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Sunday, June 16, 2019

Social Security is in Trouble

This is a solid, proven myth.  The only trouble Social Security is in is the same trouble it's been in since before it was signed into law 84 years ago:  ignorant, malicious attacks by self-righteous ideologues.

As quoted in Social Security Works: 
The most important takeaways from the 2019 Trustees Report are that (1) Social Security has a large accumulated surplus, and (2) Social Security is extremely affordable. In three-quarters of a century, in 2095, Social Security will constitute just 6.07 percent of GDP. That is considerably lower, as a percentage of GDP, than Germany, Austria, France, and most other industrialized countries spend on their counterpart programs today.
The 2019 Trustees Report projects Social Security’s cumulative surplus to be $2.9 trillion. It shows that Social Security is fully funded until 2035, 93 percent funded for the next 25 years, 87 percent funded over the next 50 years, and 84 percent funded over the next 75 years.
Yet, like a malignancy, a thoroughly inaccurate New York Times article spread until one newspaper headline said Social Security would be insolvent in 6 months.

Your Constructive Comments are Welcome!

Monday, May 13, 2019

Top Three Influencers of Fiduciary Advice- not a myth

I've always believed a universal fiduciary standard should exist for anyone who gives advice to others that can affect- and ruin -lives, whether it's journalists, bankers, stock brokers, teachers or wedding planners.  I don't know why the fiduciary focus is strictly on finances.  If you hold yourself out as an expert, you'd better not be faking it until you make it or, worse, have self serving or even malicious intent.
I want to pass on this 2 1/2 year old article by Shelby George, written when a universal financial fiduciary standard looked like a sure thing.  Turns out Wall Street succeeded in killing it (Great PR move, Wall Street, fighting an initiative that puts your customers first).
I also want to emphasize this key phrase in her article, "The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors" whether self or advisor induced.  It would have helped protect investors not only from inexperienced or dishonest advisors, it would have helped protect them from themselves!  Virtually all of the big ripoffs of investors are catalyzed by investor greed, carelessness, unrealistic expectations and trusting without verifying.  Even with a universal, well-enforced fiduciary standard, investors still need to do their due diligence by verifying the credentials and recommendations of their advisors.

3 Influencers Driving Today’s Fiduciary Best Practices

November 21, 2016 | Fiduciary
Senior Vice President, Advisor Services
As the Department of Labor (DOL) has redefined “investment advice,” they have undoubtedly accelerated the evolution of what it means to be a fiduciary. Regulators are but one of the three key influencers shaping best practices for new fiduciaries. Financial institutions are working aggressively to comply with the DOL’s new rule; however, advisors can take actionable steps today to better identify the needs and best interests of retirement plan participants and IRA holders.

Influencer 1 – The Markets

The markets are an often overlooked key influencer. The current slow growth, low interest rate, long-term economic outlook creates new challenges for savers that were not a concern for the last generation of retirees. Fortunately, there has been an increased focus on savings as study after study finds that we need to save more for retirement than in previous years. Unfortunately, savings is only a part of the solution.
The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors and encourages new fiduciaries to pay particular attention to each investor’s unique risk tolerances and reactions to the markets as well as the investor’s long-term savings goals. In today’s market, where volatility is a “new normal,” it becomes critical for fiduciaries to frame investment due diligence and portfolio performance around the investor’s objectives rather than a hypothetical benchmark.

Influencer 2 – The Regulators

In the DOL’s own words1, the new rule will, “mitigate adviser conflicts and thereby improve plan and IRA investment results, while avoiding greater than necessary disruption of existing business practices.” However, certain compensation arrangements are viewed with heightened skepticism. In particular, the DOL application of ERISA’s self dealing prohibited transaction to all ERISA plans and IRA accounts will cause significant disruption to traditional brokerage models.
As the DOL encourages more level, transparent fee structures, fiduciaries must shift their focus to offering a service rather than selling an investment product. The value of the fiduciary’s services is based on the need of the investor.

Influencer 3 – The Litigators

ERISA class action litigation dates back to 1998 as an outgrowth of securities and class actions. Since that time, the volume and scope of the litigation has ballooned, especially when the stock market drops.
Recent 401(k) litigation demonstrates that no fiduciary decision is insignificant. IRA advisors are paying increasing attention to recent 401(k) fee litigation because of the DOL’s Best Interest Contract Exemption and the possibility of class action lawsuits.
With the new DOL Rule, advisors need to view each plan decision independently and have a repeatable and documented process for each. All processes should be designed to identify the needs of plan participants or the IRA holder and then make a recommendation based on that need. Each step of the process and the resulting recommendation should be documented with reasons given as to why the decision is in the best interest of the client.
To learn more about the three key influencers shaping fiduciary best practices and more on the DOL’s Fiduciary Rule, visit www.manning-napier.com/EvolutionaryFiduciary.
1Source: Federal Register. Department of Labor. Rules and Regulations. Volume 81, no. 68, p. 20952.
 
Your Constructive Comments are Welcome!

Monday, April 22, 2019

Social Security Trust Fund Set to go Bust by 2035.

Yes, this is a solid, ridiculous myth.  Don't step in it.  I feel sorry for Melanie Waddell, the ThinkAdvisor writer, that her editor capped an otherwise laudable article this way.  Here is her original piece.

The Social Security program’s reserves will be depleted in 2035, with continuing income to the combined trust funds being sufficient to pay 80% of scheduled benefits, the board of trustees predicted in its annual report, released Monday.
The old age and survivor insurance trust fund reserves are projected to be depleted in 2034, at which time OASI income would be sufficient to pay 77% of OASI scheduled benefits, the report states.
The disability income trust fund’s asset reserves are projected to become depleted in 2052, at which time continuing income to the DI Trust Fund would be sufficient to pay 91% of DI scheduled benefits.
“The report shows the depletion of the combined funds is one year later than projected last year — 2034, last year, and 2035, this year,” Nancy Altman, president of Social Security Works, a group that supports expanding the Social Security system, told ThinkAdvisor in an email message. “That kind of variation is not surprising when projecting out so far into the future.”
The 2019 Trustees Report projects Social Security’s cumulative surplus to be $2.9 trillion, according to Social Security Works. The report shows that Social Security is fully funded until 2035, 93% funded for the next 25 years, 87% funded over the next 50 years, and 84% funded over the next 75 years, the group said.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, added in a Monday statement that the report shows Social Security “faces a nearly $15 trillion funding shortfall and will face insolvency in only 16 years. That’s when today’s 51-year-olds reach the normal retirement age and when today’s youngest retirees turn 78. At that point, if not addressed, the law calls for a devastating 20% across-the-board cut for all Americans who rely on the program.”
Medicare’s Hospital Insurance trust fund will run out even sooner in 2026, when today’s 58-year-olds become eligible and today’s newest beneficiaries turn 72, MacGuineas said.
“The 2019 Social Security Trustees Report confirms that Social Security remains fully affordable, notwithstanding its modest projected shortfall,” Altman said. “The underreported story is that Democrats are moving forward with plans to raise sufficient revenue to eliminate the shortfall and cover the cost of expanded benefits.”
The Social Security 2100 Act, introduced by Rep. John Larson, D-Conn., “has over 200 co-sponsors” in the House, Altman said. “Larson has held several hearings on the bill and intends to bring it to the House floor this spring.”
While the combined basis is the way everyone tends to look at the trust funds, “by law, if either fund is unable to cover all the costs of its benefits and related administrative costs, it would be unable to pay full benefits on time,” Altman explains, but that “has never happened.”
The Social Security 2100 Act, “which expands benefits, has a provision combining the two trust funds so that reality comports with how we all refer to them,” Altman said.
The bill would gradually raise the payroll tax from 12.4% to 14.8% over the next 24 years and subject annual income above $400,000 to the tax. It would also raise the minimum benefit to 25% above the poverty line, link cost-of-living adjustments to the Consumer Price Index for the Elderly and eliminate the taxation of Social Security benefits for those with non-Social Security income above $50,000 for singles and $100,000 for couples, up from $25,000 and $32,000 currently.
Several other bills to protect and expand Social Security benefits have been introduced in the House and Senate, and nearly every 2020 presidential candidate serving in Congress is a member of the bicameral Expand Social Security Caucus, Altman said.
MacGuineas added that That fact that we now can’t guarantee full benefits to current retirees is completely unacceptable, and it should be cause enough for every policymaker to rally around solutions to restore solvency to those programs. Certainly we should be focused on saving Social Security and Medicare before we start promising to expand these programs.
Rep. Kevin Brady, R-Texas, the top Republican on the House Ways and Means Committee, said in a Monday statement that “Social Security reform only has a fair chance of succeeding if it is done with Republicans and Democrats working together. Today’s Trustees Report is an important reminder that the time to act is now.”
Republicans at a recent hearing on Social Security opposed payroll tax increases but appeared open to reducing benefits or making changes to account for longer life spans.
Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, added in a statement that “This year’s Trustees report shows that, contrary to conservative propaganda, Social Security is not ‘going bankrupt’ or ‘in peril.’”
The system’s financial health “has improved over last year, and Congress now has before it two landmark pieces of legislation that could put Social Security on a sound financial footing for the rest of the century — and provide seniors a modest benefit boost and tax relief,” he said, adding that he “enthusiastically” endorses the Social Security 2100 Act and Sen. Bernie Sanders’ Social Security Expansion Act.
“Both bills ask the wealthy to pay their fair share to strengthen Social Security, something overwhelming majorities of the American people support in poll after poll,” Richtman said.
The trustees of the Medicare program report that the federal senior health care program’s finances look about the same as they did in 2018, he added.
“Medicare’s Part A trust fund will become depleted in 2026, at which time the system still could pay 89% of benefits,” Richtman said. “But, again, this is only if Congress takes no action to bolster Medicare’s finances.”

Your Constructive Comments are Welcome!

Friday, April 12, 2019

Why Annuities are a Bad Idea for almost Everyone!

This headline precedes an extremely ignorant article by MarketWatch writer Marc Lichtenfield.  Ironically, only the first sentence is close to being true:  "You're betting the insurance company that you're going to live longer than they think you will".  Yes, of course!

But let me dissect this dangerouly stupid article line by line.  As if Wall Street is so great at comprehensive financial planning.  The truth is,

Annuities are a Great Solution for almost Everyone.


Opinion: Why annuities are a bad idea for almost everyone

Published: Aug 18, 2018 7:56 a.m. ET

“Don’t lose money in the Wall Street casino!” the radio announcer blared.
“It could take a lifetime to make up your losses in the stock market.”
Unless your lifetime is five years — that’s how long it took the market to make a full recovery after the Great Recession — he’s dead wrong.
He was using this fear tactic to sell annuities. And getting suckered into buying an annuity with him — or any broker — could be the biggest mistake you ever make.
Marc, since the number one risk in retirement is living longer than expected and, hence, outliving one's income and assets, wouldn't income insurance make sense?  Yes, the market made a full recovery . . . as long as no withdrawals were being made.
You see, annuities aren’t wrong for everyone… Just most everyone.
I would love to do a comprehensive plan comparison, your way and my way.  Just ask any retiree how important their existing public annuities (Social Security and pensions) are to them.
If you’re unfamiliar with annuities — you give an insurance company your money and in return they pay you an income stream, usually for the rest of your life. In some annuities, if you die before you’ve received all of your money back, too bad for you. The insurance company keeps the money.
Seriously, that’s how it works.
No, that's not how it works.  Some annuities (single premium immediate annuities or SPIAs) do work that way, just like pensions and Social Security, unless you exercise survivorship and/or spousal continuation options, in which case payments can continue for the life of one's spouse.  But they are neither the most effective nor common.
Now, there are plenty of annuities where that’s not the case. Family members can receive cash back or even continued monthly income after your death — but you pay extra for that.
Now you just contradicted your last paragraph.  Oh, there are other types of annuities.  And no,  those particular benefits don't cost extra.
Essentially, you’re betting the insurance company that you’re going to live longer than they think you will. They take your money, invest it and give it back to you in dribs and drabs (with steep penalties if you want to withdraw more than the contract states).
Annuities are indeed long term vehicles which still have great short term liquidity.  10% per year penalty-free is ubiquitous.  After 5-10 years you have 100% liquidity.  Upon death, terminal illness or disability, even the short term penalties are waived.  Everyone has money that they don't need 100% liquid all the time.  Tell any annuitant that the guaranteed income they're enjoying is "dribs and drabs".  I'm not familiar with that sophisticated financial term.
Annuities are such terrible investments that the minute the government passed a law specifying that financial professionals had to act in their clients best interest, annuity sales fell off a cliff.
In 2016, new rules were passed by the Department of Labor that stated that brokers have to act as fiduciaries. That means they had to put their clients’ best interest ahead of their own.
Believe it or not, prior to the rule being passed, stock and insurance brokers could sell you anything they wanted — whether it was right for your or not. So typically, they sold whatever paid the highest commissions.
Fixed and indexed annuities are not investments.  They are insurance products.  They are regulated by state insurance departments.  Variable annuities are indeed terrible, expensive and poorly regulated investments.  The best interest statutes never stuck.  What killed sales was the requirement that all compensation, even trips, etc. be disclosed to the client.  Those of us advisors who are already legal fiduciaries comply with the best interest standard anyway, even though it was eventually thrown out.  
Annuities pay extremely high commissions — often 7% or higher of the total amount. So if a client was sold a $200,000 annuity, the salesperson might take home $14,000 up front.
Needless to say, there’s not a lot of incentive for him to put you in a low-cost index fund.
Yes, the far more virtuous stock broker or money "manager" would rather you pay 1-2% of your money every year, indefinitely.  Annuities actually pay less compensation over a 10-yr. period.  Finally, I do in fact recommend low cost ETFs for the growth portion of my clients' assets.
This new law is scheduled to go into effect this year, though that will likely be delayed.
As soon as the fiduciary rule was passed in 2016, sales of annuities fell 8%. They slid an additional 18% in the first quarter of 2017.
Sales of variable annuities, which are the worst of the worst, crashed 22% in 2016.
If these were such wonderful products, as defenders of annuities will maintain, why did so many people stop selling them — even before the law went into effect?
Those were my two best years, due to the uncertainty caused by our current awful president.  Keep in mind, too, that everyone thought they were invulnerable in the market.  Stodgy old annuities weren't as sexy.
So why do people like them?
Fixed annuities prevent losses. You are typically guaranteed that the value of your principal will not go down regardless of what the stock or bond markets do.
Fixed index annuities allow the investor to take part in some upside, though it is usually very limited — about 4% per year in this low interest rate environment. So the investor is trading upside potential for downside protection.
If the market soars 20%, the investor will only make 4%. But if the market falls 20%, the investor won’t lose any money.
More top-of-the-head opinionating without doing any research.  I had indexed annuities credit close to 20% last year.  Virtually all indexed annuities offer monthly caps of 1-1.5%, meaning you could earn 12-18% any given year.  But this misses the point.  The primary purposes of indexed annuities are income insurance & principal protection that beats other principal insured options like CDs and bank accounts.
Another way they screw you
Let’s say you take out an annuity and your circumstances change. You need the money urgently. If you’re still within the surrender period, it’s going to cost you. Big.
A typical surrender period is seven years and the surrender charge starts at 7% and falls by 1% per year.
So if after two years, you need your money back, it’s going to cost you $10,000 ($200,000 x 5% = $10,000) to get your own money back.
 This is why fiduciary advisers build income plans to prevent having to access long term money.  That's what emergency funds are for.  Wall Street shills don't seem to be able to grasp this.
Instead, take the money and invest it in Perpetual Dividend Raisers — companies that raise their dividend every year.
Yes, they did so well in 2008.  Investors spending down such account allocations would never have recovered.  This is referred to as "sequence" risk, losing money at the wrong time while you're drawing down savings.  Wall Street shills don't seem to understand sequence risk either.
But I don’t want to risk any money, you say. After all, that’s one of the most attractive features of annuities.
Annuities are typically long-term contracts. People buy them in their 60s, 70s and even 80s, expecting to collect income for years in the future.
And most do indeed collect income for years in the future, usually well beyond the "average" life expectancy used by brokers in their plans, if they've even done a plan.
Consider that over 10-year periods, the stock market has only been down seven times in the past 80 years. And those seven times all were tied to the Great Depression or Great Recession.
In other words, you had to sell in the depths of historic financial collapses to not make money in the stock market over 10 years.
Again, this ignores sequence risk.
If you invested in 2000, near the top of the dot-com bubble and sold in 2009, near the bottom of the Great Recession, you were down 9%. Not good, but not horrendous considering you endured two epic stock market meltdowns.
But what if you were having to meet your budget during that period?
Or consider this scenario… If you have the worst timing of any investor and put your nest egg into the S&P 500 SPX, +0.62%   at the absolute top in 2007 — right before the financial collapse — you’d be up 91% (including dividends) 10 years later.
Just stop and think about that the next time market naysayers talk about the “Wall Street casino.”
Securities are indeed a casino.  Where else can you lose everything?
As an industry saying goes, “Annuities are sold, not bought.”
Don’t be one of the people who gets sold.
Actually, I disagree heartily.  Annuities are bought.  By people who want principal protection, and a solution to the three greatest retirement risks:  Sequence risk- having to spend your money after or while it shrinks, Longevity risk- outliving your income, and Withdrawal Rate risk- e.g following Wall Street's 4% rule and then going broke.
A well designed income allocation plan includes market investments.  But no one should have all their money in the market, not in a well-crafted income allocation strategy.


Your Constructive Comments are Welcome!

Wednesday, March 20, 2019

Complaints Soar About Equity Indexed Annuities

This is, of course, another false statement, a blazing myth.  In a recent study by the National Association of Insurance Commissioners (the enforcers of insurance regulations), the complaint ratio about fixed indexed annuities (EIAs) was 0.039%.  That's about one-third of a tenth of a percent.*
This is because
  • retirees can see the handwriting on the wall, that we're long overdue for a recession, 
  • they don't want to lose decades of savings- again -
  • but also don't want to miss out on gains if they continue to occur.  And finally, 
  • there is no other way to get as much guaranteed lifetime income from a fixed amount of principal should they miscalculate their longevity.

Your Constructive Comments are Welcome!

*https://eapps.naic.org/cis/