Why does everyone hate annuities?

Posted on March 7, 2012March 7, 2012 by Danielle

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If you are one of the rare few who have a guaranteed pension at work, you’re probably pretty happy when you think about your retirement. Over the last 20 years or so, these have just about evaporated for most of us working stiffs, except for teachers and public employees. Now, any state or local employee probably is just a teensy bit worried these days about underfunded pensions, but let’s not go there for now. But what about the rest of us?

We’ve all heard about the profligate baby boomers and their frugal saver parents, but the truth is that those “frugal” parents probably collected a nice stable pension from the giant stable companies they’d worked for for 30 years. Baby boomers have been hit with the triple whammies of companies who have moved to 401ks, far less certain and stable employment, and a big thud from investments just as they reach retirement age. And while I’m at it, let’s talk about those generous company matches to your 401k—even a “great” employer probably has figured out by now that a 5% match costs a lot less in contributions than a pension plan (especially if one or two employees don’t contribute, ya’ know?) and is a lot cheaper to set up and run.

So basically, it’s all on you and Social Security. And now, we get to annuities. People hate them, in fact, I hate them. Why? Because the insurance industry has come up with a jillion ways to separate you from your money, pay you less than you thought you’d get, and make it darn near impossible to get out of them once you plunk your money down. Like all the other creative insurance “products”, it’s buyer beware and be sure you know what you’re investing in.

The other reason many people hate annuities (I’m talking about the simplest single premium fixed annuity here) is that it HURTS to write out a big check and wave all that money bye-bye. And we all want to leave our kids a million bucks, right? Do me a favor–ask your kids whether they’d prefer you to run out of money and move in with them, or whether they’d prefer you take care of yourself.

But here’s why I think they’re worth considering:

You can get more income out of the same amount of money. A rule-of-thumb safe withdrawal rate from your retirement portfolio is 4%. So let’s say you have $250,000. You can probably safely withdraw $10,000 per year/$833 per month. Now let’s say you purchase an annuity for $250,000. Even at today’s really crappy rates, you will probably get a payment of around $13,125 per year/$1,093 per month. Makes a difference.
You won’t ever run out. One big risk many of us face thanks to the improvements in medicine is living long enough to outlive our money. The market hasn’t been helping much, either. You can win the lotto, sort of, if you beat the odds and live past 85—a properly structured annuity will keep on paying
They can provide you more money when you’d really like to spend it. That is, when you’re still young enough retired to travel, etc. If you can cover your expenses with a combo of Social Security and an annuity, the rest of your portfolio can be allowed to grow longer. Beats working until 85.

So, if you’re anywhere near retirement age, ask yourself if you’d feel better if you had a guaranteed source of income, like a pension or say, double the amount of Social Security you’ll actually get. If so, it’s worth looking into an annuity. Even if you’re not too thrilled with the current rates, it’s worth considering for the future. If rates improve, you can jump on it then; if they don’t, an annuity is still likely to be the best available.

Of course, selecting one requires some serious thought (hint: get some objective planning advice before you pay a commission to that nice man) and comparison shopping. But for a lot of people, it could make the difference between just barely making it, and having some serious breathing room.

Big wins—get more than one insurance quote

Posted on March 1, 2012March 1, 2012 by Danielle

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I have a change jar in the kitchen and I pinch all the pennies I put into it, but it’s really more about the psychology of feeling thrifty than any significant savings. Anything thrifty makes me feel smug that I’m getting away with something, so I don’t mind these money tricks. But if the thought of cutting your “latte factor” just seems like not worth the bother, there’s still something that can give you a pretty good payday. Real life example coming up.

Get more than one quote, and update those quotes every year or two.

Let’s take a look at my car insurance. I’ve been with well-known mega insurance mutual almost since I started driving, when wheels were made of stone. My family thought of them as a good solid insurance company, cheaper than the other well-known insurance company that has good hands. It’s all been true, and I’ve had both good service and good claims experience with them over the years. Despite my advice to every client, inertia would have probably kept me there.

However, this year I’ve finally convinced dear daughter that she needs to learn to drive. Now, I don’t get this reluctance, because I had my license the hour I turned 16, but she’s avoided the issue and is now 18. But all the college applications are in, and now’s the moment. Called the insurance company to discuss this with them. Insurance would double (no surprise there), but here comes the kicker. I also have a personal umbrella liability policy and not only would the auto insurance double, but the umbrella policy would go up about $1,200 (from $188/year to nearly $1,400). All of a sudden it sounds like real money, no? The kid starts driving and I’m out another $2,500 a year? Either she doesn’t drive until 26 or I really needed another quote.

Got one. That’s when I found out mega insurer has already been charging me nearly twice what the lizard insurance would have. Adding my daughter as a driver brings it up to just about what I’m already paying, and the umbrella policy is cheaper than my current one. Looking back, saving $150 or so a year probably wasn’t compelling (although it would have paid for a great dinner at a better restaurant than I usually frequent), but going forward, I made $1,800 for an hour’s work, a little better than I do with financial planning, KWIM?

Full disclosure, apparently eliminating this will cause my homeowner’s insurance with mega-insurance to go up by $200, but it’s still worth it. Lizard insurance wasn’t able to beat that, but there’s probably more quotes in my future. I feel like I’m on a roll.

By the way, I did do a little “due diligence” on this and there are plenty of complaints on message boards about my new insurance company. Trick is, there are plenty about my old insurer, also. Sigh. Since I haven’t had an accident in more than 15 years (and that guy ran into me), and I’m hoping dear daughter won’t run into a pole, I hope I never have to test it. One thing that became apparent, though, in the discussion with the agent was, the lizard doesn’t like people that don’t have a perfectly clean record.

Insurance can be a pretty dull topic, but disaster protection and money savings aren’t. Products change so quickly, it’s worth a good look at all your coverages every year to two years—adequate? Up to date? Correct beneficiaries when applicable? And of course, best value.

Should you invest in Target Date Funds?

Posted on February 24, 2012February 24, 2012 by Danielle

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Do you know what box you checked when you signed up for your 401k or 403b or 529 plan? Pick something that sounded good, like “fixed income” or “cash max” or whatever? Guess what?

Wrong. You should give some serious thought to how you’re allocating that retirement fund, because for many people it will be the biggest investment you’ll ever make, except for your house, and we all know there have been a few problems with that investment, no?

Many of these plans have a terrible set of choices. I don’t know how employees let companies get away with offering them only Lord Putheimer funds or some other combo crap of high commission, low performance load mutual funds. I mean, pick up any newspaper and you’ll see an infinite number of recommendations to avoid these turkeys. But then, nobody reads anymore. If this describes the offerings of your company, it’s time to start “encouraging” a better choice of funds. It’s your money and your future, not the company’s.

But, let’s say your 401-403-529 does indeed offer some decent companies—Fidelity maybe, or T. Rowe Price, or if you’re really working at the right place, maybe they’ll even offer Vanguard. Should you pick the Target Date fund that most closely resembles when you hope to retire (or when your kid starts college), or should you hand pick specific funds? Here’s what you should consider:

What’s in the proposed fund? What mix of stocks, bonds, and other investments does it offer? Mostly active funds or passive funds? Are you comfortable with 90% stocks, or would you sleep better with a 60/40 mix? You have to be comfortable with the risk, no matter what your actual age. On the other hand, I see many young people who watched their parents’ retirement funds evaporate and are more conservative than is reasonable.
How much money do you have in it? If you are just starting out, investing in something diversified is important, and maybe difficult to achieve with a small amount of money. However, if there are six figures in that account, you may want to choose, or get help choosing your own diversification.
How much time and knowledge do you have? Will you take the time to compare the target fund’s results to your own proposed portfolio selection? This can be difficult because many target funds don’t have a really long track record. Of course, historical performance is no guarantee of future results, but what else do we have?
Is there a management premium? Check out how management fees are charged—does the fund charge an extra management fee on top of all the management fees in the individual funds? Is it reasonable? Could you invest in a reasonable selection of stock/bond/alternative funds individually for less total management costs? Ask for a Morningstar sheet on the target date fund and take a look at it compared to individual funds (individual bond funds and stock funds should be very low; international funds somewhat higher). Note that management fees are different from commissions or loads—management fees are what keep the lights on at Fidelity, Vanguard or whatever. They are deducted from the return you actually see deposited in your account. You’ll never actually see them, except as to how they affect your returns. Which can be a lot of leakage, depending on the fund and the fund company—another reason for passively managed funds with no “star” managers.
How does it fit in with the rest of your portfolio? If you have a “rest of…” that is. It is quite difficult to do an accurate asset allocation profile with a target date fund in the mix. As an estimate, you or your financial planner can break the fund into percent categories, but it’s not easy. Also, if you have significant investment assets, you should be considering asset “location” as well—things that generate interest in non-tax accounts, things that generate capital gains in taxable accounts, internationals in taxable accounts, as a ROUGH guide—your own investment picture may vary. Target date funds give you less control.

Now, don’t use any of this as an excuse to stop contributing. If you get an employer match, you’ve probably already gotten a better “return” than the market is offering. Then, there’s the tax benefit of salary reduction. As with all wealth building, first HOLD ON to your money, then figure out the best way to invest. If your 401k forces you to save, that may be the best investment of all.