Window on Wall Street: Annuities worth another look?

Posted by on May 29, 2014 in Uncategorized | 0 comments

As retirement today lasts nearly 30 years, you really cannot look at retirement without considering longevity. Annuities are an anchor that allows a client to say here is the amount I get every month. In my favorite Humphrey Bogart movie, “To Have and Have Not,” Walter Brennan asks, “Was you ever bit by a dead bee?” That’s often the same reaction some people have when the topic of an annuity is raised in a conversation. The main fear of clients nearing or in retirement is they will run out of funds by spending more than their portfolio can return. One of the most — if not the most effective — way to prevent straining a portfolio by taking more than the portfolio is capable of earning is to use an annuity to meet some portion of income needed. An annuity’s guaranteed income return is able to provide a base of income, and by so doing, provide a degree of comfort to a worried client. How much income to be provided depends on the size of the client’s portfolio, the amount of income needed from the annuity, as well as taking into consideration longevity risk and risk tolerance. The concern with longevity is relatively recent. The Gallup Organization just found the average retirement age is now running around 61 to 62. Average male life expectancy is about 82, while female expectancy is about age 86. As retirement today lasts nearly 30 years, you really cannot look at retirement without considering longevity. More than that, there is a realization that a defined benefit pension plan is no longer part of the retirement scheme. Absent a defined benefit plan, the new reality is you have to manage and arrange your own retirement. It’s the equivalent of we give you the cubicle, but you bring your own chair to work. The important thing is there are so many products available, it is not overly difficult to devise and implement a strategy. Matters are at a point where you can do something about your own retirement. So why do so many advisors dislike annuities? The typical reactions I hear are I will lose assets under management, those assets are gone forever, and I will lose fees and commissions. All of these reactions are understandable. Annuities have been around for many years. They will continue to be around, and they will be the foundation on which retirement income plans are built. Often fee-based advisors try to focus and limit the annuity conversation to spreadsheet numbers. The general argument is even if you live to age 97, the internal rate of return for this annuity is 8 percent, and I can do better for you. The...

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Every major market event needs a story

Posted by on May 9, 2014 in Uncategorized | 0 comments

The past couple of weeks I’ve been listening, watching, and reading about why the market is behaving unpredictably. Up today and down tomorrow every day a new narrative to hold our interest, change the way we see the world, maybe even prod us to take action. Sitting in my car in traffic I was listening to a business station on satellite radio. The guest offered a compelling narrative of why the market was behaving in a certain way and his expectation of what to do next to either protect or benefit from the direction he predicted. At the commercial (did I just admit to avoiding a commercial) I changed to another business station and their guest offered a totally different story about the market. To create a powerful moving narrative, the real world needs to be interpreted with some facts elevated in importance, some discounted, and others totally ignored. What is selected can either be helpful or dangerous, depending on the choices made. Most investors prefer to learn about and act on trends. Trends are easy to understand because they provide a direction for us to act. Trends can be misleading because they may suggest a directionality which does not in fact exist or causality which cannot be sustained. Investors faced with a compelling narrative ought to be skeptical because of the possibility of creating a false or incomplete reality. Even the smartest and most sophisticated individuals can be misled by a narrative. The guest on the first station said he was not offering trend analysis but more fundamental analysis. My interest was engaged because the financial markets reflect broad trends and these operate over long periods of time. Usually, we understand these relationships years afterward when we look at them in retrospect. A second consideration is daily shifts in the markets are easy to understand by relating short-term market changes to news events as if there exits cause and effect. While this idea is false, the message is repeated so often it is impossible to ignore and investors may make poor choices. There are two compelling examples of investment myths based on a narrative either incomplete or totally inaccurate. First, Yale University investment model changed the way universities invested their endowment funds. The model invested in hedge funds, private capital, real estate, and commodities. It was the “gold standard” until it lost 25 percent of its market capital in 2008. Most of the assets were recovered but is the model dead? Very few universities have adopted the full Yale approach which was to focus on making the best possible investment choices. This model is certainly alive. Narratives are so powerful they continue to inform our understanding even when...

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Through the financial looking glass; Northwestern Mutual study shows we aren’t saving enough

Posted by on May 9, 2014 in Uncategorized | 0 comments

Is it possible to be financially optimistic in the absence of fact to support such a conclusion? Two recent studies, one by Russell Investments, the other by Northwestern Mutual, show a disconnect bordering on positivity between how investors evaluate their financial position and how much catching up they need to do to close the gap in their long-term savings and the continuing effects of a slow-growth economy. With the Federal Reserve continuing to pump money into the stock market, a new record is set each week, while unemployment remains high and there is little growth to speak of in the economy. That leaves investors uncertain about the markets. The default option is slow and steady because it is assumed that is the safe course. Russell asked this question, “How optimistic or pessimistic are you about the capital markets over the next three years?” Here is where the disconnect is between advisors and their clients. Eighty-seven percent of advisors were reported to be optimistic, while only 30 percent of clients were optimistic, looking forward three years. Advisors were focused on technique, such as rebalancing and allocation, while investors were absorbed with market volatility, overall portfolio performance, and concern with federal government policy. A second area is tax-efficient investments. With new tax laws taking effect in 2014, Russell found that most advisors make tax strategies available to investors without proactively wanting to discuss tax implications in their investment strategies. Few advisors are considered knowledgeable enough to be fully engaged on the abject and have a firm grasp of tax-aware strategies and how to implement them effectively, according to Russell. The Northwestern Mutual study contained a module on longevity certainly appropriate for a life insurance-based company. The results were sobering: •One quarter of adults over age 25 lack confidence in being financially secure living to the relatively young age of 75. •One third believes they will be unable to be financially secure if they live to age 85. •21 percent say they are playing “catch up” when it comes to savings and investments. Debt, unexpected expenses and a lack of effective planning are most often cited as causative. To be financially prepared means understanding the difference between saving and investing. It also means having appropriate solutions to navigate changing needs and dealing with changing results throughout your lifetime. The Northwestern Mutual study showed that about two thirds of American adults over age 25 have a savings account; the overwhelming majority of Americans have no preparations beyond it. According to the study: •27 percent own stocks and 17 percent own bonds •23 percent own mutual funds •14 percent own real estate •14 percent own an annuity •24 percent own life insurance and only...

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