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Friday September 8, 2017

Annuities, Bonds, and Bad Advice

Recently I was working with a client on analyzing and reallocating his IRA investment portfolio. The portfolio was substantial (over $3M) and was 40% Equities, 40% Bond, and 20% Cash. I really liked this allocation for someone his age (70) and told him that the only real improvements would be using a responsive, tactical investment management platform and to improve his Bond Allocation. The fees on the products and funds he held were already low at an average cost of 1.14%.

In assessing the Bond Allocation, using Morningstar’s X-ray Analysis, we found that over half the total was held in High-Yield or junk bonds. While there is nothing inherently wrong with holding a portion of one’s Fixed Income allocation in High Yield Bonds as a means of diversification and improving the overall yield, a 60% allocation seemed a bit high. Moreover, the total yield on his Fixed Income/Bond allocation was only 3.4%.

I came back to this client with the suggestion of replacing his Fixed Income/Bond Allocation with a combination of Fixed Index Annuities. The criteria I used for my recommendations were that any fees associated with these FIA’s should be comparable to his current annual cost of the Bond Allocation, which was .96%., that any annuity carriers we considered should have a credit rating of A+ or better, and that we could reasonably expect to exceed the current yield of his Bond Portfolio.

Many leading advisors (myself included) view a fixed indexed annuity (FIA) as another fixed income asset and allocate them accordingly:
• An alternative to low yielding bond allocations.
• Allows the investment professional to be as “active” as necessary in other areas of
the wealth management process.
• Provides a range of interest crediting methods with both capped and uncapped
strategies managed by leading investment banks.
• Provides for an ongoing guaranteed income stream for the client and spouse if desired.

The two FIA’s I recommended for this client had internal fees of .95% and .4% respectively, for an average cost of ownership of .675% annually, lower than the current cost of his Bond Funds. The performance of these annuities were tied to underlying diversified stock indices that were managed with volatility controls and had the ability to shift allocations monthly. Disclaimer: Index Annuities are never meant to be a competitor for true equity investments and are not direct investments in the underlying market indices. A reasonable return expectation for this type of product would be between 3½% – 5% over time, with negative index periods earning a 0% return. That’s why they are a viable substitute for bond positions.

This would remove the Market Risk, Credit Risk and Interest Rate Risk associated with his current Bond Allocation, lower the overall annual cost and potentially improve the annual returns. In addition, there is the option of a guaranteed lifetime income that would protect the client (and his spouse) from the risk of extreme longevity. While there are substantial surrender charges in the early years to withdraw more than the annual free amount, Required Distributions from IRA’s are never penalized and that’s all the client anticipated ever withdrawing. Seemed like a no-brainer. Except that it wasn’t.

When we finished with the analysis of the FIA’s, their performance data, reasonable projections, and the financial data on the carriers that offer the products, we scheduled our next meeting for the following week to begin the transfers and implementation of this strategy.

This next meeting is where the process fell apart. Why? Because his (adult) kid heard somewhere that annuities weren’t a good thing to do. While I’m sure that this child is smart, expertise as an elementary school teacher doesn’t qualify one to render complex investment advice. But that’s sometimes how it goes; blood is thicker than 25 years of experience and numerous advanced planning designations. In these situations I just have to let it go or run the risk of insulting the client by impugning the intelligence of their oh- so-smart progeny.

In my opinion, Index Annuities are actually over-hyped and oversold by agents (often posing as fiduciary advisors) as the silver bullet for everything investment related. Cable stations and weekend radio shows are filled with agents dispensing advice about how Index Annuities are the answer to whatever ails you. Market-like returns? Index Annuities! High Growth, No Risk? Index Annuities! Erectile dysfunction? Index Annuities! The only thing more annoying is former TV stars telling people to stockpile gold for the coming financial apocalypse.

Why are annuities so over-hyped? Because they pay commissions. Earning commissions on these products is not inherently wrong or against the best interest of the client, unless the product is not properly positioned and/or sold for the wrong reason – strictly for earning a commission.

But there’s no doubt that annuities can and do solve many of the challenges faced by retirees. The puzzle has been that consumers, and advisors to a large extent, don’t understand where annuities fit or how to use them effectively.

For me there are three primary uses for annuities in my practice – replacing Bonds or Bond Funds with a more efficient alternative in a client’s comprehensive financial plan, filling a defined need for current or future income, or for that client that just can’t stomach any real market risk.

A Wall Street Journal article once referred to income annuities as “super bonds,” which is not the most accurate term. A more appropriate term would be “actuarial bonds.” Extensive research in the field of Retirement Income Planning concludes that income annuities significantly improve retirement outcomes over what is possible with bonds or bond funds.

Unless of course your clients’ kids heard something from somewhere and doesn’t like them.

But for actual research, I suggest the following blogs:
https://retirementresearcher.com/
http://www.theretirementcafe.com/
http://squaredawayblog.bc.edu/

Thursday January 26, 2017

The Late-1950s Boomers Are The Least Prepared for Retirement

The following is a re-post of Boston College – Center For Retirement Research’s January 24, 2017, “Squared Away Blog”:

It’s old news that the many Baby Boomers who did not get married and stay married are worse off financially than those who did. Unfortunately, the financial damage to one segment of this generation has broken new ground.

Only 44 percent of “middle boomers” – those born in the late 1950s – have remained married to their original spouses, down from 52 percent of their parents’ generation. Middle boomers are also far more likely to have lived with partners without marrying, remained single all their lives, or even to have divorced twice.

The heart of a study is determining which of middle boomers’ choices were most likely to have led to financial distress when they reached their pre-retirement years.

About 11 percent of middle boomers had negative net worth by the time they were in their early 50s – more than double the share for the generation born during the Great Depression when they reached this age. Negative net worth means that middle boomers’ mortgages and other debts exceed the value of their assets; in this study, assets included everything from retirement plans and taxable bank accounts to primary and vacation homes.

To understand why, the researchers culled marital histories from a survey of older Americans. They found that four lifestyles are most strongly linked to middle boomers’ negative net worth: never marrying, going through one divorce and becoming single again, separating from a second marriage, and divorcing from a second marriage.

In all of these situations, the individuals were about three times more likely to have negative net worth than were the continually married middle boomers. The study controlled for age, gender, race, education, health, household income, and the number of offspring.

Middle boomers are the “least prepared for retirement” out of four groups studied, the researchers concluded, and their choices around marriage have been important contributing factors.

Marital Histories, Gender, and Financial Security in Late Mid-Life: Evidence from Four Cohorts in the Health and Retirement Study

The Late-1950s Boomers: Hit by Divorce

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

Thursday June 16, 2016

Assessing The Risks in Your Financial Plan

The following is a re-posting of a discussion thread from APViewpoint by Harold Evensky. This defines and assesses the types of Risks associated with one’s Financial Planning and how to address and weight them in importance.  Link: http://www.apviewpoint.com/viewpoint-home

This site is full of information and opinions from thought leaders from across the spectrum of investment and financial planning.

Harold Evensky – 15 Jun 2016 12:46

An interesting and obviously important discussion. Here goes my 2 cents.

There are three risk metrics a planner needs to consider – Risk Need; Risk Capacity and Risk Tolerance. Unfortunately they do not necessarily correlate well with each other. I believe that in designing a policy allocation only two are controlling – Capacity and Tolerance.

Risk Need is the level of risk (i.e., equity allocation) necessary for the client to have a high probability of achieving all of his goals,

Risk Capacity is a measure of the ability of the portfolio to sustain a significant loss and still provide the client with a high probability of achieving his goals.

Risk Tolerance – after many years of thinking about this concept I’ve concluded that there is only one appropriate definition for a practitioner. What is that threshold of emotional pain just before a client will call and say “Harold, I can’t stand it anymore!! Sell me out and take me to cash.” I’m well aware of the objection that determining this “tolerance” is problematical; however, I have no idea how an advisor can make a recommendation for a client without some opinion on this parameter.

The reason I do not believe “Need” is a planning criteria is that if the “Need” requires an equity allocation higher than the client’s Capacity and Tolerance constraints the advisors responsibility is to educate the client on the need to revisit ‘Needs,’ not increase risk. While it may be tempting to acquiesce to a client’s response during a period of positive or stable markets “Well, OK, I guess I can take more risk in order to meet my goals.” When the bottom drops out they will quickly forget their prior willingness and will likely make that “sell me out call.”

Finally, while tolerance is typically the determining factor, on occasion an investor’s Risk Tolerance is significantly higher than their portfolio’s Capacity. In that case, Capacity is the controlling factor.

Saturday October 10, 2015

Why Long Term Care Policies Lapse

The following is an article from a blog that I subscribe to called “The Retirement Café” written by Dirk Cotton. This blog is full of great information on all aspects of the Retirement Planning process. You can read past articles and subscribe to it here: http://www.theretirementcafe.com/

Why Retirees Let LTC Insurance Lapse

Originally Posted: 09 Oct 2015 01:24 PM PDT
From “The Retirement Café” blog written by Dirk Cotton

A reader recently asked my opinion on long-term care (LTC) insurance policies. My position is that many retired households, perhaps most, will not be able to afford LTC premiums and will have no decision to make. Wealthy households will be able to self-insure. That leaves the households in between with a decision to make. For those households, purchasing a long-term care insurance policy can be the lesser of two evils.

The problems with LTC insurance are well known (see An Economist Explains the Dangers of Long-Term Care Insurance). Many carriers have found the policies unprofitable and have simply gotten out of the business. According to a recent Wall Street Journal article, five of the 10 largest LTC policy sellers, including MetLife and Prudential Financial, have sharply reduced or discontinued sales entirely since 2010. Buying insurance when many insurers are abandoning the market for that insurance is risky.

Some Boomers have been encouraged to buy LTC policies because they worked well for their parents, but this is not your father’s LTC policy. Rates increased substantially after insurers realized they had initially underpriced policies and would need to raise rates substantially if they were to make a profit. You’re unlikely to get the deal your parents got.

Perhaps the greatest problem with LTC insurance is the possibility that an insured retiree will let his or her policy lapse and, after making large premium payments for years or even decades, not be covered when LTC insurance is actually needed.

While insurers can’t increase premiums for a specific policy, they can increase premiums for classes of policyholders. Jane Gross, a retired correspondent for the New York Times and author of the excellent blog on aging, Next Avenue, recently wrote in a post entitled, “Reasons to Worry – and Agitate – About Your Financial Security”, “Next up is my long-term care insurance policy, which now costs $1,357.85 a year but, this letter tells me, is raising its premiums by 48 percent — unsurprising but still breath-taking.

It would be way more than that, the MetLife representative told me by phone, but for the fact that New York State has one of the nation’s most stringent insurance commissions. . .
In 2019, MetLife told me, the state commission will again allow the insurer to raise its prices. When that happens I’ll reduce my benefit duration from three years to two. Is there a point when I’d flush down the toilet 13 years of premiums already paid? I haven’t a clue.”

Although the probability that a retiree will need some amount of long-term care is significant, the probability of a financially catastrophic stay in a long-term care facility is relatively small, as I described in an earlier post. Many stays will be quite brief and some can be paid out-of-pocket.
Long-term care expenses can range from informal care in the home to expensive nursing facilities, from short stays that can be paid out-of-pocket to lengthy stays with catastrophic costs.
The following table is from a study entitled, “Long-term care over an uncertain future: what can current retirees expect?” Notice that while 69% of people over age 65 required some form of long-term care, 31% required none at all. Another 29% required stays of two years or less. The scary number is the 14% that required more than 5 years of in-facility care. The odds of that happening are somewhat low, but the magnitude of the risk can be financially catastrophic and that’s what we need to prepare for in some way.

Medicare does not cover most long-term care costs. Medicaid may, but only after most of the retiree’s financial resources have been spent. It is intended to cover indigents. To use it for long-term care, you must become one.

A recent brief published by the Center for Retirement Research at Boston College entitled, “Why Do People Lapse Their Long-Term Care Insurance?” researches this important issue. According to the report, “At current lapse rates, men and women age 65 have, respectively, a 32- and 38-percent chance of lapsing prior to death, assuming that lapse rates remain at the same levels observed for recent cohorts.”

This brief is here: http://crr.bc.edu/briefs/why-do-people-lapse-their-long-term-care-insurance/

Let me repeat that. 30% to 40% of 65-year old’s will eventually allow their LTC policy to lapse, forfeiting all benefits after having paid years of premiums.

The brief’s other key findings are:

1. Lapses could be due to the burden of insurance premiums, a strategic calculation that care use is less likely, or poor decisions due to declining cognitive ability.
Why do retirees allow their LTC coverage to lapse? Insurance premiums could increase and render the policy unaffordable, or they could remain the same while the retiree’s ability to pay declines. That doesn’t mean the premiums would have been spent totally in vain, because risk was protected prior to the lapse and that has value. But it does mean that the retiree has a potentially huge uninsured risk going forward. It would be a poor outcome, indeed, to pay premiums for decades and then suffer devastating long-term care costs after the policy lapsed.

2. The analysis finds support for both the “financial burden” and “cognitive decline” explanations. The research finds that many LTC policy lapses are the result of either premiums that the retiree can no longer afford, or the retiree losing the mental acuity needed to maintain the policy. They might forget to make premium payments or simply decide, incorrectly, that they no longer need the policy.

3. The consequences of lapsing are significant, as lapsers are actually more likely than non-lapsers to use care in the future, partly due to cognitive decline. Interestingly, the study found that retirees who let their policies lapse are more likely to need long-term care in the future than those who don’t lapse. This is partly explained by the fact than impaired retirees are more likely to let policies lapse and impaired retirees are also more likely to need long-term care.

4. Thus, for some lapsers, having insurance could be counterproductive as they buy it to protect against risk but drop it just when the risk becomes more likely. In other words, if you’re going to allow the policy to lapse, you’re probably better off not buying it in the first place. Of course, when you buy the policy, it is probably your intention to keep it in force.

Joe Tomlinson, whose opinion I respect most on retirement insurance issues, suggests that purchasing the policies, despite their known faults, is the lesser of two evils. Retirement advisor, Dana Anspach, wrote a nice piece, “What Happens When You Don’t Have Long Term Care Insurance?” explaining the downside of not purchasing LTC insurance. I agree with all of it, perhaps with the exception of identifying “the worst case scenario [as] where one spouse remains healthy and retains most of the ongoing costs of living independently and the other spouse needs care in assisted living or nursing home.” I think paying premiums for decades and then letting a policy lapse just prior to incurring huge end-of-life costs has a strong claim on that title.

I believe that you should forego these policies if you can’t afford the premiums, and potentially large future premium increases, or if you are wealthy enough to self-insure.

If you fall in between, I don’t believe there is a clear winner. There are several strong arguments in favor, and several against. I hope that explaining the issues involved will help with your very difficult decision.

Thursday September 24, 2015

More Changes to Reverse Mortgages

This is from September 24, 2015, edition of Boston College’s Center for Retirement Research Squared Away Blog:

The federal government continues to work out the kinks in its reverse mortgage program. The latest change allows a non-borrower to remain in her home after her spouse, who signed the reverse mortgage, has died.

The federal government established its reverse mortgage program in the 1990s to provide an alternative source of income for retirees over age 62. These Home Equity Conversion Mortgages (or HECMs) are secured by the equity in borrowers’ houses, and the loans are repaid only when they move or die. The loans are federally insured to ensure that borrowers get all the funds they’re promised, even if the lender fails, and that lenders are repaid, even if the value of the property securing the loan declines.

A June 2015 regulation effectively allows lenders to permit a surviving, non-borrowing spouse to remain in the home, postponing loan repayment until she moves or dies. To qualify, the original reverse mortgage must have been approved by the Federal Housing Administration prior to August 4, 2014 and the property tax and insurance payments must be up to date and other conditions met.

The spousal provision adds to earlier changes, detailed in a 2014 report by the Center for Retirement Research, aimed at improving the HECM program’s fiscal viability while protecting borrowers and lenders. These regulations were a response to riskier homeowners who had tapped their home equity to cope with the Great Recession. The regulations reduced the amount of equity that borrowers could extract upfront and also introduced financial assessments of homeowners to ensure they’re able to pay their taxes and insurance.

Today, the maximum amount allowed for a reverse mortgage is calculated based on the value of the home (up to a $625,000 value), current interest rates, and the borrower’s age. Homeowners generally are limited to borrowing just 60 percent of that personal maximum in the first year of the loan.

When the reverse mortgage closes, borrowers pay an insurance premium equal to 0.5 percent of their house’s value, which can be paid using funds from the loan. They also pay an annual insurance fee of 1.25 percent of the loan amount, in addition to the normal interest charges.

Despite the changes, few people have a reverse mortgage – just 52,757 were approved in 2014. But as more baby boomers reach retirement with insufficient savings, more of them should consider a reverse mortgage as one option for supporting their retirement needs.

Thursday August 20, 2015

The Future of Retirement Is Now

The following is reprinted from the Center for Retirement Research’s August 18, 2015, Squared Away blog:

Gray, small, and distinctly female.

This is what the director of MIT’s AgeLab, Joseph Coughlin, sees when he peers into the future of retirement.

“The context and definition of retirement is changing,” Coughlin said earlier this month at the Retirement Research Consortium meeting, where nearly two dozen researchers also presented their Consortium-funded work on a range of retirement topics. Their research summaries can be found at this link to the Center for Retirement Research, which supports this blog and is a consortium member.

Coughlin spooled out a list of stunning facts to impress on his audience the dramatic impact of rising longevity and graying populations in the developed world, and he urged them to think in fresh ways about retirement. In Japan, for example, adult diapers are outselling baby diapers. China already faces a looming worker shortage, and Germany’s population is in sharp decline. In 2047, there will be more Americans over age 60 than children under 15.

“The country will have the demographics of Florida,” Coughlin said.

The attitudes and comportment of the ballooning population of U.S. retirees – baby boomers – will be more confident and less polite than their parents’ generation, he predicted.

The U.S. labor force is also graying with the aging population. The average age of physicians in this country is already 53, and it’s 49 for nurses, 51 for truck drivers, 56 for financial advisers, and 50 for engineers. In five years, more than one-quarter of the U.S. labor force will be over 55, according to the Stanford Center on Longevity. And an AARP study finds that 40 percent of boomers say they plan to work “until they drop.” But to assume you can keep working, because “you have a master’s or PhD is a joke,” Coughlin warned. “If you don’t stay aggressive about your learning, you’ll fall behind.”

When he says the future is “small,” he means family size is shrinking, with implications for retirees and the elderly. More Americans today than in the 1970s live in a household of one, especially women. In the 1970s, nine out of 10 women had children, but today just eight out of 10 do, he said. This points to a future in which there will be fewer children to care for aging parents. And fewer caregiving spouses: divorce among people over age 50 has also increased dramatically in recent decades.

As the population ages, he sees women, who tend to live longer, becoming more influential, because they already make decisions about retirement and child care. Women, particularly oldest daughters, also do the heavy lifting for parental care.

Older people today are “old but not sick,” but they have multiple chronic conditions, often managed with multiple medications. Aging in the home will be a prime location for the kind of technological innovations Coughlin’s AgeLab specializes in.

He predicted that seniors increasingly will rely on gadgets like implantable sensors to monitor their blood pressure or smart mirrors that detect worrisome changes in their health or gait. He even talked about a $100,000 pop-up house, so mothers-in-law can live (alone?) in their children’s back yard.

The future is here, and Coughlin suggests that everyone “really rethink the contract around what retirement is.”

Tuesday August 4, 2015

How 401(k) Plans Have Failed Us

The following is excerpted from an article in Think Advisor Magazine by Alicia Munnell of Simply Money:

The 401(k) is America’s most common retirement plan and is also its most misused plan.  The 401(k) is a ‘failed experiment’ in retirement planning and there’s plenty of blame to go around. Let’s declare 2015 the year we officially recognize 401(k) plans as a failed experiment in retirement planning. And let’s give some credit for that to plaintiffs’ attorneys, the Supreme Court and the Department of Labor.

To be fair, lots of credit also goes to the CFOs and HR professionals who cut costs on 401(k) plans to bare bones and failed to educate employees about how to use their investment options. Let’s not forget the fund companies that enjoyed years of large fees without scrutiny, or third-party administrators who used higher internal expenses to rebate the company’s costs back to the employer. Financial advisors who pocketed 12b-1 fees and other forms of trailing commissions can’t be completely overlooked, either.

Imagine how recent lawsuits would have gone if the 401(k)s had done a good job. What if the plaintiffs had sued about plan expenses and the companies’ response had been “We use those fees to cover advice services to all plan participants, with advisors who come on-site once a week”? I did this in the early 2000s for a $100 million plan. We gave the company relief from fiduciary responsibility. We were on-site, did financial plans, asset allocation, explained rebalancing—at no additional cost to the plan participants. We were paid with 12b-1 fees, which we split with Putnam, the plan provider—we took 12.5 basis points and didn’t feel underpaid.

So what’s the problem? Maybe it isn’t the fees workers pay but that they don’t get the service they deserve.
The 401(k) has become a feeding trough for financial institutions and service providers that routinely rip off participants. Why? Not because of the fees, but because participants don’t know how to use them—and no one is willing to take responsibility for guidance.

Just this year we have the following facts to ponder:

  •  • Participants left $24 billion in company matching funds unused because they didn’t save enough to claim the full match.
    • In 2014, only 10.5% of plan participants changed the asset allocation of their account balances, and just 6.6% changed the asset allocation of their contributions.
    • Approximately 21% of savers who can borrow from their 401(k) plan have outstanding loans—so they’re using their retirement funds as a piggy bank.
    • Roughly two-thirds of investors think they pay no fees for their investments, or have no idea how or how much they pay.
    • At the same time, 53% of households are at risk of being unable to maintain their standard of living in retirement.

What if participants in large plans are paying too little to have their assets managed and, therefore, are not getting the help they need? If you doubt this, just grab a copy of the yearly report from AON Hewitt—or any retirement plan consultant—about participant behavior in the plans they administer. This is not a survey; it’s a report on the millions of accounts AON Hewitt administers and what their owners do or don’t do with their funds when they get no real input or advice.

It’s not a pretty picture. Inertia rules. Did none of these employees have any reason to change their investment choices? Did none of them get a few years closer to retirement? Get divorced? Have children? Did the allocation they picked five years ago not need rebalancing after the supersonic run-up in large U.S. stocks?

More troubling, AON’s clients—the plan participants surveyed for the report—make up approximately half of the Fortune 250. Assume for a minute these companies have their pick of the smartest people around, and pay better compensation and benefits than many other firms. If these workers can’t get investing right, what does that say for the rest of us?
Where did companies go wrong? Ironically, it started with fiduciary concerns about their liability for investment returns if they, the employers, invested on the employees’ behalf.

To solve the problem of liability, companies chose to give their employees self-direction, rather than take responsibility for performance. They had a choice and took the easy one. It seemed like a simple enough strategy for getting the employer off the fiduciary hook, but it was a mistake as far as the workers’ financial well-being was concerned. For every worker who succeeded with a 401(k), there were scores who never signed up, never invested beyond the default or, worse still, bought high and sold low in a panic. If the employees had gotten help, guidance, direction—would they have brought these lawsuits?

That brings fees back into focus. If you pay a fund company very little, that’s what you’ll get from them in service. These are organizations set up to manage money, not educate Americans about financial planning. But if the fees were well-spent, employees would benefit.

No one has been putting the plan participant—the worker, the consumer—first; not the plan sponsors, the plan providers, the asset managers nor the government. The Department of Labor has been trying for a few years to figure out how to have a fiduciary standard that could be functional at the worksite.

It’s time to call it like it is and redo the 401(k). That’s going to require more time and expense on everybody’s part, but this is a case where you get what you pay for—or at least you should.

401(k) participants deserve a real plan. I personally would recommend charging everyone a fee that came out of plan assets and covered a basic level of advice for every participant. Participants should then be able to choose from a fee-for-service menu that could include more frequent financial planning, advice on assets held outside the plan, asset allocation, rebalancing, etc. The extra fees would be deducted from their 401(k) balance. The cost of these services, given the scale of most investment firms, would be modest compared to what they might cost an individual investor, owing simply to scale.

A plan that used a robo-advisor could set fees at a very low level, probably around 20 basis points. A hybrid version would couple a robo-advisor with human beings at the local level and cost more.

These options all have one goal: get participants’ investment behavior to match their investment goals. That will translate into growing account balances and shrinking lawsuits. And yes, whoever provides the service would be held accountable for the job they do. Isn’t that how it should be?

Thursday July 30, 2015

The Asterisk on Your Social Security Statement

The following is an article from the July 30, 2015, edition of the National Review written by Myra Adams :

While engaging in the mundane task of gathering financial statements for a “secure retirement” meeting with my husband’s and my adviser, this Baby Boomer stumbled upon documented proof that our nation does not have the guts to confront one of its most serious economic problems. The realization came when I pulled from my files a document statement innocently titled, “Your Social Security Statement.”

At first glance, the statement did not appear menacing. I was told I could expect to receive a benefit of “about $2,136 a month” upon reaching age 70 — which certainly seems like good news. But immediately I thought of a parallel of President Obama’s infamous Obamacare promise: “If you like your Social Security, you can keep your Social Security.”

Then, as if on cue, I saw an asterisk with the following message:
The law governing benefit amounts may change because, by 2033, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.

I could not believe I was seeing the equivalent of what I was just thinking, but with a new twist, “If I like my Social Security, I can keep 77 percent of it.” With an asterisk, my beloved government was informing me that they will be unable to fulfill their part of a financial arrangement into which, as their statement attested, I had been making mandatory contributions starting in 1971 at age 16.

This impending “benefit rationing,” reducing my future financial “security” by $492 a month, may, in fact, not be the worst of it.

Sitting in the back of my Social Security file was an earlier statement dated March 10, 2009. Again, followed by an asterisk was a sentence that read exactly like my 2015 statement except for two major differences (emphasis added):
The law governing benefit amounts may change because, by 2041, the payroll taxes collected will be enough to pay only about 78 percentof your scheduled benefits.

Clearly, in 2009, the government’s prediction — that Social Security would have to be cut to 78 percent of benefits come 2041 — was overly optimistic.
Now, in 2015, they are projecting 2033, eight years earlier, with one percentage point less of my projected benefits. The projections have steadily worsened over the past few years, helped by a much weaker economy than the federal government expected. Does anyone really expect these numbers to get better?

The skepticism I felt when I saw my initial monthly benefit was entirely justified. There are just too many Baby Boomers and too many financial promises with elected leaders too afraid to inflict the necessary pain of real reform.
But the pain will be much, much greater when monthly Social Security benefits are rationed. Now is the time for Baby Boomers to force their elected leaders to confront this issue and take action. The planned benefit reduction should be a major talking point for every 2016 presidential candidate, but somehow it is not.

Why? Politicians fear confronting the truth, and they fear Americans can’t handle it.

Meanwhile, here is the truth, as stated by the Social Security Administration in its annual Trustees Report from 2014:
Social Security is not sustainable over the long term at current benefit and tax rates. In 2010, the program paid more in benefits and expenses than it collected in taxes and other noninterest income, and the 2014 Trustees Report projects this pattern to continue for the next 75 years.

The old cliché “demographics is destiny” has never been more applicable. In January 2011, the first 1946-born Baby Boomers began turning age 65, at the rate of 10,000 a day. This gray-haired evolution continues for 19 straight years — until the end of 2029 — when the youngest crop of Baby Boomers, born in 1964, finally turn 65.

That adds up to just over 69 million former hipsters who changed America at every stage of their lives (though, of course, some of them have died). Now, many equipped with artificial hips and knees, they’re expecting generous automated deposits from the government at the first of each month. (With many millions of them over time eventually receiving far greater amounts than what they initially contributed.)

Keep in mind that those millions of surviving Baby Boomers do not include all the immigrants, also aging, who came to America in the past decades. The official total is 74.9 million Boomers native and foreign-born.

Here is more truth (and pain) from the Social Security Administration:
The population of retirees is projected to double in about 50 years. People are also living longer, and the birth rate is low.

Baby Boomers can expect to live longer than any previous generation, which compounds the problem, and on the other side of the equation, we have the low national birth rate. Combined, the Social Security actuaries put it this way:
Trustees project that the ratio of 2.8 workers paying Social Security taxes to each person collecting benefits in 2013 will fall to 2.1 to 1 in 2032.

Like it or not, the worker shortage is a key reason why our government is importing immigrants (both legal and illegal). Don’t buy it? See this 50th anniversary video commemorating President Johnson’s signing Medicare into law, produced by a group promoting immigration reform — clearly implying more immigration is what’s keeping Social Security and Medicare afloat.

The Social Security trustees go on to warn that “if no changes are made to the program,” they project that “assets will be sufficient to allow for full payment of scheduled benefits through 2032” — hence the most recent warning on my Social Security statement.

Don’t you just love understated government language explaining what will soon become a Baby Boomer revolt?

My favorite phrase: “If no changes are made to the program.”

Let’s face it. Congress is never going to make changes to the program. It won’t happen, or certainly won’t happen any time soon, because (surprise) Baby Boomers themselves are against changing the benefit formulas.
So, barring some positive developments, in 18 years — or less — Washington, D.C., will be filled with aging protesters, many using walkers, wheelchairs, or scooters. They will carry signs reading, “Give me my full benefits” and “It’s my money.” Old men wearing Vietnam veteran caps will be demanding, “100 percent and no less.” By that time, it will be too late.

What comes to mind is a classic 1965 song by The Who, “My Generation.” If you are of a certain age you know the famous lyrics, “I hope I die before I get old.” Now, since the Baby Boomer generation is already redefining what it means to be “old,” it’s time to rewrite the lyrics: “I hope I die before the government goes broke.”

As things are going right now, you won’t, but it will.

— Myra Adams is a media producer and political writer. She was on the 2004 Bush campaign’s creative team and the 2008 McCain campaign’s ad council. Her writing credits include PJ Media, the Daily Beast, World Net Daily, RedState, and the Daily Caller.

Tuesday July 28, 2015

Social Security Financial Outlook: The 2015 Update

The following is a summary of this year’s brief from the Center for Retirement Research at Boston College.

By: Alicia H. Munnell; IB#15-12

The brief’s key findings are:
• The 2015 Trustees Report shows little change from last year:
a) Social Security’s 75-year deficit declined modestly from 2.88 percent to 2.68 percent of payroll.
b) The deficit as a percent of GDP remains at about 1 percent.
c) Trust fund exhaustion moved back slightly from 2033 to 2034, after which payroll taxes still cover about three quarters of promised benefits.
• The shortfall is manageable, but action should be taken soon to restore confidence in the program and give people time to adjust to needed changes.
• In addition, the disability insurance program needs immediate attention, as its trust fund is expected to be exhausted next year.

To read the entire brief go to:
http://crr.bc.edu/wp-content/uploads/2015/07/IB_15-12.pdf

Thursday July 9, 2015

The Business of Risk

Cyber threats have created an interesting conundrum in which the criminal perpetrators are frequently more tech savvy than those responsible for preventing their crimes or apprehending them. And the situation, at the moment, doesn’t really show signs of improving.

Several national security experts recently issued recommendations to help address the problem. They referred to the issue as a “black elephant — a dangerous crossbreed between the ‘black swan’ risk (capable of producing unexpected outcomes with enormous consequences) and the ‘elephant in the room’ (a large problem that is in plain sight).”

[CLICK HERE to read the article, “We Don’t Need a Crisis to Act Unitedly Against Cyber Threats,” from Knowledge@Wharton, June 1, 2015.]

[CLICK HERE to read the article, “RSA Conference: Is Hiring Hackers a New Thing?” from Adeptis Group, May 6, 2015.]

[CLICK HERE to read the article, “Security Companies Hire Hackers, Ex-Spies to Fight Cyber Attacks,” from Bloomberg, April 14, 2015.]

While hackers certainly present a grave risk at the national level, frequently the outcomes are more personal. Sure, it’s a real blow to companies like Target and Home Depot for their data to be hacked, but ultimately it’s their customers who may suffer more relative damage.

And as great as technology is, the more we integrate it into our lives, the more risk we face of being personally “hacked.” For example, what a wonderful convenience to be able to lock and unlock our homes and cars using our cellphones, even when we’re out of town. But consider the benefit to a criminal who hacks into a person’s phone and unlocks the house and car, making for easy theft while knowing the owner isn’t home. It kind of makes the old-school, trusty German shepherd seem a bit more attractive for warding off potential burglars.

[CLICK HERE to read the article, “Data breaches may cost less than the security to prevent them,” from TechRepublic, April 9, 2015.]

[CLICK HERE to read the article, “Black Hat 2014: Security experts hack home alarms, smart cars and more,” from CBS News, Aug. 6, 2014.]

Then there are the security breaches that don’t make the headlines. For example, a data breach at a local vendor that results in unauthorized charges to your bank debit card, PayPal account or other online vendor. These sporadic incidents can range in damages from a minor inconvenience to lost hours trying to identify the issue, resolve it and get your money reimbursed.

Naturally, it makes sense to protect your own data as much as possible instead of relying solely on vendor and government solutions. For example, experts recommend using a credit card instead of a debit card. Relevant to this advice, it’s a good idea to revisit any of your accounts where you may have entered your bank account or debit card information, even if you only use your credit card with those accounts. Consider what card information is stored at accounts such as Amazon, eBay, Etsy, PayPal, Netflix and other online merchants you might frequent.

And with another nod to the old-school approach, consider using cash instead of credit at places where they habitually take your credit card out of sight for a few moments (long enough to record its information) — such as at restaurants and fast-food joints.

[CLICK HERE to read the article, “7 Reasons Your Debit Card Makes You a Target for Fraud,” from MagnifyMoney.com, Oct. 22, 2014.]

[CLICK HERE to read the article, “New ways to prevent credit-card fraud,” from Consumer Reports, May 28, 2015.]

One thing we’ve learned throughout history, no matter the threat, is that the best time to prepare for a disaster is before it occurs. This applies not only to cyber threats, but to health care screenings and creating a plan for retirement security. The more we educate ourselves and the more we plan, the more prepared we are when something unexpected occurs.

We are here to help you feel more confident in your financial strategy — now and in the future. Please give us a call at 770-778-5242 or at: wctucker@thewoodvillegroupllc.com.

We are an independent firm helping individuals create retirement strategies using a variety of investment strategies and products to custom suit their needs and objectives.

This content is provided for informational purposes only. It is provided by third parties and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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