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Thursday, June 30, 2011

Finally, A Financial Publisher with a Positive Spin on Annuities- Barron's

Go to this link to read for yourself a very intelligent (finally) appraisal of annuities, oddly enough, in the financial press:
Advisers like myself who have been recommending annuities for the last four years don't need a journalist to tell us how good they are; we have direct experience.  Annuities are ideal for avoiding at least the following risks:
  1. Market risk- Your principal is- or can be, even with variable annuities -protected from downside risk.
  2. Inflation Risk- Stereotypically "safe" havens like CDs & bank savings accounts while FDIC insured nontheless guarantee that you will lose money due to inflation.  The returns on these types of accounts have historically nearly always lagged behind inflation.  Substantially.  Several annuity lifetime income riders available can guarantee increasing income that will outpace inflation.
  3. Longevity risk-  In the days when we only lived 5-7 years beyond retirement, this wasn't much of a risk.  But now that we live 20 or even 30 years after retirement, the risk of running out of dough is substantial.  Laddered annuity income riders can guarantee lifetime income.
There is a caveat.  But it's a good one.  Because annuities are issued by insurance companies, they are regulated by each State's insurance department.  So availability varies widely from state to state.  Oregon is especially tough so a lot of the companies & products listed in the Barron's article are not available here.,

Monday, June 13, 2011


Even an old goat like myself can learn something new (several times a day, as a matter of fact).  Until today, I did not know there was such a thing as the Death Master File.  Although one may think this is one of Satan's nefarious databases, rather, it is issued weekly by the Social Security Administration (SSA).  Hey, wait a minute (kidding).  How is this file used?
Well, this is very clever.  Turns out John Hancock was brilliantly both using, and not using, the database to boost its profits.  Here's how:  John Hancock sells both life insurance and annuities.  Annuity companies are anxious to find deceased owners of annuitized contracts because then they can stop making payments; most annuitized income streams end at the death of the annuitant (unless more intelligently structured which, unfortunately, most aren't).  So Hancock was using the list to find people to whom they could cease writing checks.  That's how they used the list.
The way they chose to not use the list was for finding deceased life insurance owners.  Until the state of Florida caught them.  Suppose, for example, your late uncle owned a paid up life insurance policy naming you as a beneficiary.  Oregon, and virtually all other states, require all known unclaimed property to be reported to the State, even as little as twenty cents!  Hancock simply chose not to know.
So how would you know?  If no one could find the policy, who would know whether or where to submit a death claim?  And the policy was paid up so there would be no check register entries to clue you in.  Since Hancock already has the Death Master List, wouldn't they use it to the benefit of their customers, to notify the beneficiaries of the policy's existence?  I guess not.  As a result, millions of dollars of potential life insurance claims ended up as unclaimed property.  So Hancock agreed to set up a $10 mil. fund to pay past claims.  To be fair, Florida Insurance Commissioner Kevin McCarty believes this is a pervasive industry practice not John Hancock's exclusive scheme.  And, you can use the National Association of Insurance Commissioners' website to see if your newly departed had a life insurance policy.  I have no idea how reliable it is.
How can you prevent this from happening to your family?  (In Oregon there is over $350 mil. in unclaimed property which, by the way, earns interest that is paid to the Common School fund.)  Get one of my Getting Your Estate in Order booklets (have to come meet with me; too heavy to mail), which includes a complete financial records data sheet.  Or, simply get your will done and include a Letter of Instruction listing the locations and contact info. for all important policies, advisers & documents.  After all, the devil's in the details.

Thursday, June 9, 2011

Myth: The Stock Market will always out-perform all other investment options

Yours truly used to spout this myth, about betting on the ingenuity and hard work of the American worker, that "productive America", (which at the time implied Wall Street & the Banksters as opposed to actual workers actually working) would perpetually deliver us the American dream.  I also used to- and still do -issue the caveat that past performance is no guarantee of future results.  How are those two positions supposed to fit together?  They don't.  Which is why I've since abandoned the first one.  Because there are universal laws which, for example, prevent trees from growing into outer space.  And trees don't lie.  Similar "laws" apply to the financial world, and let me emphasize "world".

As I sit here at my desk looking at the two major indexes- DJI and the S&P 500 -I note that the Dow is now lower than it was at the end of 2006 and has grown a total of 8% since the peak of 1/21/2000!  The S&P is at the same level as March 1999.  Yet practically all I hear from people is how they've "made a fortune" in the last year.  Granted, an index does not include dividends.  But neither does it include fees & taxes so I think it's a fair performance evaluation of what Wall Street is actually delivering:  astounding wealth to itself.

Suppose, to illustrate, you had invested $100,000 with your broker 11 years ago and paid the low average mutual fund annual fee of 1.3%.  In addition, your broker charged you the low average 1% management fee.  Right now your money is worth the same as it was 11 years ago.  But you've lost 25% of what you could have gotten because of commissions and fees (2.3% x 11 years)!    Study after study shows an inverse relationship between high management fees and performance.  What could you have done instead?

Wall Street "gurus" like Ken Fisher & financial narcissists like Suze Orman like to trash annuities because, as I've said before, annuities make them unnecessary, proverbial tits on a boar.  And rather expensive tits at that as we've seen above.  But hey, they've shown us theirs, I'll show you mine!
Let's pretend it's 11 years ago and you pay me an indexed annuity premium of $100,000 and opt for the 8% lifetime income rider at an annual cost of 0.45% (yes, less than half a percent), and, the S&P500 index crediting strategy.  Other fees, commissions and expenses total . . .  zero.  Today, your principal balance would be about $172,000.  You could also rest assured that it would never ever be less than that in the future, unless you take withdrawals.  And, if you were now 65, your guaranteed lifetime income- should you decide to turn it on, without surrendering your principal by the way -would be approximately $1000/mo.  Or, you could simply walk away with your $172,000 with no fees or penalties.  Aren't indexed annuities just absolutely evil?!  In fact, they are so evil and expensive that Americans gave in excess of $31,400,000,000 to indexed annuity companies last year.

Annuity terms aren't nearly as favorable these days because annuity companies by nature are extremely conservative; they present themselves as bastions of safety and rightly so. ( I know of no annuity owner who has lost money ever, unless they violated the provisions of their contract, such as excessive withdrawals or premature surrender.)  So, they have had to increase fees and/or reduce guarantees.  Even so, with $100,000 today at age 55 I can guarantee that in 10 years you will enjoy $11,442 annual income for life.  And even if the market tanks or is flat for the entire ten years, I can also guarantee you will walk away with no less than $129,213 if you choose that option instead of the income.  Try that with Wall Street or CDs from the Banksters!  Impossible.