Tag Archives: retirement plans

Why Annuities are Good (yikes!) and Bad for Your Retirement

  By petillo | July 7, 2011 - 4:03 am | 401k, annuities, financial planning, insurance, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, women and finances, women and retirement
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Nothing that is good for you can be considered bad and vice versa. Except perhaps when asking a five-year old about broccoli. But the vast majority of adults, fifty years hence wouldn’t even consider an annuity for their retirement and if they did, would almost certainly regret the decision at some point soon after. How can annuity be both regrettable and not, good and sometimes bad, bad and almost the best option?

First, a disclaimer: I am not a big fan of annuities – too complicated and too costly and too much insurance. Secondly, as if that weren’t enough of reason to dislike them, they are quickly becoming an idea with a certain allure, almost mystique. They have done little to reinvent what they are – aside from some product tweaks along the way, they are essentially exactly what they always were. So why the sudden interest? Okay, it’s not really sudden. The thought that is currently being bandied around by many of my cohorts is worth considering. After I tell you what they are.

If I were to offer you a “guaranteed income for life” that grew at 4%, you’d think to yourself that this was too good to be true. If it were free of fees and locked in penalties and all sorts of hidden costs, it would be too good. But this is an insurance product. And I’d be willing to wager you have never met, over the course of your lifetime, an insurance product that is free of some small print just waiting to rear its ugly head the moment you need it. Then they tack an investment portfolio into the mix and you have a recipe for problems. Kinda sorta.

First off, you need to buy the product. When you buy it has more to do with it than the actual need or desire. Annuities come with salespeople in tow and when they begin talking, most of the information you might need to know later gets pushed to later. What stands out is the fixed number, the income for life. Secondly, you will not be the same person ten-years from now and this makes this sort of purchase subject to those shifts in not only who you are but where you are financially.

MetLife explains the difference between the two most common types: the fixed and the variable. A fixed annuity “earn[s] a guaranteed rate of interest for a specific time period, such as one, three, or five years. Once the time period is over, a new guaranteed interest rate is set for the next period. A fixed annuity guarantee is subject to the financial strength and claims-paying ability of the insurance company that issues the annuity.”

In other words, you know exactly what it is your are getting into – if only it were that simple. The fixed rate often offered is just barely beating inflation and won’t beat taxes. Yes it will be fixed but this also depends on your age and your sex. If you are a woman, you will receive less compared to a man because you will live longer – the insurance side of the deal in the equation.

If you meet a retiree who regrets their decision once they have bought and annuity, it will be because the stock market is doing well. Studies have shown that if the markets are good in the months preceding retirement, the retiree will more than likely opt for investing on their own; if they are bad, they buy an annuity.

When MetLife describes variable annuities, they roll their eyes and shrug their shoulders, knowing that even as the markets are doing better, you still want safety. They describe these products: “Variable annuities typically offer a range of funding options from which you may choose. These funding options may include portfolios comprised of stocks, bonds, and money market instruments. The account value of variable annuities can go up or down based on market fluctuations. Your purchase payments and earnings are not guaranteed; they depend on the performance of the underlying investment options.”

But believe it or not, there is a place in your retirement plan where these products belong: inside your 401(k). When asked about them in 401(k) plans: “Eleanor Blaney, consumer advocate for the Certified Financial Planning Board, is blunt, “This is categorically a bad idea.”" Of all people, women benefit the most from annuities in these plans. They don’t discriminate based on sex. They give women the conservative approach many say they want – and the knowledge of knowing what they will have – and it gives them the opportunity to educate themselves about other potential investments available to them. Plus, it eliminates the choice at retirement that most people can’t make. Stuffing them in every 401(k) can help men make the right choice for their wives – who will live longer and benefit from them.

Mutual Funds: Are You Where You Should Be?

  By petillo | July 2, 2011 - 9:47 am | 401k, bonds, economics, financial planning, index funds, Mutual Fund Investing, personal finance, Profitable Investments, Repercussions: A Retirement Review
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For the vast majority of investors – mutual fund investors in particular, watching the major indices and judging your performance against them distorts the reality of not only where you should be but where you could have been. If you were to look only at the difference between the former highs the markets hit in October 2007 and those at the most recent close on Thursday (the Dow Jones Industrial Average DJIA +1.36% is around 12% below its all-time high of 14,165, and the S&P 500 index SPX +1.44% is nearly 16% below its October 2007 high of 1,565.) you might be considering jumping back in.

But you would have been much better off had you done absolutely nothing. Back in those desperate times, many people did what the rest of the herd did as stocks began to tumble. You sold. But three years later, that would have proved to be the wrong thing to do. During that period, most folks fled the actively managed mutual fund, particularly the domestic issues in favor of bond funds and in far too many instances, to target date funds.

Let’s consider the indices that are often compared to the riskier funds, a benchmark that has proven to be less than accurate in terms of performance. The Dow and the S&P 500 track the largest companies, a group that has struggled to assure the investor that dividends and size were enough to best the market. Turns out, that picking and choosing, as actively managed funds do, would have been the better approach.

Two things come into play. One, these funds tend to have higher fees. Less those fees, you would have still found yourself in a better position than had you simply put your money in a benchmark S&P 500 index.

And secondly, there is the liquidity issue that comes with buying mid-cap and small-cap companies. Liquidity refers to the amount of stock available in smaller companies weighed against the amount of stock held by the principals. This makes these companies more volatile and even under-purchased in indexes that track those larger markets (the Wilshire 5000 for instance may track all available stocks but the indexes crafted based on this index only own.

To complicate matters somewhat, the Wilshire 5000 actually has 5700 stocks in the index, Wilshire 4500 is the Wilshire 5000 without the S&P 500 stocks in it. A Wilshire 5000 index fund (usually called total market index) will probably own around 4000 stocks. A Wilshire 4500 index contains those same stocks less the top 500 companies.

As Mark Hulbret noted in a recent column for Marketwatch, “According to a report produced earlier this week by Lipper (a Thomson Reuters company), 45% of the domestic-equity funds for which they have data back to October 2007 were, as of the end of May, ahead of where they were on the date of the stock market’s all-time high.”

So the indexes are lower than where you would have been had you stayed put – of course this is based on the assumption that many of you where using actively managed funds in your 401(k) plans, that many of those funds did not have indexes available and the post 2007 products such as target date funds or even ETFs, weren’t a consideration or even an option during those days. You embraced risk and ignored fees and looking at your portfolio, that was probably seen as a good thing.

Does that mean index funds shouldn’t be part of your portfolio? The simplest answer is no. Index funds still provide a low cost and low turnover environment to invest in. More importantly, the largest cap indexes add dividends to the mix. This brings these investments closer to the domestic out-performance over the last half of the year.

Diversity in this investment environment, which is still far more volatile than anyone would like it to be, with global issues remaining a major concern, means taking a little less – in terms of performance. You should be in index funds now. To do this would be considered a defensive move for those that kept the actively managed faith.

A portfolio of five, perhaps six index funds, tracking sectors from the S&P 500, a mid-cap index, a fund tracking the small-cap, an international index (which tracks the companies of what is considered the developed world), an emerging markets index (contains investments from countries like China, India, Russia, Brazil and others) along with a bond index.  This sort of diversification keeps the low cost features of index funds and avoids any crossover investment (owning the same stocks in different funds).

You can be proud of your investment accumen in getting back to those 2007 highs and perhaps beyond. But show your real prudence and protect what you have done. This economy, both domestic and globally is far from recovered and the stock market is painting a better picture than reality suggests. Being a little defensive at this juncture will keep you in the game without risking what you have gained.

Women Investors: Look to a Man for Answers?

  By petillo | June 30, 2011 - 3:06 pm | 401k, debt, financial planning, index funds, IRA, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, women and business, women and finances, women and retirement
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I’m sure Warren Buffet doesn’t mind the title of LouAnn Lofton’s new book “Warren Buffet Invests like a Girl”. But does he really or is he just showing a sensitive side?

Here is an interview the author had recently with Reuters. And below that, I’ll examine some of things Mr. Buffet has said and wonder if they could have been said by a woman. Two things you must know if you don’t already: I think women make excellent investors and two, I haven’t read Ms. Lofton’s book.

Like all quotes, they can and will be taken out of context. And the standalone quotes are just that, standalone, without the surrounding text to bring them to life. Nonetheless, do these next five quotes attributed to Mr. Buffet as Ms Lofton suggests, reveal something about the man investing like a woman, or perhaps as she should?

“A public-opinion poll is no substitute for thought.” Study after study has suggested that women value the opinions of others whereas men seldom do. Not to say men don’t look to the successful or experienced for information to help them invest, but given the choice, men will continually say they arrived at a decision on their own, after much thought and consideration. In fact, men look at investing as the result of much “thought” even as they gained lots of opinions along the way.

A woman’s ability to network, seek advice, even consult a mentor is at the heart of the every effort to get women to invest more. They value public opinion and make decisions based on what those opinions offer. Could Mr. Buffet simply be suggesting the circle of wise friends, a class of like-minded individuals or simply the educational sources women seek akin to putting too little thought into the process? Score One for Warren investing like a man.

“I always knew I was going to be rich. I don’t think I ever doubted it for a minute.” Single-mindedness, bullheadedness, even the slight hint of braggadocio are more than evident in this statement. There are women who have all of these traits and are driving the statistics that suggest women are on the upswing as investors. But the problem remains and was pointed out recently by Sheryl Sandberg, COO of Facebook when she offered this piece of advice to the graduates of Barnard College.

She suggested that women make small decisions along the way that eventually lead them” to a bigger decision, one that leads them to want more balance. Her message to this class of 2011 was “do not leave before you leave. Do not lean back; lean in. Put your foot on the gas pedal and keep it there until the day you have to make a decision, and then make a decision. That’s the only way,” she said, “you’ll even have a decision to make.” As long as women approach the world in this manner, the gap between who women investors are and what their male counterparts have become will persist. Score One for Warren investing like a man.

“I buy expensive suits. They just look cheap on me.” Suits, like armor are all in the wearer’s ability to pull the look off. Investing is like that as well. It’s illusory and easily-lied about trait make it best suited, no pun intended, for men.

Women on the other hand like the research but not the sort of information that is clustered around numbers and charts. Instead, they want to invest and look good when they do. This keeps them from taking any investing (fashion) chance and as numerous studies have shown, means women take far fewer risks. Investments are needed and retirement is a must. But it will never be fashionable because no matter how hard a woman tries, the act feels cheap. Women need to get over that and too not over-think the process. There are some excellent ways to get to what needs to be done when it comes to investing and retirement planning and much of it comes from learning how to budget and creating a debt-less lifestyle. Score One for Warren investing like a man.

“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” Women have been stepping over 1-foot bars for quite sometime. And this slow and easy approach to investing is definitely a plus for their chances to be successful when they invest. But the investor we think about, the ones I have spoken to have all pointed to a single investor philosophy: sell before you get hurt.

While I am going to score this one for women, because I do advocate the slow and methodical approach to gaining wealth, there is still too little money being directed at these 1-foot step-overs. But that is a topic hinged on pay and until women reach income parity, they will not feel as well-invested as men. Score One for the women.

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” and “Our favorite holding period is forever“. This emotional behavior, the herd mentality mentioned in the first quote and the patience to keep with something that has long gone out-of-fashion don’t seem to be reflective of the women I have met. Granted, I usually tap the sources closest to me, professional women in my network and the research done academically to form some sort of a conclusion, albeit a moving one,. But I wouldn’t be far off the mark to see women (and men) chasing the chance to follow the rest of the herd if the herd seems convinced. Remember, it takes one to turn the tide in a direction and in most cases, the rest will follow. What appears to be a sale or the in the case of men, the next new thing, is in fact a display of our susceptibility to what the crowd suggests we need.

Keep in mind, I’m extrapolating here when I use the activities of everyday life to suggest that this is how we invest. But taking the emotional animal out of the equation is difficult to do and behavioral economist know this as well. As to buy and hold and Ms Lofton’s suggestion that his investment style is “girlish”, I offer one word: redecorate. Score Tie

I do applaud Ms. Lofton’s effort at addressing this topic. Women have a great deal of ground to cover and while doing so, men could benefit from what they are learning. Better 401(k) plans with index funds, higher IRA contribution limits and requiring annuities in every 401(k) would have a leveling effect for both sexes, but much more so for women.  It’s just too bad, at this point so far along in the history of these markets, that the icon a woman wants you to look at is a man.