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The Tow Truck Economy

Investors have a serious choice to make. Either they sacrifice growth for safety or take risks for growth. If you want to ensure both security and growth when trading in an erratic market environment, you can benefit from a fixed index annuity. When you gain from a stock market price rise, you get to keep all your gains. When the market prices fall, you won’t lose your capital because the annuity keeps you protected.

We do not believe stocks should go much higher based on their fundamentals. But that may not matter if individual investors continue to flock back to stocks. After shunning stocks after the financial crisis of 2008 and early 2009, individual investors began tiptoeing back into the stock market in 2013.  So if 2014 turns out to be the year when the so-called “Great Rotation” of money from bonds to stocks really takes place in earnest, then the market could wind up doing much better than expected.

Did you ever tow another vehicle? The tension is tremendous. Every noise or jerk of the vehicle sends your heart into your throat. You and the driver of the towed vehicle are both trying to keep the rope tight, but despite your best efforts, it tightens and loosens erratically, causing jerks and lunges in both vehicles.

The economy is related to the Stock Market in a fashion similar to that of the tow vehicle to the towed vehicle. Every stock’s real value is directly related to how the company it owns is doing in the economy. If the sales or potential sales are good, the company makes money, and the stock is worth more. If the sales and potential sales shrink, the stock loses value. The economy tows the Market.

To further complicate matters, there is a second towed vehicle. It is Government. It is widely believed that the economy can be controlled by government. All real government money comes from the economy. They are powered by the taxes they collect. If a government becomes too big and demanding, it may begin to try to go it’s own way, ignoring the economy as well. Spending may reach a point where it stalls or wrecks the economy.

We’ve always heard that money doesn’t grow on trees, yet the economist I heard the other day said “The government is big enough they can finance whatever they want to. Either he thinks that money just appears, or that we can just print some more and it will be okay. If that’s true why do they collect taxes? It would really help the economy if they didn’t.

The markets have steadily increased since, in large part on stimulus from the U.S. Federal Reserve‘s quantitative easing (QE) policy it initiated in 2008 to stanch the bleeding. The true strength in the underlying businesses — revenues last year inched up 2.6%. Instead, earnings per share were partly inflated by cost-cutting initiatives and stock buybacks that reduced the number of shares outstanding, as companies took advantage of Fed-engineered low-rate financing.  For the market to keep advancing, profits going forward need to be driven mostly by rising revenues.

I read that this is just the first leg of a generational bull market. A generational market is a long-term market cycle that has averaged about 25 years in duration over the past 112 years. Within a generational market, many cyclical, shorter-term bull and bear markets can also occur. Indeed, there will be steep falls here and there – including a market correction, defined as a decline of 10% or more, early on in the New Year.

Many advisors feel that the stock market in 2014 still has plenty of room for growth, however, stocks will be volatile over the next ten years and there could even be another recession and big market pullback along the way. But for now, many experts think the bear is going to remain in hibernation mode for the remainder of this year.

Many believe the Standard and Poor’s 500 Index will rise to 2,000 by the end of 2014, which implies a price return of about 11%… While that gain would be less than in 2013, the view is still higher than the consensus view on Wall Street… Really!

Investors have to make many important decisions, among them: Should I pay attention to market forecasts and predictions? Should I act on them? I believe the answer is simple: No! Forecasts and predictions are valuable because they show us how easy it is to be wrong. The only function of economic forecasting is to make astrology look respectable.

Equities are nothing but stocks whose values will fluctuate from time to time, up or down. Many retirees are looking for ways to transfer their stock market risk and cut the risks involved in dealing with stocks. They have found that today the holder of an annuity can establish a floor price below which their annuity cannot fall.

Fixed index annuities (FIA) earn interest based on the performance of another financial instrument. The annuity will closely follow investments in a particular index of the stock market. The most commonly used index for an FIA is the S&P 500. Such annuities offer the best of guaranteed returns and good growth.

With a fixed indexed annuity, interest is credited to the annuity based on a formula that is linked to the performance of it. The interest rate of the policy will not necessarily match the performance of the index exactly. If the stocks rise then the holder of the annuity will get a percentage of the yearly increase in the stock and this percentage is referred to as the participation rate.

The performance of an FIA is based on the indexing method and the participation rate that is used. In addition, an FIA will pay investors a minimum interest rate in case the index performance for the accumulation period is not above a certain threshold.

An annual reset is also used to determine the index interest rate. Using the annual reset method, you are assured that you will forever gain from market prices rise. In instances when the market is very volatile and the index rate declines, the method secures you at a lower index level that is very appealing. And with a lower index level, more impressive breaks can be seen in the future.

One of the advantages of fixed indexed annuities is that they are low risk. They also offer good growth based on the market. In addition, the investor does not have to manage their premiums or continually manage their investments. Once the contract is initiated, it is linked to the performance of the index for the term of the contract. Moreover fixed indexed annuities cannot lose capital – a significant advantage during down markets.

Another area to consider is tax treatment of fixed indexed annuities. Fixed Index Annuities are considered to be (by the IRS, Internal Revenue Service) as being vehicles of retirement savings and so provide the investor with a tax deferred growth. Income is not taxed until it is withdrawn.  One downside to fixed indexed annuities, however, is that there is a 10% tax penalty if income is withdrawn by the investor before they are 59.5. Annuities are, after all, retirement savings instruments, which is yet another key point of distinction.

At present, it will not be very easy to contest an annuity that continually goes up. Thus, it is no surprise to see many seniors going to the stock market to capture their gains and buying fixed indexed annuities as a result. Now, they are anticipating a rise in market prices to get more gains.

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Wednesday, March 19th, 2014 Wealth Management, Wealth Preservation Comments Off on The Tow Truck Economy

Foundational Position in Your Retirement Planning.

Year-end melt-up, here we come!  The market has now gone for 25 months without a major correction of 10 percent or more. The average time span has been 18 months, and the median has been 12 months. We’re at 25 months. There have been six times since World War II that we continued to advance between six and 60 months.

In spite of the upsurge in the market, many retirees and near retirees are getting increasingly nervous about the current stock market and its vulnerability to the downside. As a retiree investor, you want to make sure you are well aware of the stock market vulnerability.  We have a fragile economic renewal, weak corporate revenue growth, muted jobs growth, a housing market that’s stalling.

In the markets, a stock is worth whatever someone will pay for it, meaning that opinions can be powerful driver of share price. There are thousands of stocks out there and there’s lot of advice out there on how to invest when to invest, what to invest in, and even why to invest. It is important to remember that if a stock gets downgraded by multiple companies, its price may drop really fast.

Managers of the economy tried to keep growth going by piling up debt in the mistaken belief that it is only money that makes the economy run. There are no real gains in the economy, just phony spoof-like patchwork. We may be on the next train to stock-market hell and there were no tickets left for a return journey.

A false positive in the economy is the fact that the Federal Reserve has been dishing out too much monopoly money. The Fed’s bond-buying program has helped stocks by making other investments less attractive, and few expect the Fed to change policies before the end of the year.

Another false positive that is covering up reality is the fact that the market should do pretty well into the end of the year, since most fund managers have returned less than the market, there will be a temptation to buy into the end of the year to try to capture some last-minute gains—or at least make it look like they have owned the winners all year.

Over the long haul, stocks track earnings. If corporate earnings grow at a compelling rate for a long time, stocks generally follow them up. If corporate earnings stagnate or tank, meanwhile, stocks generally follow (or even precede) them down.

Revenue growth these days is considerably slower than average, because the economy is so weak. What has made earnings grow so much in recent years is not revenue growth, but expanding profit margins.

Growth is necessary to job creation and the health of businesses. Without growth the rolls of the homeless and jobless swell, requiring governments to shoulder more responsibility; yet at the same time tax revenues fall, making both new and existing government debt unbearable. We seem to have arrived at a moment when further economic expansion is hemmed in by financial as well as natural limits.

With the uncertainty in the investment marketplace individuals at or near retirement, fixed annuities may be a better choice. If you’re looking to have a larger retirement nest egg, fixed annuities may help you meet that goal better than securities, CDs or a money market account.  The greatest benefit is ironclad safety. Annuity buyers are willing to trade off a higher return for the guarantee of never experiencing a negative one.

A Fixed index annuity offers several advantages that may suggest a foundational position in your retirement planning.

The benefits of an index annuity are appealing to people who are retired or near retirement– namely, a safe return with some upside if the market does well, and when you’re ready to receive income, this product starts paying a fixed, guaranteed amount each month for as long as you live.

You may be familiar with a traditional deferred fixed annuity, in which an insurance company invests your money in bonds during an “accumulation period” of seven years or so, then lets you convert your account into a stream of income payments that are guaranteed by the company. An index annuity is essentially a fixed annuity that’s been juiced up by tying its interest rate to the performance of a stock market index such as the S&P 500.

If the index rises, the insurer exercises stock options it has bought against that index, and your account earns some percentage of the gain. If the index falls, you lose nothing: The insurer lets the options expire and still makes money from bond investments (where it has put the bulk of your money).

Index annuities provide benefits that most investment products don’t. One is the option to annuitize payments, thereby getting guaranteed income for life — increasingly a more valuable feature to buyers than potential returns.  For example, $100,000 could buy a 65-year-old man $641 a month for his entire life no matter how long he lives.

Added provisions to most new index annuities allow you to take out up to 100% of your money penalty-free if you are diagnosed with a terminal illness or enter a nursing home.

Annuities impose surrender penalties, like bank CDs, if you exit early, to recoup costs that the insurer pays upfront. However unlike bank CDs, annuities do allow 10% penalty–free withdrawals annually to provide liquidity.

There are no perfect investments or retirement strategies that solve every contingency. It is more likely that a combination of investment strategies and financial vehicles will ultimately give you the diversified retirement plan that you are looking for.

We suggest that you put in just enough so that the income the annuity throws off — plus income from your pension and Social Security — is sufficient to cover all or most of your basic living expenses. Keep the rest of your money invested in a diversified portfolio.

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Tuesday, November 12th, 2013 Wealth Management Comments Off on Foundational Position in Your Retirement Planning.

You-Do-It “Personal Pension”

All three pillars of retirement—Social Security, employer-sponsored plans and personal savings—have weakened in recent years. 401(k) plans were introduced in the 1980s as a supplemental savings program to augment traditional pensions. But they almost immediately began to supplant—not supplement—defined-benefit plans, and today defined-contribution plans are the primary retirement savings vehicle for many workers.

The old rules about how to draw income from your retirement nest egg no longer apply. Previous generations relied on the four percent rule, which assumed that once you reached retirement, you could safely withdraw four percent of your savings each year and not worry about running out of money. But recent market volatility, changes in tax laws and longer life expectancies combine to create a more challenging scenario for future retirees.

Age 85 is a bad time to go broke.  Personal savings, various investments and, yes, Social Security may prove to be short of what you’d expected. For a 65-year-old married couple today, there is a 72 percent chance that at least one spouse will live to age 85; a 45 percent chance that one will live to age 90, and an 18 percent chance that one will reach age 95.

Retirees expect to have guaranteed income for the rest of their post-employment lives.  If you decide that Mutual Funds are the best vehicle for you then you need to decide which fund you are comfortable with.   Is Your Mutual Fund Insured? Nope. Your mutual fund isn’t FDIC insured or by anyone else.

It costs money to run and manage a mutual fund. Some funds cost more to operate than others. Regardless of the cost, all mutual funds have a fee they call either a management fee, or an operating expense. This fee is deducted out of the total assets of the fund before your share price is determined.

There are also regular fund operating costs that are not necessarily associated with any particular investor transaction, such as investment advisory fees, marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountant’s fees.

When you buy an “A share” mutual fund, you will pay a fee, or commission, when you purchase the shares.  When you buy a “B share” mutual fund, if you sell shares of your fund within a specified time frame you will pay a redemption fee, also called a contingent deferred sales charge, or surrender charge.

If you purchase a “C share” mutual fund it will typically have an extra 1% service fee, in addition to the management fee. Just like the management fee, this mutual fund fee will be deducted out of the total fund assets before your share price is determined.

Mutual funds are designed to be long term investments; short term trading fees have been imposed to discourage investors from trading in and out of funds. Mutual funds inside your 401k account may be subject to short term trading fees.

Funds typically pay their regular and recurring, fund-wide operating expenses out of fund assets, rather than by imposing separate fees and charges on investors. (Keep in mind, however, that because these expenses are paid out of fund assets, investors are paying them indirectly.) These expenses are identified in the fee table in the fund’s prospectus under the heading “Annual Fund Operating Expenses.”

Bonds can be issued by a corporation, bank, or the government. Bonds fluctuate inversely with interest rates, meaning that bonds are up when interest rates are down and bonds go down when interest rates are up. You will receive scheduled interest payments, but how often you will receive them depends on the terms of the bond. When the bond reaches maturity, the organization that sold it to you will return the original cost of the bond. If you pass away before your bond matures, the face value of the bond will be paid to your beneficiaries. Bonds are also tax deferred.

Government bonds have a lower risk than bonds from banks or corporations, but there are still risks. If you need to sell the bond before it reaches maturity, there is no guarantee on what you will get for it. You may lose money if you sell it and there is no way to predict how much you could lose.

One problem with bonds as a retirement income is that after the date of maturity, you will not receive any more interest payments. If you live for many years after the bond matures, you’ll have to invest your money in another bond or other financial service in order to continue receiving an income.

Bonds can be a good option, but you do have to consider that you’ll have to reinvest your money if you live beyond the bond maturity date and that you may lose money if you need to sell the bond before it matures.

What would be the point of taking on extra cost and risk to generate a lower income?  Many of us think that when we go into investments that all of them must cost us money. Many of us think that we have to lose money in order to gain money; however, this is not always true.

So how can you make sure your money lasts as long as you do? Create a plan to effectively manage and spend your retirement income, because the strategies you use to accumulate funds for retirement differ from the strategies you’ll need once you are in retirement.

Lifetime annuities have always been a popular choice for retirees seeking a guaranteed source of income for life.  The main problem though is that many individuals will consider their position today and not think much further ahead – and even those that do consider the future often underestimate their life expectancy.  For example, the average life expectancy of a 65 year old is currently about 20 years but many retirees may fail to fully consider that because this is an average this will include a high proportion of less affluent people with health problems who, statistics suggest will not survive anywhere near 20 years.

Annuities main strength is that it creates a “Personal Pension” income stream by insuring the risk of dying too late. With an income annuity you enjoy peace of mind knowing your income is guaranteed for an entire lifetime. The peace of mind may grow increasingly valuable over time as each of us grows older, we may become less confident managing a “Do It Yourself” approach to creating a reliable retirement income.The purpose of an annuity is always income, whether you need money now, or in the future.

It can be helpful to think of an annuity as being similar to other types of investment vehicles.  For instance, a CD is an investment vehicle between you and a bank, and a municipal bond is an investment vehicle between you and a municipality. Fixed annuities guarantee a set interest rate over a specific period.

Annuities are straightforward, with no potential for agent salesmanship or client misunderstanding – – YOU KNOW WHAT YOU ARE GETTING. Nothing is left up to chance or agent interference. The insurance company in the policy (contract) spells out that exactly how your annuity works .

Each year, the growth and interest on annuities is credited, locked-in, and protected by the legal (statutory) reserve system of America’s insurance companies. Therefore, principal and interest can grow, compounding. Tax deferral is a big help to investors who currently pay tax on the interest they earn each year.

Guaranty Associations were created by state legislatures to protect life, annuity and health insurance policyholders and beneficiaries of an insolvent insurance company. All insurance companies licensed to write life or health insurance or annuities in a state are required, as a condition of doing business in the state, to be members of the guaranty association. If a member company becomes insolvent, money to continue coverage or pay claims is obtained through assessments of other insurance companies writing the same kinds of insurance as the insolvent company.

 

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Wednesday, October 9th, 2013 Wealth Management, Wealth Preservation Comments Off on You-Do-It “Personal Pension”

Financial Insecurity

Financial insecurity has become the number one reason for Americans to put off retirement. While a good wealth creation strategy is the answer, even those who may understand something of the financial systems of the world often fail to create lasting streams of wealth that can see them through retirement.

Beyond retirement accounts and pensions, the average man or woman has very little knowledge about investing and creating wealth. The old line, “I’ve got some good news and some bad news” rings oh so true. Good news is you, sir/mamm, are going to live longer. Bad news is you, sir/mamm, will need a lot more money to live.

money flowerFrom the earliest of years the formula for success in life was training and education to prepare a person for a working life.

Go to school

Get an education

Learn occupational skills and expertise

Get a good job

Earn a paycheck

Retire

This is a formula that has worked very well to create a workforce of lifelong workers. It accomplished the goal of supplying a workforce very well. But it does little to prepare for the end of that life cycle.

This formula is very good at producing job-dependence, but not so good at producing a financially independent society.

The proof of this is in the statistics. By retirement age, 96% of the population in countries like Australia is not financially stable enough to stop working and live in comfort without depending on others. In the U.S., almost 25 percent of those who’ve reached retirement age are still working (of those aged 65 to 74).

More and more Americans are taking back their future from a depressed economy and reversing a decade’s long trend of retiring early. With a failing system of Social Security and Medicaid and an aging population it’s no wonder many boomers are working longer before retiring.

There are a number of reasons more people are working to an older age. Some just because they can and others because they want to, but increasingly more and more because they need to.

Take a look at some of the latest data released just this month from the Bureau of Labor:

– Year to year employment has increased for Americans 65 and older.

– Decreases in employment for those under 65 in each of the last three months.

– Last year 15.5% of Americans 65 and older were in the labor force. This is the highest rate since 1971 and this is an upward trend from a low of 10.4% in 1985.

– Until 2002 part time workers always outnumbered full time workers among older workers, but 56.3% of workers who were 65 or older worked full time last year. This is a new high.

– In the last 30 years the 65 and older work force grew by 101%, compared with an increase of all workers at only 59%.

– A whopping increase of 172% can be seen in workers over 75.

Our money or the money we thought we had keeps shrinking. Retirement plans keep getting battered by the financial markets and housing equity keeps shrinking at the same time.

With all of this in mind what matters right now is looking to the future and developing a mindset that goes beyond retirement.

A financial exit strategy, which is what is learned from a wealth creation education, is the means to exiting the working world for good, at any age. It is the one reliable way to create wealth that can last a lifetime. The financial strategies (financial intelligence) necessary to utilize the world’s financial systems to build streams of income (what is referred to as putting money to work for you)

Wealth creation is the exit strategy that allows people to create the level of financial freedom necessary to live a life in charge. Through wealth creation, any person can gain the financial stability that will ensure that he or she will be able to enjoy a life free from the cycle of the working life.

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Wednesday, July 15th, 2009 Wealth Preservation Comments Off on Financial Insecurity

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