Looming changes to the Social Security system meant to shore up its pending insolvency have created a renewed sense of urgency for maximizing Social Security benefits for high net worth clients. Because these clients are often financially secure enough to delay their Social Security benefits past the normal retirement age, when they can reap a higher benefit level, they have become the likely target of the impending Social Security reform. There is a strong possibility that the powerful file and suspend strategy for maximizing Social Security benefits will not survive the transition, so it is time to engage your retirement-aged clients in a Social Security planning discussion before it is too late.
April 29, 2013
April 19, 2013
For much of the past decade, variable annuities were “destination” products for clients’ retirement-oriented dollars, and with good reason. Variable annuities gave the vast baby boomer generation, then pre-retirees, market-linked accumulation potential, provided generous lifetime riders that limited downside risk through guaranteed benefits, and maintained liquidity.
The variable annuity benefit capability, however, is altered today as a result of volatile equity-market conditions combined with the historically low interest rate environment. In the face of skyrocketing costs for hedging, various firms have exited the variable annuity business altogether. Remaining competitors generally have scaled back (and/or increased the price of) the lifetime guarantees offered in their variable products.
For more coverage from our 2013 boomer survey, visit http://www.LifeHealthPro.com/BoomerSurvey.
With more modest and expensive lifetime income guarantees, many variable annuities have moved closer to their originally intended purpose of providing powerful tools for accumulating retirement assets. Importantly for advisors and clients, this repositioning of variable annuities has paved the way for a more rational, financially responsible spectrum of annuities in which the roles played by different products are more clearly delineated and more easily matched to the client’s stage of life.
The contemporary annuity continuum
Variable annuities — which pair income guarantees, liquidity and potential for asset growth with the possibility of market-induced downside risk protection — anchor the more aggressive end of the guaranteed retirement income spectrum. At the opposite end are deferred income annuities (DIAs) and single-premium immediate annuities (SPIAs), characterized by strong income guarantees and stable account values but little or no liquidity and no market-related growth potential. The former clearly have a place for clients still in the retirement-accumulation phase of life, and the latter should appeal to the more risk-averse clients and those squarely in the decumulation phase who seek income they cannot outlive.
Neither, however, may be desirable to many boomer clients, given their stage of life and the present macro environment. With portfolios battered by, and barely recovering from, two stock market crashes in less than a decade, boomers in or approaching the early years of retirement continue to need income growth potential yet cannot afford to sacrifice principal protection for growth. This need for growth, combined with the relative illiquidity of income annuities, may make DIAs and SPIAs a difficult sell to boomers. Variable annuities, however, may be too volatile for these clients and provide too little guaranteed income.
The rest at An annuity with boomers in mind | LifeHealthPro.
April 17, 2013
Worried about a potential loss of jobs for its members, a big roofing union is calling for repeal or “complete reform” of the federal health care reform law.Starting in 2014 under the Patient Protection and Affordable Care Act, employers with at least 50 employees must offer qualified coverage or pay a penalty of $2,000 for each full-time employee.That mandate will result in a competitive disadvantage for roofing companies offering coverage to their unionized workforces through multiemployer health care plans, says Kinsey Robinson, international president of the United Union of Roofers, Waterproofers and Allied Workers in Washington.That requirement creates “an unfair bidding advantage” for smaller contractors who will not have to provide coverage, with the potential for union members to lose work, Mr. Robinson said in a statement Tuesday.As a result, Mr. Robinson said, “I am calling for repeal or complete reform of the Affordable Care Act.”The position taken by the head of the 22,000-member roofers union contrasts sharply with the strong support of the health care reform law by other unions, such as the United Auto Workers.Other calls for repealLast year, the House of Representatives voted to repeal the law, but the Senate did not take up the repeal measure. The House action came after the Supreme Court upheld much of the law, including a core provision that will require, beginning in 2014, most Americans to enroll in a qualified plan or pay a fine.This year, individual Republican lawmakers have introduced legislation to repeal parts of law. For example, Sen. Rob Portman, R-Ohio, introduced legislation to repeal the employer mandate, while a measure proposed by Sen. Orrin Hatch, R-Utah, would repeal the laws individual mandate. No action has been taken on those and other repeal bills that have been introduced.
April 3, 2013
Health insurers have persuaded Medicare Advantage bidding managers to admit that the underlying cost of care is likely to go up about 3 percent in 2014, not fall more than 2 percent.
But other program changes could still make the 2014 bidding process hard on insurers, according to Humana Inc. (NYSE:HUM).
The Centers for Medicare & Medicaid Services (CMS), the arm of the U.S. Department of Health and Human Services (HHS) that runs Medicare, announced changes in the final “national per capita growth percentage” in a Medicare Advantage “final call letter” — a document that gives a complete description of the factors a health carrier must consider when coming up with the products and prices it will offer to Medicare Advantage program managers.
March 29, 2013
The Society of Actuaries had already released its analysis of the damage that ObamaCare will do to health-insurance costs, and HHS Secretary Kathleen Sebelius had already admitted that prices would go up as government forced people to buy bigger comprehensive policies. CNN even went so far as to ask whether Barack Obama and his administration had “misled” voters over the costs of ObamaCare.
This study, though, is actually separate from the SoA’s analysis. The state of California commissioned this new study for its state exchange to determine the impact of ObamaCare, and it matches closely to the SoA conclusion:
A study commissioned by the State of California says that the new federal health care law will drive up individual insurance premiums, but that subsidies will offset most of the increase for low-income people.
The study, issued Thursday in the midst of a growing national debate over the impact of the law, is significant because California is far ahead of most states in setting up a competitive marketplace, or exchange, where people can buy insurance this fall.
Premiums could increase by an average of 30 percent for higher-income people in California who are now insured and do not qualify for federal insurance subsidies, the study said.
March 28, 2013
California’s public employee pension system has lost millions of dollars on its green investments, which a top investment officer for the fund called “a noble way to lose money.”
Joseph Dear, CalPERS’ chief investment officer, made the comments at the Wall Street Journal’s ECO:nomics conference this week, where he said the pension fund has pulled back on its clean energy investments to avoid losing even more.
“We’re all familiar with the J-curve in private equity. Well, for CalPERS, clean-tech investing has got an L-curve for ‘lose,’ Dear told the conference, the Sacramento Bee reported. “Our experience is that this has been a noble way to lose money. And we’re not here to lose money. We have dialed back.”
Allianz S.E. on Thursday said it will vigorously push back against a lawsuit filed last week in Florida that asserts the company is responsible for the demise of Magnolia Insurance Co.
“These claims are wholly unfounded,” said Hugo Kidston, global head of communications for Allianz Global Corporate & Specialty. “Allianz will robustly defend itself.”
The lawsuit, brought on behalf of the Florida Department of Financial Services, alleges that a $23.8 million loan made in 2008 to Magnolia’s parent company, Irl Financial Group Inc., by New York-based Allianz Risk Transfer, as well as fees and payments resulting from a subsequent managing general agency agreement and other service agreements signed by subsidiaries of both firms, were the cause of Magnolia’s demise.
July 9, 2012
ASHINGTON—President Barack Obama has signed into law legislation that will allow employers to slash their defined benefit plan contributions by billions of dollars throughout the next several years, but it also boosts their pension insurance premiums.
The pension-related provisions were included as part of a broader transportation funding bill, H.R. 4348, that President Obama signed Friday.
Under the new law, employers can use higher interest rates to value plan liabilities, thus reducing the value of the liabilities and the contributions they must make to the plans.
Employers will continue to value plan liabilities based on interest rates on top-rated corporate bonds for three different segments, averaged over 24 months. Segments refer to when benefits are paid to participants.
Under this methodology, interest rates that value plan liabilities are based on the maturity date of the corporate bonds. For example, interest rates on pension liabilities to be paid within the next five years will be based on corporate bonds maturing within five years.
Over the next decade, the interest rate changes will boost federal tax revenues by more than $9.4 billion, according to the congressional Joint Committee on Taxation. That is because using higher interest rates will decrease the value of plan liabilities, reducing required tax-deductible plan contributions, which in turn will increase employers’ taxable incomes.
However, the actual interest rate for each segment in 2012 would have to be within 10% of the average of those segment rates for the preceding 25-year period. In succeeding years, this 10% corridor would increase and top out at 30% in 2016.
June 1, 2012
Remember when a can of soda cost a nickel? And candy bars were just a dime? Those days are long gone, as inflation over time has raised the price of just about everything. In the past, what your clients earned through wage gains or from their investments generally outpaced the rate of inflation. That difference, in the long term, has helped raise the overall standard of living of many people. Today’s inflation rates create a very different reality for your clients — one that is potentially quite frightening.
The most widely used measure of inflation is the Consumer Price Index (CPI). It is used to measure the changes in prices of all goods and services purchased for consumption by households. It is also an important measure of the overall health of the economy. Over the past 12 months, the Consumer Price Index (CPI) increased 2.9%, according to the Bureau of Labor Statistics. But does that paint the whole picture? Would you say the impact to your clients’ budget has been only 2.9% in the last year? Not likely.
The CPI number has, in the last few years, been suppressed by the lowering cost of some non-essential but useful items, like televisions and computers. The things we have to buy — life’s essentials — are skyrocketing. In the last 12 months, the price of beef is up 11.5%. Milk is up 9.2%. Gas? Up almost 10%. And the prices for college and health care have routinely outpaced that of general inflation for a decade or more.
Calculating inflation’s toll
A recent study by the American Institute for Economic Research developed the Everyday Price Index (EPI) to better reflect the day-to-day experiences of Americans. What they essentially did makes sense. They tweaked the calculation to scale back the percentage on some of the bigger categories with products that consumers can delay or avoid purchasing and focused on categories that are needed and purchased on a daily or weekly basis. A nice, new 50-inch HDTV or an iPhone is a luxury to many, while breakfast and dinner or the gas for the drive to work is not. With these revisions, the EPI for 2011 came in at a staggering 8% — well above the 2.9% increase indicated by the CPI.
In reality, those with additional mouths to feed or who have above-average commutes are likely experiencing even higher rates. CPI and EPI are just different attempts to capture a majority of the prices people are paying for an “average” basket of goods. What really matters, at the end of the day, for all individuals, is that their own income is keeping up with their own expenses.
So where does that leave your clients? In a financially scary place. Today’s inflation rates present a very serious challenge for those living on a fixed budget or in retirement. At the 8% EPI rate, the average American will lose half his purchasing power in just nine years. Even at the CPI rate of 2.9%, purchasing power would be halved in 25 years. But people in or near retirement could still have several decades of need for inflation-protected income. Making the situation worse, interest rates are still near record lows, and most bank savings accounts, money market and CDs are yielding less than 1%.
“Going broke safely” is a situation where investors have unknowingly kept money in low-yielding accounts or under the mattress. While it allows investors to sleep at night, inflation, over time, will erode the purchasing power of that safe money.
via Inflation Sedation.
When you think about all the different obstacles consumers must face today on their way to a fruitful retirement, it boggles the mind. First, there are the endless choices with regard to financial products, from mutual funds to annuities (both fixed and variable), to individual securities like stocks and bonds, to bank products. The list goes on and on. And then there’s life insurance, from term and universal life, to indexed universal life and variable life, to whole life.
Fortunately, indexed products today are perhaps among the simplest solutions to help consumers cut through the endless clutter of product choices and ensure they minimize or eliminate uncertainty in their financial futures. Simply put, having indexed products as a core holding of an insurance and retirement portfolio can help ensure clients don’t find themselves in the wrong product at the wrong time. In addition, owning an indexed product as a core holding will help reduce the temptation consumers often have to do the wrong thing at the wrong time, even if for the right reasons.
Consumers: Their own worst enemy
DALBAR, an independent, Boston-based financial research firm, recently released its latest edition of the Quantitative Analysis of Investor Behavior (QAIB). Using monthly fund data supplied by the Investment Company Institute, QAIB calculates a proxy for investor returns and compares this number to the returns produced by the broad market as defined by the S&P 500.1
For the 20-year period from 1992 to 2011, the S&P 500 returned 7.81%, on average, per year. It should be noted that this number is significantly lower than in past years, reflecting a downtrend in long-term average returns for equities resulting from two deep bear markets, 2000-2002 and 2008-2009. For example, the average annual return for the 20-year period ending in 1999 was a whopping 18.01%. For the period ending in 2007, it was 11.81%.
Clearly, the most recent 20-year return is disappointing compared to past 20-year periods. Worse still, the average equity investor continues to do far worse than the market itself, and this underperformance is entirely due to poor market timing decisions.2 Simply put, rather than stand by the old maxim of “buy and hold,” most equity fund participants have darted in and out of their funds at the worst times. Fear and greed are the enemies of investing success, and they continue to prevail. Fear drives investors to sell when the markets are in a tailspin, and greed compels them to buy after market gains have already been booked.
Take, for example, that 20-year period ending in 1999, in which the market returned 18.01% per year on average. In stark contrast, the average equity fund investor earned far less, only 7.23% per year, during this time frame. Putting this into perspective, the average annual investor return during the best 20-year period of market performance still underperformed the average market return during the market’s worst 20-year performance, which happened to end in 2011.2
The reason for this poor outcome is simple — as Michael Jackson once said, “It’s the man in the mirror.” Individuals are their own biggest obstacle when it comes to successfully accumulating wealth over the long term, due to the powerful pull of fear and greed. People, more often than not, succumb to loss aversion, in which the pain from their losses is greater than the pleasure from their gains. As a result, they are quick to flee the discomfort caused by excessive market volatility, and, subsequently, they miss out on the big gains that always come without warning.
In contrast, they usually only want to get back into the markets once they’ve heard about the big gains that have already taken place. I mention “usually” because, this time, after a horrific decade of volatility and seemingly endless bad economic news, the markets seem to have quietly recovered, and yet, no one seems to notice or care. I suspect this is because they all think this may be yet another “head fake” designed to lure them in only to collapse and spit them back out, poorer for it once again.
As I write this, on March 18, the Dow Jones Industrial Average just crossed 13,000, the NASDAQ broke the 3,000 barrier for the first time since December 2000, and the S&P 500 Index crossed the 1,400 level for the first time since May 2008.
All of this happened during the week of March 12, exactly three and a half years since the financial crisis officially kicked off in September 2008.
Only three short years ago, in March 2009, these indices were hovering at roughly half of these current levels, as the global economy appeared on the verge of total collapse. Given the well-documented behavior of individuals reacting to financial volatility, it is fair to assume that not many went for broke in March 2009 to see their portfolios double in value by March 2012. Instead, like the rest of the world it seems, the bunker mentality was and is in full effect, leaving the equity markets to rise with little fanfare and the fixed income markets to continue rising while relentlessly pushing down yields.