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Monday, September 29, 2014

Why I Hate Annuities . . . and Ken Fisher Too!

To forestall the libel lawsuits I remind you that the titles of these posts are Myths.  In general, I don't practice "hate".  And, as you probably already know, I don't "hate" most annuities (and Ken Fisher really doesn't either, by the way).  There are excellent ones, and bad ones as well.
I certainly don't hate multi-billionaire Ken Fisher.  I've never met him.  I admire his research on, and support of, California redwood forests.  But really?  Are you going to sign over all your retirement funds to a high pressure firm that performs worse than unmanaged money?  Here are my issues with his firm's borderline practices. 

First and foremost are the ubiquitous (not to mention, factually remiss and ethically questionable) full-page "I Hate Annuities  . . . And So Should You" advertisements.  I have a copy of the "free" report offered in the ad and it is, overall, a fairly evenhanded summary of annuities . . . with a few serious errors.  But serious, glaring errors they are, and I wonder if they are accidental, for example conflating fixed annuities with their risky cousins, variable annuities.  I'm not going to get into those details in this post.  Later.

Second, is his gargantuan push to lure investors into a very bubbly market with claims of consistent 11+% annual returns.  Didn't work out so well back in 2008 either.  I think this is unconscionable, this appeal to the irrational fear and greed of investors who cannot afford to lose any money, especially in this overvalued market.

Third, is the neglect of his fiduciary obligations to his clients.  Fisher Investments has its own propriety products which it almost exclusively recommends.  They have a history of inadequate evaluation of client needs.  And for this they charge fees of 1% or more.  They have been sued and fined.

Fourth, as a result, Fisher Investments appears to be glossing over a major retirement risk for small investors:  sequence of returns risk.  The table below shows how average returns work.  It doesn't matter in what order the years are calculated, the end result is the same, as long as no contributions or withdrawals are made.

But suppose you're retired and making withdrawals to meet your fixed budget.  All of a sudden, losing years make a huge difference.  Nobody seems to be able to consistently predict sequence of returns.  So avoiding losses is essential in retirement.  Here are the facts in the table:
  • Initial principal balance is $500,000.
  • $25k annual withdrawals are taken, increased with inflation.
  • The average return for both portfolios is identical:  6%

Finally, Fisher is already a billionaire.  I encourage you to do business- instead -with local independent, fiduciary advisers who sell no proprietary investments & employ a holistic approach in evaluating and planning for your retirement.  And who don't resort to inflammatory mass marketing to add to an already gigantic empire.  If you're going to spend 1.25+% of your assets every year for planning and management you might as well at least get some guarantees in return.  Or at least outperform unmanaged index funds.

Sunday, September 21, 2014

10 Things Life Insurance Agents Won't Tell You: Thing #3

Thing #3. Your child doesn’t really need life insurance- Daniel Goldstein

Those of you who know me won't be surprised that I agree with this "Thing".  Other than as required by legal arrangements, nobody "needs" life insurance any more than they "need" a sports car.  Life insurance is a luxury, a luxury many of us prefer to have.  So for a child, especially, there is no "need" for life insurance.
So why do my peers and I often recommend coverage for kids?  To name just a few reasons:
  • It is, in fact, a great investment.  The best equity indexed universal life (EIUL) policies now have uncapped indexing options.  Of course you give up some gains in the form of a spread or participation rate but over the long term that is well worth the advantage of missing out on all losing years.  Combined with no caps on contributions & tax-free access, I know of no other way to replicate these benefits.  What a great head start for a kid.
  • Long Term Planning-  Someday your kid will be an adult with a family.  If you have lousy genes or poor family health history, let your kid arrive at adulthood with a fully funded, increasing life insurance policy.  Life insurance seems invaluable when you are no longer able to qualify for it.
  • Estate planning-  If you think you'll have a taxable estate, why not gift premiums to an EIUL?  They will reduce your taxable estate, and, pass tax-free to your beneficiary/owners.
As far as "profiting" from your child's death, I also find that idea repugnant.  But a small policy we had on my daughter allowed us to contribute to a medical foundation in her name after she died.  That really helped us through.

10 Things Life Insurance Agents Won't Tell you- Thing #2

Thing #2- "We'd rather sell you investments than insurance."
Hooboy.  This one makes me tired.  To reiterate, this "10 Things" series resulted from a breathtaking article by Daniel Goldstein.  Thing #1 appeared in a previous post.
Thing #2 makes no sense at all, especially the "wave of complaints" about missing out on market returns.  I see.  Those complaints must have flooded in after the 2008 crash, no?, where people like me continued to earn 4%, tax-free, while my peers were suffering double digit losses three years in a row.  Slow and steady wins the race.
I sort of agree with Mr. Goldstein's take on "suitability".  A good solution is to take financial advice, and buy financial products, from only  legal fiduciaries.  Here's the difference.  "Suitability" essentially means the product is OK for you, not inappropriate, not bad.  Under a fiduciary standard, however, it must be the best option the adviser can find for you.
In the final analysis, I sincerely believe most of us advisers want to "sell" you success in reaching your goals using the lowest cost, least risky options we can possibly find.  I'm not really sure what people like Mr Goldstein want.

Thursday, September 18, 2014


A chemist, a physicist & a statistician went hunting.  They came across a deer.  The chemist aimed and fired way to the left, missing the deer.  The physicist aimed and fired way to the right, also missing.  The statistician shouted, "We got him!"  (Thanks to my old friend David Salminen for reminding me of this classic joke.)  It perfectly illustrates the hazards of relying on tips from financial entertainers, a lot of whom appear in AARP Bulletin.

But I have to say the "5 Steps to Retire Happy" article was actually pretty good (until Step #5, which I"ll discuss below.)  To their credit, Bulletin editors drew from a stable of authors instead of relying on one writer's stream-of-consciousness.  Here are their 5 Steps:
  1. Ask these key questions:  Am I ready to retire?  What will I do when I retire?  How will retirement change my life?  What role will my children play?  How do I cope with the downside of retirement?  Can I afford to retire? 
    I wholeheartedly agree with Stan Hinden, the author, that often these "soft" questions are the most important.  Life is more than a math problem.  If we do great math but you're still unhappy, what good have we done? 
    Let me just say this though:  There is no substitute for Q&A sessions with an experienced, holistic, fiduciary adviser who is registered in your state of residence.
  2. Educate yourself.  Allan Roth lists some excellent books to read.  But it is also essential to take classes in your state of residence because tax regulations, product availability and estate planning statutes can be very different.  A generic, national market publication could send you down the wrong path.  (This is an unabashed plug for my highly rated Retirement Success classes!)
  3. Save all you can.  This actually goes hand in hand with #4.  Excellent article by Carla Fried.
  4. Avoid a nasty tax surprise.  If you can reasonably predict that your tax bracket will be lower in retirement, then by all means save in "Traditional" retirement accounts.  A lot of us however, due in part to our good savings habits and also doing work we love until we die, will continue to pay more in taxes.  In that case, better to plow after-tax dollars into Roth IRAs and even do conversions, especially before age 70.
  5. Make your money last.  Here's where I take issue with Jane Bryant Quinn; she asks the wrong question:  "How much [i.e. what percent of your assets] can you safely withdraw from your nest egg each year?".  I especially adore the phrase (referring to the 4% withdrawal rule), "It's too early to know the 30-year outcome for people who retired in 2000 . . ."  I never would have guessed.
    The "expert" withdrawal rates quoted in the article range from 2.5% to 5.5%, over a 100% difference! 
    What is a reader supposed to do with that??  I side with Wade Pfau, professor of retirement income at The American College, (from which I received my ChFC designation) who suggests the 2.5% figure plus future inflation increases.  But who has $2,000,000 to work with to meet a $50,000/yr. budget?
    My main issue with this 5th article is that it fails to deal with, or even mention, the #1 risk of market-based (stocks & bonds) income sources:  Sequence of returns risk.  If you need 5.5% of your assets to live on at the same time the market is experiencing double digit losses- possibly several years in a row like in 2001 -it could be impossible to recover.  In the Wade Pfau article it is pointed out that the standard "4% rule" will result in retirement failure for 1 of 3 retirees, a completely unacceptable ratio.
    There are ways, however, to enable 5-6% withdrawal rates with no risk of running out of money and without surrendering your principal to a third party (like AARP suggests you do in the full page annuity advertisement right after their article)  But these solutions vary wildly from state to state.  There is no substitute for a customized analysis of, and plan for, your retirement by a legal fiduciary practicing in your resident state.