The Federal Reserve Board has not formally relaxed its intention to keep interest rates low through the end of 2014. And there is little new to say about the way non-existent interest rates on savings accounts, certificates of deposit, and U.S. Treasury securities have hurt all savers, particularly risk-averse investors.
Retirees are, of course, the poster children for risk-adverse investments, and their nest eggs have been hammered by the Fed’s policy. The Fed has said that low rates help the economic recovery. So it argues, in effect, that investors should enjoy the solid stock market returns and that savers should display a stiff upper lip. [Read More at US News...]
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4 Ways New Annuity Rules Will Help Retirees
The White House last week strongly endorsed annuities as a needed but missing piece of Americans’ retirement plans. Insurance companies and annuity trade groups had something nice to say about Washington regulators for a change. And the new rules just might set in motion some interesting retirement-plan changes.
Among financial products, annuities have long been a very hard sell. It’s easy to understand the appeal of buying Apple stock or getting in on the ground floor of Facebook’s IPO. Understanding annuities and their benefits, however, is not on the minds of many investors.
The premise of an annuity is easy to state: Give some money to an insurance company and it will make guaranteed payments to you for the rest of your life. The money can be paid now or in the future. The payments can begin at any time the investor chooses. And the lifetime stream of income promised by an annuity can augment Social Security and help put to rest a person’s fear that he or she will run out of money before they die.
Annuity Guys Video Transcript:
Dick: One thing that really gets our blood boiling, and I would have to say a lot of the folks that we speak with, is this low interest rate environment that is really being penalizing to retirees.
Eric: The unfortunate thing is you’ve got a government who is forcing low interest rates down our throat.
Dick: Why would that be to our government’s benefit, Eric?
Eric: Let’s see here. If I print cheap money, and if I don’t have to pay it back at high interest rates . . .
Dick: If I owe $16 trillion, and there’s a way I can actually manipulate and hold interest rates low, that might be a good thing for me?
Eric: Just borrowing free money. We’ve been propping up the banks and propping up and, supposedly, economy by keeping these rates low, but the return effect is we’ve taken our retirees and our savers, and we’ve thrown them under the bus.
Dick: We’ve penalized them in a major way. When you look at the financial institutions that these interest rates were put into effect, supposedly, to help and to shore-up, these financial institutions are all passing their stress tests.
Eric: They’re making money.
Dick: They’re making money; they’re coming back. There’s a few that are having a challenge, but overall, our financial system at least gives the appearance that it’s been restored to some degree.
Eric: What they did is they designed this to basically push money into the economy to make it better to borrow. Borrowing helps the economy; that’s what the theory is here.
Dick: Stimulating the economy.
Eric: If you want to borrow money right now, it’s a great time, but if you’re getting close to retirement and you’ve already saved up everything, you’re now earning next to nothing on most of your major options or your safe money options: Your CDs, your money markets, the FDIC-insured options. You’re being forced to look at other alternatives.
Dick: Our corporations are cash-rich. The banks have a lot of cash that they don’t know what to do with. The demand isn’t there to borrow the money, even though the rates are extremely low. What I believe that this is leading up to, and I think, Eric, we’ve discussed this, is that there is no short-term fix.
Eric: No. In fact, Uncle Ben Bernanke has promised us that we’re going to keep interest rates at this level at least until the beginning of 2015. We’re sitting here, years away now, and people are saying, “Are rates ever going to increase?” The crystal ball in front of us says no, because we’ve got a guarantee, or a pledge, to keep rates at a hyper-low level.
Dick: Our government’s motivation isn’t there to stimulate and raise the rates for savings, which encourages savings and that type of thing. The more that consumers spend, the more that they borrow, the more that drives the economy, and it has that other side effect of holding the government’s borrowing costs down. When we look at Japan, we go back to 20 years of very, very low interest rate environment, and the savers over there have had . . . who knows if we’re really following that model or not, but there are some similarities there.
Eric: I’ll be honest, and Dick’s heard me say, I don’t care about Japan. I’m worried about what happens here at home.
Dick: What happens to our clients right here in Central Illinois, United States.
Eric: That’s right. We’ve got people that are constantly walking in the door. I’ve had umpteen people that are typical CD borrowers, who walk in with their hands in the air, and they go, “What can I do? What are the alternatives?”
Dick: We’ve been pretty fortunate. We’ve been able to establish at least the foundational portion of many of our clients’ portfolios in annuities, and we’ve been able to ladder those annuities and get 8% guaranteed growth on the income base anyway. Maybe the cash accumulation isn’t growing at 8%, but their income base is growing, that they can draw their income off of. It will have a tendency to outpace or stay ahead of inflation.
Eric: Just real quickly, when we talk about laddering annuities, what we’re talking about is basically having different start-points for annuities. You may turn on Year-1 and you may wait 5 years before you turn on another, and another 10 years before you would turn on a third.
Dick: You’ve got this 8% or 7% compounding year-after-year. The longer you can stretch it out, the better. You may need some income immediately or income in 5 years, and then income in 10, in 15.
Eric: To turn those on after those have been in deferral so they have a greater compounding effect.
Dick: The other choice that we have if somebody needs income right away, is to setup some type of an immediate annuity or a hybrid annuity that will actually have some cost of living adjustment built into it.
Eric: The one thing with [inaudible: 05:11] the immediate annuities, if you start them with a cost of living adjustment, they usually start a little bit lower than those that just have a normal life expectancy.
Dick: Similarly on some of the hybrids, but there are some hybrids that will actually start about the same point and still have a cost of living adjustment built into them.
Eric: That’s what we always talk about with the client: What’s the longevity expectation? If you have a longer than normal life expectancy in your family, that’s especially the time to look at those things, because that’s [inaudible: 05:39].
Dick: You can really come out ahead. Our goal is never to do out and beat up on the insurance company, but when it comes down to . . . Eric says, “Yes we do.” When it comes down to the client or the insurance company, we’re for the client.
Eric: That’s exactly right. We want you to make the most money possible back.
Dick: If you can win against the insurance company, then obviously, longevity is one of those variables, those wildcards.
Eric: Our goal is for everybody to win. I say that facetiously. I don’t want to take the insurance company down, but that being said, I want all my clients to benefit.
Dick: To benefit in the best way possible. We really come down to, Eric, a low-rate interest environment. It’s affecting retirees all over the country, and their choices aren’t that many.
Eric: No, very limited. I don’t want to say ‘in closing,’ necessarily, but in summary . . .
Dick: It’s okay. We can close.
Eric: Look at your full range of options because of the interest rate environment. It’s not the time to be sitting on the fence, unfortunately. People keep on saying, “If I wait.’ I’ve had somebody out there waiting for 3 years now, waiting for rates to increase, and the opposite has happened.
Dick: It lost ground, and they don’t have the same options they had a few years ago.
Eric: How long can you sit in a 0.5% CD?
Dick: With 3% inflation.
Eric: Exactly. You’re losing money by putting yourself in a . . .
Dick: You’re going backwards at 2½% to 4% a year, probably.
Eric: In summary, yes. Low interest rates hurt retirees, they’re very painful, but it shouldn’t stop you from taking action and making a progressive retirement plan.
Dick: Yeah, making a good decision. Use a good financial advisor and just weigh all the options. Thank you.