you retire during a robust bull market, you will be more inclined to believe that you possess some sort of powerful ability to manage your money better. But bull markets fall and this causes confusion among those who may have deluded themselves into thinking they were more skilled than they were.

Professor Pfau thinks that a 60/40 stock split is optimal and if you invest over the course of 30 years at a rate that is close to 17% of your pre-tax income, you will be able to have 50% of your pre-retirement income, inflation adjusted, throughout your retirement. Staring earlier will mean less needed to get to the same mark. And of course this excludes any other money you might receive in retirement.

You are probably saying to yourself, 'that's a lot of income to sock away' and you'd be right. But this is one thing that hasn't changed: if you think you haven't been putting enough away, you are probably right. If you think old age is something that will resemble the first day of retirement for the next 30 years, you would be wrong.

Baby Boomers should be thinking about spending more when they are healthiest. Because 'old old' doesn't give you the chance to revise your planned 'young old' retirement.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

Our Paul Petillo on Financial Impact Factor: The Annuity Show

Today on the Financial Impact Factor Radio show, we had as out guest, Joe Tomlinson of Tomlinson Financial Planning. Joe is no slouch when it comes to the world of finance, annuities and retirement planning products. He joined the host of the show Paul Petillo, Dave Kittredge and Dave Ng for lively discussion that traveled from a discussion about what planners/advisors/brokers were to annuities and other retirement planning products to a discussion about whether college was worth the enormous cost.

You should give it a listen. Better yet, click on the little iTunes button at the bottom of the player and never miss an episode (you will automatically be subscribed to each show as a podcast allowing you to take the show wherever you go).

Listen to internet radio with

Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

Playing Worry: Approaching Retirement with Dread

Baby Boomers and those that follow you age-wise through the workforce all seem to very concerned about a single thing. You can't escape it.  You are having your choices about retirement and your plan diced and splayed and discussed in any number of forums.  None of the outcomes from these conversations are suggesting what you want to hear. So here's a flash: you're worried.

Insured Retirement Institute President and CEO Cathy Weatherford recently wrote "Unfortunately, as the promise of Social Security continues to be on unsure footing, working Americans are coming to realize that they will need more than just that paycheck to sustain them throughout their retirement." Even when the Employee Benefits Research Institute released its most recent report, concerns about retirement were, as they could only be expected to be, were the top concern.
And with that comes the numbers.  Now I tend to agree with Steven Strogatz, professor of applied mathematics at Cornell and the author of "The Calculus of Friendship when he suggests that although we are easily duped by words, numbers "brook no argument," he writes suggesting that they "are the best kind of facts."  he describes them as cold, hard, and objective. So when the EBRI reports that 69% of those recently surveyed believed that retirement accounts were extremely important, most of us agreed. Three out five the EBRI concludes from their question don't believe in Social Security and almost two-thirds say they lack confidence in the program enough to begin saving more.

Now to Ms. Weatherford's defense, she sells annuities.  So when she adds that "Increasingly, they [the working folks] are looking for ways of securing their retirement income through annuities, retirement savings accounts and other insured retirement strategies. Employers can play an important role in helping to connect employees with available benefits that can lead to a financially sound future."  I am left to ask the question: wasn't it the employers who got us to this point?

Although as the report, which was commissioned by Project 2010 suggests that 94% of the employers offer a plan of some sort, the less than surprising number is the actual participation.  With three-quarters of the employees that have access us them, it is the fourth that don't is the more troublesome number. And tucked inside these numbers is the fiduciary fib that these employers have done everything they could do to get their employees involved.

Employers are directly responsible for encouraging their employees to invest for their own futures.  Some incentivize their plans with matching contributions. Matching contributions do not have to be high in order to get their workers to participate in the plan.  In fact, studies have shown that a more modest matching contribution might actually spur the employee to put additional funds into their accounts. In the latest economic downturn, companies dropped or greatly reduced their matching contributions and are slow in returning to them.

The matching contribution does a great deal in getting the employee to do right by their own future.  But more important is the period of time between initially beginning the job and the actual beginning of their participation in the plan.  Some employers hold their matching contributions for a longer (than is necessary or even in some cases, realistic) vesting period giving the employee less incentive to invest if they feel as though they don't expect to remain at the job that long.

Some employers do offer plans that are both robust but well-supported with information and educational materials. But no plan is the be-a;;-to-end-all offering that would create the perfect scenario for everyone: employers, employees or the plan administrators. And also included in the report was the fact that 17% of the plans now offered annuities. Is this just an attempt at getting to that perfect "everything" plan?

This lack of what the investment industry refers to as a holistic approach, or decumulation, has professionals practically drooling in anticipation of of what these products can hold for their industry.  I don't really worry that my opinion about annuities will alter simply because this product has begun to emerge as the next big element in your retirement plan.  An annuity will always be an annuity and because of that, will always have more unanswered questions that concrete evidence that it is a better product as a whole instead of its parts.

Annuities are hybrids, born in the insurance industry as part insurance and part investment.  They are costly and unwieldy, ripe with fees and special ta situations for your heirs, hard to get rid of if you change your mind and don't necessarily do for women the way they provide for men.  That last part about women versus men is an actuarial adjustment for the longer lives women have. No other "investment" makes such a distinction.

Then there are the idea of guarantees. Annuities make certain promises, the largest of which is that they will never go out of business. Never is a really long time. And depending on the potential you might have for living longer than you anticipated, it would be nice to think that a company could never falter, never be affected from some unforetold expectation and never consider closing its doors for good. But it happens. It doesn't happen with your equity mutual funds and some bonds might default in your bond funds, but insurers are not forever. This is risk that is grossly understated.

What makes people so fearful about Social Security is the very thing that makes it work.  Whenever you can pool risk, you eliminate more than you create.  The fixes to Social Security are rather simple and even if you are decades from retirement, the program has the legs to continue on even in the face of the Boome onslaught (a wave that may effectively be not much more than swell in this post-recession economy). Annuities can't do what Social Security does and for good reason: there is no money to made.

In the name of fiduciary responsibility, plan sponsors will be begin to offer this sort of product with questions on cost, viability and suitability all left unanswered.  Even a simple CD could do the same sort of thing an annuity would, come with FDIC insurance and promise to never lose a penny.  A well paid CD tucked inside a retirement portfolio but outside the tax-deferred plan would help ease those fears just as well.

But the biggest fear is that when they do become available in your 401(k), they won't be one annuity, but a succession of small, mini-products, each with differing contracts. So far, no retirement plan has been able to answer the question of liquidity and security. Until those can be answered with any certainty the annuity will languish as an option, even with government support.

Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer

Building a Boomer Annuity without the Insurance Company

I have been writing about money for almost thirteen years now and if anything thing has remained consistent over all of that time, it is my opinion of annuities. Not the idea.  I have always liked the concept that you had the knowledge in hand that a fixed amount of money was coming in each month, and even if it was diminished over the years by inflation and taxes, so be it.


On The Surface
I'm sure your probably wondering what's not to like about annuities? They have the ability to grow in value, guarantee a steady stream of income, never run out and are tax-deferred. Some have loan provisions and some even have nursing home language that allows you take more of your annuity out without penalties.

And that's where the annuity really takes a downside.  You might think all of those things about annuity I just mentioned are all worth the costs of what annuities charge.  But there is little reason to purchase an annuity if those costs can be had for some much less with almost no more effort.
All annuities have surrender charges.  These are penalties that often go away after seven years, sometime longer in the case of CD Type annuities; some, as in the case of fixed annuities, fifteen years. These charges can be steep and demand you consider how much of your money you want to be unable to touch without incurring huge costs if you change your mind.

And we all change our minds. In fact the older we get (studies point to this ability to get financially confused occurs after age 70), the greater the chances are we will make bad financial decisions. In fact, insurers know this about you and because this is part insurance/part investment, who you are also determines how much you can receive in the form of monthly payment over the course of your lifetime.

Inflation in layperson's terms simply tells us that each year that passes, your dollar will purchase a little less. Economists see this as a good thing if it is kept under control.  But the simple fact is that if you found ten bucks in your jeans, a pair you hadn't worn in a while, the money wouldn't go as far as it would have had you spent it the last time you had them on.

Taxes are the hidden surprise in annuities.  You buy an annuity with a fixed amount of cash. In a great many instances, this huge amount of cash comes to you upon retirement.  You are left with a couple of choices.  You could reinvest it back into an IRA - because, in most instances, the money in this lump sum payment is stuffed with cash that hasn't been taxed.  So you need to keep it that way. Or you could buy a tax-deferred annuity.

The oddest thing about this decision is that most folks turn down the opportunity based on what the stock market has done in the last six months. If it has done well, these newly minted retirees will take their chances and invest on their own.  If it hasn't done so hot, they look at the safety a regular monthly payment offers and how it makes them feel.

So back to the tax part.  Unlike every other form of investment which can be passed on to your heirs without any taxes being paid - until they decide to sell whatever you have left them, annuities are taxed.  And you and probably your heirs were not aware of this. And the tax is done on a stepped-up basis which means the taxes reflect the increased value of the annuity. And yes that is the other up-sell for the product, annuities gain over the years based on a guarantee of sorts from the insurance company.


Making it Better for Women
Because women live longer, they generally receive less as a monthly payment than their male counterparts. That's why annuities inside of a defined contribution plan like a 401(k) can be beneficial for women. In the current state of the economy, knowing how much income you could receive as you accumulate retirement savings can be a huge help in retirement planning.  If your plan doesn't have such an option, you can ask.  But the change may be coming.

One study suggests that "about one in four companies (22%) that offer DC plans provide an annuity as a distribution option, while 10% of those who don’t supply one are considering adding it."
The most interesting thing of all: You can do it yourself. And in many instances with just CDs. Here's how it works.


The DIY Annuity
First find a ten-year CD (or a five-year if you are skittish about the concept) with a low early withdrawal penalty (this can often be for a short-period of time, like two years and might not be so prohibitive an amount to pay if interest rates begin to inch their way up - and they probably will - and you want to turn the CD in). They are FDIC insured so you will never lose your invested money.  The government does tax your heirs if you should die before the CD matures.  The interest is still taxed more favorably than income or annuities. And the fees run about 0.02%.

Sure, you will have to buy another CD when it matures, or if interest rates go up making worthwhile to sell the CD you have in favor of a better one.  But this doesn't require a boatload of financial savvy to master.
Keep in mind, you should not bail on your retirement plans in favor of a total investment in CDs.  But having something else safely earning while your 401(k) works its own form of market-based compounding, is as good a way as any to build a safety net for the future.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer.

Annuities in Retirement

I have never been a fan of annuities.  The plain and simple truth to this belief rest on the fact that an insurance company should not be involved in your retirement future, past or present.  These businesses do have a role in protecting you from unforeseen problems and the possibility of those issue delivering a financial blow that could derail your plans.  Insure your life, your house, your car.  But insure your retirement?

First, an annuity is as I wrote, an insurance product with an investment aspect that offers to mask the true identity of what it is.  Now annuities have been gaining traction in the retirement discussion as a way to guarantee a lifetime income for those who feel as though they may run out of cash.  Just like every guarantee you are offered (on many items that at the time would be too expensive to repair on replace), the cost is built into the offer.  In other words, you are paying upfront for something that you may never use.

To read about this interesting subject more from Paul Petillo, managing editor of Target2025.com and a fellow Boomer, click here.

The Annuity Discussion has Resurfaced

The Obama Middle Class Task Force is looking to annuities as a way to make retirement just a little more secure.  Just the mere mention of annuities has sent insurers jumping for joy.

Worried that you will run out of money, annuities have been discussed as an alternative that few Americans consider but should.  Is this part insurance/part investment plan right for you? Could you outlive the insurer or will you outlive the product you bought?

Can annuities be the answer?  More at Target2025.com

The Risk of New Annuity Products

Annuities come in all sorts of flavors. Single premium annuities are an all-in type that is purchased in a lump sum. Flexible annuities spread the payments over a period of time. Sometimes these are deferred until a later date whereby the investor can withdraw money all at once or in scheduled payments. Investments grow in a tax-deferred environment. Fixed annuities offer the investor the lowest risk (in part because the insurance company invests in bond funds) which insures your principal is never lost. Immediate annuities are also lump sum investments that begin distributions immediately.

But there is a new variable annuity product coming to market that will attempt to lure Baby Boomers into its trap. Question is whether you understand what this trap offers to your retirement and whether it is worth paying the high cost.

Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer