Seven Mistakes Annuity Buyers Make

Posted June 18, 2013 by brianrezny
Categories: Investing

From Stan Haithcock at MarketWatch, the Seven Deadly Sins of Annuity Buyers:

“Annuity consumers can use an altered form of this ancient list to avoid landing in “annuity purgatory.” Let’s take a unique look at the 7 deadly annuity buying sins of greed, envy, gluttony, lust, sloth, pride, and wrath.

Annuity Greed can sometimes be encouraged by overreaching agents, but can also be embraced by a person that hopes the annuity that sounds too good to be true, actually is. Annuities should never represent all of a person’s portfolio, and every annuity strategy should be customized to fit each specific situation. These transfer of risk strategies should always have a suitable and appropriate allocation percentage just like any other asset class within your portfolio.

Too many annuity sales come from the Annuity Envy of perceived product benefits. A typical example of this happens when one of your friends tells you about a “7% annuity” they just bought which, on the surface, sounds pretty good. Not to be outdone or outsmarted by your friends, a common mistake is to buy the same annuity from your friend’s agent without finding out the specifics of the contract. Eventually, you will realize that the high interest rate that attracted you is really an income rider (an attached benefit used only for future income), and is not actual yield.

The worst case of Annuity Gluttony I’ve seen involved a baby boomer that was sold nine different indexed annuities in less than a year that unfortunately represented over 85% of his portfolio. This gluttonous annuity buying spree happened after the 2008 market hiccup, with the agent obviously “selling fear” to validate too many policies. Annuities are customized strategies that should solve for specific problems, and more is never better. Most of the time, Annuity Gluttony happens when too much of your portfolio is put into one annuity with one carrier.

Annuity Lust is typically evoked when agents blur the lines between actual yield and high-percent income riders. This is a common advertising gimmick with online display ads and Internet annuity videos. With the 10-Year Treasury hovering at the 2% level, it is impossible for annuity carriers to offer 6% or 7% in CD type yield. People lust for the high interest rate days of Jimmy Carter, and are unfortunately duped too many times into believing that an annuity income rider is just like that CD they bought in the late 1970s. That lust for high interest rates is not solved by an attached benefit income rider. The reality of an income rider is that if that high-percent calculation is not used for income, then it’s nothing more than monopoly money.

Annuities are contracts, so everything that annuity will and can do is within those pages of the policy that the agent delivers to you after purchase. A major problem that I see is that most annuity buyers do not do the needed research on the product they purchased or are considering to purchase. You can always request a specimen policy from the agent before buying in order to see the exact contract you will eventually receive. With “free look” periods in place with all annuity purchases, you have enough time to ask additional questions or get third party verification on the annuity you have just bought. This product due diligence takes effort, but is worth the time spent to make sure your specific annuity transfer of risk strategy solves your specific need. Don’t be an Annuity Sloth — do your product homework.

Too many times a person buys an annuity that they didn’t understand or weren’t explained the details properly by the selling agent. As a prime example of Annuity Pride , they stubbornly hang on to a sometimes bad annuity investment because surrender charges would apply if they cashed out. Overcoming this type of Annuity Pride might involve implementing an annuity “stop loss” strategy to get your money out of a possible annuity mistake.

Annuity Wrath normally comes in two forms. Either it’s your spouse or beneficiaries in disagreement with your annuity purchase or it’s your anger toward the person that sold the annuity to you. Annuity Wrath can also be represented by having buyer’s remorse and being mad at yourself, which is truly avoidable with the free look period allowed with every annuity purchase.

Avoiding annuity purgatory
Annuity Hell can be avoided by being aware of these seven common annuity buying sins, and keeping a realistic and common sense understanding of how annuities work. Make your decision to own an annuity on the contractual guarantees, not the sizzle points that are so easy to latch on to during the sales process. Never forget that if it sounds too good to be true, then it is with no exceptions. Never take the agent’s word for it and always go with your gut instincts on any annuity that you are considering or that is trying to be sold to you.”

The Treasury Sell-off

Posted June 18, 2013 by brianrezny
Categories: Investing, Markets

It looks like everyone wants to dump their Treasury bonds.

Last week the Treasury Department reported that foreign investors were net sellers of US government debt in April for the first time in seven months. China’s central bank (the largest foreign US creditor) sold off $5.4 billion. Japan sold $14 billion. All together, overseas investors dumped $54.5 billion.

And it wasn’t only central banks unloading Treasuries. Foreign private investors sold $30.8 billion…the highest one-month outflow on record.

That comes on the heels of a rough month for the Treasury market, with a sell-off that started on May 3rd, spurred by a better-than-expected unemployment report. By last Tuesday, Treasury prices had fallen to the lowest point in 14 months. The chart below shows the rise in the ten-year yield (bond prices and yields move inversely, so as bonds sell-off and prices drop, yields rise). On May 2nd, the ten-year yield was 1.63%…last Tuesday it rose to 2.29%.

The flight from Treasuries might have been sparked by decent economic data, but it has been goaded along by the Fed.

The Federal Reserve is the biggest player in the Treasury market, so changes to its $85 billion-per-month bond buying program are going to make an impact. On May 22nd, Fed Chairman Ben Bernanke didn’t quite say no when asked if the Fed might start to taper stimulus by Labor Day: “I don’t know. It’s going to depend on the data”. The market’s response: the ten-year yield shot up to 2.04%.

Bernanke’s prepared statement was carefully worded, and the word ‘taper’ was not used. But ‘taper’ has become a bad word for the bond market – the media has used it freely, and yields have climbed.

The Impact of the Recession Across Generations

Posted June 5, 2013 by brianrezny
Categories: Economy

The Great Recession hurt. It destroyed wealth across generations…for some more than others.

Early baby boomers (born between 1946 and 1955) lost 28% of their median net worth from 2007 to 2010. Late boomers (born between 1956 and 1965) lost 25%. Gen-Xers (born between 1966 and 1975) lost almost half of their net worth – 45% – which amounts to an average $33,000 hit, according to a new study from the Pew Charitable Trusts.

For Gen-Xers, the rub is that they weren’t in great shape to begin with. At the outset of the recession, they didn’t have that much in the way of savings, and the downturn only eroded what they did have. Because of that, “Gen-X is the first generation that’s unlikely to exceed the wealth of the group that came before it and face downward mobility in retirement”. Late boomers aren’t fairing much better.

On the other hand, early boomers might be “the last group on track to retire with enough savings to maintain their financial security” since they were in a better position before the recession, after benefiting from the dot-com bubble and the housing boom, which left them with higher net worth and home equity.

While early boomers will go into retirement with enough assets and savings to replace between 70 to 80% of their income, late boomers will replace around 60%. Gen-Xers will only replace about 50% of their preretirement income. In other words, the recession will follow a lot of Americans beyond their working years.

Apple V. Congress

Posted May 28, 2013 by brianrezny
Categories: Politics

Last week, Apple CEO Tim Cook went where Steve Jobs never had to go – to Capitol Hill for a Congressional committee grilling.

The hearing came a day after a Senate report slammed the company for avoiding taxes by “shifting” profits to a “complex web” of offshore entities. The report said that Apple used Ireland-based affiliates to pay little to no corporate taxes on $74 billion in worldwide income from 2009 to 2012. From 2009 to 2011, Apple International Operations, a unit which is incorporated in Ireland, but has no employees there and is controlled in the US, accounted for $30 billion of the company’s profits. Because the unit does not have tax residency in either country, it is out of the reach of the IRS and Irish tax collectors.

In other words, Apple behaved like a corporation.

But the company did not break the law. Apple pays “all the taxes we owe – every single dollar” according to Cook. He told the committee that last year the company paid $6 billion in taxes…which amounts to more than $16 million every day.

So basically, Apple was accused of obeying American tax laws and not paying more taxes than it was legally obligated to.

Apple is sitting on $145 billion in cash – and about $102 billion of it is offshore. With a US corporate tax rate of 35%, it’s not realistic to bring that money home. If the company needs cash it’s far cheaper to get it in the bond market. Case in point: just last month Apple raised $17 billion in the bond market, and it didn’t have to repatriate a single penny from overseas.

Dragging Apple’s CEO in front of a Congressional committee was meaningless. Lawmakers created the tax law and its loopholes, and then they acted surprised when a corporation used them. Some might say the people who created the problem were on the wrong side of the table last week on Capitol Hill.

How Much Have Bond Investors Lost?

Posted May 28, 2013 by brianrezny
Categories: Investing

From CNBC producer Alex Rosenberg:

“Assessing Just How Much Bond Investors Lost”

“Bond yields have surged in the month of May. So just how much have retail investors lost?

Almost five years.

On July 25, 2012, the 10-Year Treasury yield hit a low of 1.38 percent. And on Wednesday, yields finished the day just shy of 2.04 percent, as investors became concerned that the Federal Reserve will taper quantitative easing sooner than previously expected.

That huge move in yields translates into a gigantic difference in how long it takes bond investors to get their money back. To make up for this jump in yields, bondholders would theoretically have to hold their bonds for 4.8 years longer to make the same amount of money that they would receive if they bought bonds today.

Worse, if bond yields continue to rise on the theory that the Federal Reserve is about to taper its bond purchases, then those who bought bonds at the bottom will be missing out on more and more money. Adding insult to injury, the S&P 500 has appreciated by 24 percent since then…”

Pension or Settlement Income Streams – What You Need to Know

Posted May 17, 2013 by brianrezny
Categories: Investing

Following is a new investor alert released by FINRA:

Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them

Do you receive a monthly pension from a former employer? Are you getting regular distributions from a settlement following a personal injury lawsuit? If so, you may be targeted by salespeople offering you a lump sum today to buy the rights to some or all of the payments you would otherwise receive in the future. Retired government employees and retired members of the military are among those being approached with such offers. Typically the lump sum offered will be less—sometimes much less—than the total of the periodic payments you would otherwise receive.

After acquiring the rights to a future income stream (such as a retiree’s pension payments), these pension purchasing or structured settlement companies, sometimes called “factoring companies,” may turn around and sell these income streams to retail investors, often through a financial advisor, broker or insurance agent. These products go by various names—pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities. They may be pitched to investors with words like “guaranteed” and “safe”—and may tout robust returns that outpace more traditionally conservative investments such as CDs or money market accounts. The advertised returns may sound enticing, but investors should be aware that these investments can be risky and complex.

FINRA and the SEC’s Office of Investor Education and Advocacy are issuing this Investor Alert to inform anyone considering selling their rights to an income stream—or investing in someone else’s income stream—of the risks involved and to urge investors to proceed with caution.

What Is a Structured Settlement?

A typical structured settlement involves the resolution of a personal injury or workers compensation lawsuit, which often takes the form of “structured” or periodic payments made to the injured party. The periodic payments are commonly funded by an annuity issued by an insurance company, and are often structured to provide a dependable stream of income and a degree of financial security to the injured party.

Selling Your Pension or Structured Settlement Income Stream:

In a typical transaction, the recipient of a pension or structured settlement will sign over the rights to some or all of his or her monthly payments to a factoring company in return for a lump-sum amount. And the lump-sum amount that factoring companies offer will almost always be significantly lower than the present value of that future income stream.

Most states require factoring companies that purchase structured settlements to disclose this difference. In California, for example, the disclosure must identify the dollar amount of the payments being sold, the present value of those payments based on a federally established interest rate, the amount being paid to the seller, and the interest rate calculated as if the transfer were a loan and not a sale of the payment rights.

Factors to Consider When Selling Your Income Stream:

In uncertain financial times, you may find yourself searching for immediate cash to help pay for rising or unanticipated expenses. For example, even though your pension provides steady income, you may not feel it’s enough to make ends meet. At first glance, selling your future pension benefits might seem attractive, especially if mortgage, medical or other expenses loom. Under certain circumstances, these transactions may have their benefits.

However, there are several factors to consider before selling away the rights to your pension or structured settlement income. Transaction costs—including brokerage commissions, legal and notary fees, and administrative charges—can be high. You will need to think about how to replace the cash flow your pension or structured settlement income provides, especially if you depend on that income stream to pay monthly or other expenses. Furthermore, be aware that some salespeople can be aggressive or persuasive when trying to get you to sell your income stream and, in some cases, there may be outright fraud.

Before selling away an income stream you currently receive, ask the following questions:

Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pension to someone else.1 Furthermore, the secondary sale of a structured settlement often must be approved by a court, in keeping with the Uniform Periodic Payment of Judgments Act (UPPJA). Before selling your pension or structured settlement, you may wish to ask your pension administrator what restrictions may apply, review the terms of your settlement or consult an attorney.

Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream to arrive at the lump-sum amount. This is in essence the interest rate that is used to bring the future dollars you will receive from your pension into today’s present value. The larger the discount rate applied to your pension payments, the lower its value in today’s dollars. So, if the factoring company is using a high discount rate, you can expect to receive a lower lump sum. Compare this rate to alternatives such as a bank loan or other options that may be less costly. You should also take into account commissions, fees, and other administrative costs.

What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional. What complaints have been filed against the company? Were complaints resolved to the customers’ satisfaction?

Will the factoring company require life insurance? When you sell your pension, or even a portion of your pension payments, the factoring company may require you to purchase a life insurance policy. They may require you to name the factoring company, or the investor buying the income stream from them, as the beneficiary of the policy. Should you die before all payments you assigned to the factoring company have been received, funds will be paid out from the life insurance policy to cover any remaining balance. Keep in mind that purchasing a life insurance policy will add to your transaction expenses and reduce your payout.

What are the tax consequences? The lump-sum payment you collect may be taxable. Discuss the tax implications of any transaction you are considering with a tax professional.

Does the sale fit your longer-term financial goals? While you may feel you need money now, take time to evaluate your financial objectives down the road. It can be helpful to work with a financial professional who will not receive compensation from, or will not otherwise be involved in, the transaction. You may find that there are other alternatives to deal with your immediate needs. Don’t necessarily take the first offer that comes your way.

Investing in Pension or Structured Settlement Income-Stream Products

Recent stock market volatility and a low interest-rate environment have caused investors to look for investments with attractive returns. Buying the rights to someone else’s pension or structured settlement income stream may look like a good alternative to other options because advertised yields from 5.75 percent to 7.75 percent are common. In a typical transaction, the investor buys an income stream product from a financial salesperson for a specific amount. In return, he receives a specific monthly income for a set number of years. While the yield in such a transaction may be attractive, investors should be aware of the following:

These products can be expensive. You may encounter commissions of 7 percent or higher.

Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC. As such, reliable information about these products may be difficult to find and resolving disputes should an investment go sour may also be difficult.

These products are illiquid, which means that they could be difficult to sell. In the event you need money and want to sell the product, you might not be able to do so or you may only be able to do so at a loss.

Your “rights” to the income stream you purchased could face legal challenges. It may not be legal to purchase someone’s pension. And it may be difficult to legally force the original owner of a pension or structured settlement to forward or assign their income to a factoring company or investor.

Before You Invest

Given these risks and complexities, ask the following questions before you invest:

Is the financial professional selling the product registered with a state or federal regulator or with FINRA? Use the resources below to check the registration status of the salesperson. Visit the SEC’s Investment Adviser Public Disclosure (IAPD) website.

How is the salesperson being compensated? Ask the salesperson how he is compensated and how this impacts the purported rate of return.

Is the salesperson authorized to sell this product? If registered, ask if the salesperson’s compliance department has reviewed the product and allows it to be sold.

What is the reputation of the company selling the product to me? In addition to checking out the person selling the product, check out the factoring company’s record with the Better Business Bureau and research the firm online and with a financial professional.

What are the tax consequences? Consult with a tax advisor about the possible tax implications of purchasing pension or structured settlement income-stream products.

What organization is ultimately paying you? Regardless of who is selling you the product, or the original recipient of the income stream, the ultimate source of payment is likely to be a pension fund (if you are purchasing a pension income stream) or an insurance company (if you are purchasing a structured settlement income stream). You will want to check the financial stability of the organization, because if that entity goes bankrupt or becomes insolvent, it may stop paying the income stream. Research an organization’s credit rating and company filings.

Who is sending the check? In some cases, instead of receiving checks directly from the pension fund or insurance company, it has been reported that some pension sales arrangements allow for the pensioner to manually forward his or her checks to the investor. As a result, in addition to the risk the investment may be difficult to sell and the risk that the pension fund or insurance company’s financial position may deteriorate, investors are exposed to the risk that the original pension holder may refuse to forward checks to the buyer. You should make sure that the contract spells out who will be responsible for sending you the payments.

Whether you are thinking about selling a pension or structured settlement, or buying one from someone else, remember that the risks in doing so are substantial and the safety net if things go wrong may not be very strong. Don’t shy away from asking probing questions—and shop around. There may be less risky alternatives to help you achieve your financial objectives.

Just Half of Americans Benefiting From the Stock Market Rally

Posted May 13, 2013 by brianrezny
Categories: Investing

The stock market has been on a tear, hitting record high after record high. But not everyone is enjoying the gains.

Stock ownership is at the lowest level in 15 years after declining steadily over the past few years following the financial crisis. Today just 52% of Americans say they own stocks, whether individually or through funds, according to Gallup’s annual Economy and Finance survey. Back in 2007, stock ownership peaked at 65%.

Why are so many people sitting on the sidelines? The quick answer is that they see stocks as too risky. From 2008 to 2012, investors pulled more than $500 billion out of US stock mutual funds – and funneled over $1 trillion into bond funds.

The other answer is that people don’t think they can afford to invest. The withdrawal from stocks just might be “more a function of their ability to buy it, than of whether its value is soaring”.

The sharpest decline in stock ownership is among middle-income Americans. In 2008, 66% of the middle-class owned stocks…today that stands at just 50%. And there also seems to be a correlation between high unemployment and a low rate of stock ownership.

The bottom line, according to Gallup: the market rally is the reason investors want to jump into the market, but continued high unemployment is the reason that they haven’t.