4 risky places to swipe your debit card
By Claes Bell • Bankrate.com
Would you give a thief direct access to your checking account?
No? Unfortunately, you may be doing just that by regularly using your debit card. Debit cards may look identical to credit cards, but there's one key difference. With credit cards, users who spot fraudulent charges on their bill can simply decline the charges and not pay the bill. On the other hand, debit cards draw money directly from your checking account, rather than from an intermediary such as a credit card company.
Because of that, even clear-cut cases of fraud where victims are protected from liability by consumer protection laws can cause significant hardship, says Frank Abagnale, a secure-document consultant in Washington, D.C.
He cites the example of the The TJX Companies Inc.'s T.J. Maxx data breach that exposed the payment information of thousands of customers in 2007. The incident resulted in $150 million in fraud losses, and much of it was pulled directly from customers' bank accounts. While credit card users got their accounts straightened out and new cards in the mail within a few days, the case created major problems for debit card holders who waited an average of two to three months to get reimbursed, Abagnale says.
While debit card fraud is always a possibility, being careful where you use it can help keep your checking account balance out of the hands of criminals.
SKIMMING ATMS
The idea that outdoor ATMs are among the most dangerous places to use a debit card seems a little bit absurd. But some ATMs present a perfect opportunity for thieves to skim users' debit cards, says Chris McGoey, a security consultant based in Los Angeles.
Skimming is the practice of capturing a bank customer's card information by running it through a machine that reads the card's magnetic strip. Those machines are often placed over the real card slots at ATMs and other card terminals.
"Any transaction you do outdoors at an open ATM is going to be higher risk exposure," McGoey says. "If the public has access to it, then someone has the ability to add skimming devices to it, position cameras on it and position themselves in a way where they could surveil it."
He says you're better off using an ATM inside a retail outlet or other high-trafficked, well-lit place.
Julie McNelley, senior analyst for Aite Group LLC, a Boston-based financial services research firm, says even the card terminals that card users must swipe to get into ATM vestibules are being used as a skimming site by criminals. You can spot ATM skimmers by checking for ATM components that look beat-up or askew, she says.
GAS STATIONS
Gas stations are another danger zone for debit card use.
"You go to a gas station and you stick your debit card in there, and you swipe it through a machine," Abagnale says. "I'm sitting across the street with a laptop and an antenna. I put a skimmer in there, and I'm picking up all the information. Before you even get home, I've debited your account."
Gas station payment terminals have many of the characteristics card fraudsters love, McNelley says.
"In a gas station where you do have a whole bunch of pay-at-the-pump kinds of things and minimal supervision, it's pretty easy for a bad guy to put a skimming device on and put a little pinpoint camera there and compromise debit cards that way," McNelley says. Thieves often use small cameras to capture footage of debit card users entering their PINs so they can have free access to their money.
She says even if the thief doesn't manage to get your debit card personal identification number, or PIN, from such a device, he still may be able to duplicate the card's magnetic strip and use it for "sign and swipe" Visa or MasterCard transactions.
With the high potential for fraud in pay-at-the-pump debit transactions, it might make sense to use an alternative such as cash or credit cards the next time you fill up.
ON THE WEB
Debit cards are a convenient way to buy products online, especially for those who don't like to use credit cards. Unfortunately, the Web is one of the most dangerous places to make purchases, McNelley says.
"Online is the No. 1 place where consumers should not use their debit cards," she says. "It's susceptible at so many points. The consumer could have malware on their computer, so it could be at their endpoint that the data get compromised. It could be a man-in-the-middle attack where somebody is eavesdropping on their communications via the wireless network. And then at the other end, that data goes into a database at the merchant. As we've seen with some of the higher-profile breach events over the last year or so, that data is going to be vulnerable if (they're) not properly cared for."
Aside from the potential for hacking at many different points in a transaction, Abagnale says a fundamental problem with using debit cards online is it's impossible to know who is handling your information.
"Buying stuff online, you have to be careful because you have to know who you're doing business with. When you buy things online, what always kills me about that is people say, 'This is a safe site,'" Abagnale says. "Who works there?"
RESTAURANTS
"Would you care for a side of debit card fraud with that?"
Restaurant servers don't ask that question, but they might as well with the standard practice of taking customers' debit cards to run them behind closed doors.
"Any place where the card is out of hand" can increase the chances of fraud, says McGoey. "The guy comes to your table, takes your card and disappears for a while, so he or she has privacy," giving the person the opportunity to copy your card information.
Even restaurants without sit-down service can present a threat. McNelley says using debit cards to order delivery can be risky because cashiers tend to keep customer payment information on file. That may make future orders more convenient, but small businesses rarely take the steps necessary to safeguard payment information, she says.
Overall, she says, regardless of whether you use your debit card at a small restaurant or a big-box store, the possibility of fraud is always there. She cites the example of Michaels Stores Inc., which saw its customers' debit card information stolen in May by debit card terminals doctored by thieves.
"Even if you do exercise caution … there are still the Michaels-type incidents that will happen," McNelley says.
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How to Get Cheaper Cable TV (Wall St Journal)
Customers Say to Cable Firms, 'Let's Make a Deal'
By LAUREN A. E. SCHUKER
Want cheaper cable television? Try asking for it.
Every three to six months, when his most recent promotional deal expires, Carey Anthony blocks out an hour of his day to negotiate with his cable company. Each time, the president of a software company in Los Angeles says he can knock $20 to $30 off his monthly bill.
Lauren Schuker on The News Hub has some tips on how to trim your cable bill, such as asking your service provider for unadvertised deals.
"Negotiating works every time," says Mr. Anthony, 46, who estimates he has saved more than $350 a year over the past decade. "Sometimes you have to threaten to cancel service, or switch to another provider, or sit on hold for an hour, but I've never failed to get a discount," he says. "You just have to be diligent."
As prices for cable services have surged over the past 10 years and the faltering economy has pressured household incomes, a growing number of cable customers face skyrocketing bills.
Today, the average cable TV subscriber pays about $128 a month in fees for all services, including TV, Internet and phone—nearly three times the $48 they paid each month in 2001, according to estimates by research firm SNL Kagan.
The increase is largely the result of sharply rising costs of programming, particularly sports. The TV networks pass those additional costs onto the operators, which in turn pass them onto consumers.
Cable-company executives have said publicly that they're worried rising costs could drive consumers away. The largest U.S. cable company, Comcast Corp., lost 442,000 video subscribers in the first nine months of this year, though this was fewer than in the same period last year. No. 2 Time Warner Cable Inc. lost 319,000 over the same period.
.Telecommunications companies including Verizon Communications Inc. and AT&T Inc. are now offering more competitive services. And a growing number of early adapters are severing ties to cable altogether to rely on broadcast TV and Internet distributors, such as Netflix Inc. and Amazon.com Inc., though getting live sports can be difficult for these so-called cord cutters. Even in rural areas, where customers often have only one cable TV option, competition from satellite service is increasing, though satellite providers are facing similar cost pressures and passing on higher bills.
To stanch the bleeding, some cable companies have begun to quietly offer stripped-down plans to retain viewers. They frequently go unadvertised in many regions and customers might have to hunt for them on providers' websites to find out exactly what to ask for.
Comcast, for example, has a "digital economy" tier that sells for between $29.99 and $39.99, depending on the area. The next tier up in service Comcast offers, which includes ESPN, often sells for around $58 a month.
The digital economy tier includes local broadcast channels, as well as popular cable channels, such as USA, Lifetime, but no ESPN. The company says it will work with customers to find a package to fit their needs.
Time Warner Cable late last year introduced a "TV Essentials" package in the same vein. It can cost as much as $49.99 but the company also offers promotional rates as low as $29.99 a month. It includes broadcast channels as well as 38 additional channels, but not ESPN.
Fans of premium channels and their shows, such as HBO's 'Game of Thrones,' can add them to the most basic cable service.
."TV Essentials is geared towards a segment of our customers who are having trouble affording the larger packages, even though they want [them]," a spokeswoman for Time Warner Cable says, adding most people who call about it end up taking a "more robust" package.
Some cable operators and DirecTV also offer a family packages, which usually cost $30 to $40, and give households all the broadcast channels as well limited cable channels such as the Disney Channel and Food Network.
Other subscribers are dumping bulky packages of 190 channels or more in favor of the most basic service—often known as the "Lifeline" tier in the industry. These usually include public broadcast stations and the handful of over-the-air channels, and usually cost $13 to $16, compared to the $40 to $60 it usually costs to get the more widely-distributed level of digital cable service, which includes ESPN, MTV, TNT and other basic cable channels.
Although cable operators don't widely market it, a federal law requires them to allow consumers to tack on premium channels such as HBO or Showtime for roughly $17 a month, even if they only have the most basic cable package.
Some consumers say they can finagle long-term extensions of special promotional rates used to attract new subscribers that normally expire after a year or two.
Getting Down to Basics
Negotiate. Many providers offer less-expensive packages with fewer channels but don't advertise them widely. Providers often will allow customers to continue cost-saving promotions well after they expire. Other providers will cut you a new deal every six months—but you have to call and ask. Often, if customers threaten to cancel service, they are transferred to the "retention department" staffed with representatives who are trained to offer customers deals to stay put.
Don't be beholden to the bundle. Service representatives are trained to push various bundled services (cable, Internet, telephone) because it's more profitable for the company. Some customers don't need a landline and can save a lot by avoiding that service. If you are offered a promotion or discount, suggest how it could be modified to meet your needs and make the company a counter-offer.
Go basic. If you love premium channels, you can still get HBO, Showtime and others with the most basic, broadcast-channels-only service—and knock your bill down to less than $50 a month. Just ask to add those channels onto the most basic offering.
Give up the DVR. Digital video recorders can increase bills by as much as $20 to $30 in some cases. When companies introduced the DVR in the early 2000s, charges were roughly $8 to $9 in addition to the cable box. Now they often cost as much as an additional $12.
Keep tabs on promotions. Place reminders on your calendar for when a special offer expires so you can negotiate a new deal before the promotion ends and you end up paying full price.
Russell Bailyn, a 29-year-old wealth manager in New York City, says he has threatened to switch service in order to keep the new-subscriber promotional rate for television, broadband, and telephone service, even though he originally signed up for Time Warner Cable back in 2004.
Mr. Bailyn says he keeps meticulous notes of his conversations, but it isn't always an easy negotiation. "Time Warner has people trained to deal with people like me," he adds. "They won't just give into an angry, articulate New Yorker easily."
A spokesman from Time Warner Cable declined to comment on customer negotiations and extending promotional pricing.
Other subscribers say they bend the truth to score promotional rates years after signing up by cancelling service and asking someone else in the household—a spouse, grandparent, or older child—sign up for service at the cheaper, "new customer" rate.
Switching to a bundled TV, phone and Internet package can work, if you really need all three services.
Mark Nitzberg, who lives with his wife and two kids in Westmont, N.J., says he now saves about $70 a month as a result of switching his family from Comcast TV and Internet service and Verizon phone service to bundling everything together with Verizon's FIOS service earlier this year.
They used the extra money to buy a new flat-screen TV and upgrade the living room couch to a new sectional sofa. "After seeing how much we're saving, our friends constantly ask how we got the $79.99 deal," he says.
Write to Lauren A. E. Schuker at lauren.schuker@wsj.com
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
By LAUREN A. E. SCHUKER
Want cheaper cable television? Try asking for it.
Every three to six months, when his most recent promotional deal expires, Carey Anthony blocks out an hour of his day to negotiate with his cable company. Each time, the president of a software company in Los Angeles says he can knock $20 to $30 off his monthly bill.
Lauren Schuker on The News Hub has some tips on how to trim your cable bill, such as asking your service provider for unadvertised deals.
"Negotiating works every time," says Mr. Anthony, 46, who estimates he has saved more than $350 a year over the past decade. "Sometimes you have to threaten to cancel service, or switch to another provider, or sit on hold for an hour, but I've never failed to get a discount," he says. "You just have to be diligent."
As prices for cable services have surged over the past 10 years and the faltering economy has pressured household incomes, a growing number of cable customers face skyrocketing bills.
Today, the average cable TV subscriber pays about $128 a month in fees for all services, including TV, Internet and phone—nearly three times the $48 they paid each month in 2001, according to estimates by research firm SNL Kagan.
The increase is largely the result of sharply rising costs of programming, particularly sports. The TV networks pass those additional costs onto the operators, which in turn pass them onto consumers.
Cable-company executives have said publicly that they're worried rising costs could drive consumers away. The largest U.S. cable company, Comcast Corp., lost 442,000 video subscribers in the first nine months of this year, though this was fewer than in the same period last year. No. 2 Time Warner Cable Inc. lost 319,000 over the same period.
.Telecommunications companies including Verizon Communications Inc. and AT&T Inc. are now offering more competitive services. And a growing number of early adapters are severing ties to cable altogether to rely on broadcast TV and Internet distributors, such as Netflix Inc. and Amazon.com Inc., though getting live sports can be difficult for these so-called cord cutters. Even in rural areas, where customers often have only one cable TV option, competition from satellite service is increasing, though satellite providers are facing similar cost pressures and passing on higher bills.
To stanch the bleeding, some cable companies have begun to quietly offer stripped-down plans to retain viewers. They frequently go unadvertised in many regions and customers might have to hunt for them on providers' websites to find out exactly what to ask for.
Comcast, for example, has a "digital economy" tier that sells for between $29.99 and $39.99, depending on the area. The next tier up in service Comcast offers, which includes ESPN, often sells for around $58 a month.
The digital economy tier includes local broadcast channels, as well as popular cable channels, such as USA, Lifetime, but no ESPN. The company says it will work with customers to find a package to fit their needs.
Time Warner Cable late last year introduced a "TV Essentials" package in the same vein. It can cost as much as $49.99 but the company also offers promotional rates as low as $29.99 a month. It includes broadcast channels as well as 38 additional channels, but not ESPN.
Fans of premium channels and their shows, such as HBO's 'Game of Thrones,' can add them to the most basic cable service.
."TV Essentials is geared towards a segment of our customers who are having trouble affording the larger packages, even though they want [them]," a spokeswoman for Time Warner Cable says, adding most people who call about it end up taking a "more robust" package.
Some cable operators and DirecTV also offer a family packages, which usually cost $30 to $40, and give households all the broadcast channels as well limited cable channels such as the Disney Channel and Food Network.
Other subscribers are dumping bulky packages of 190 channels or more in favor of the most basic service—often known as the "Lifeline" tier in the industry. These usually include public broadcast stations and the handful of over-the-air channels, and usually cost $13 to $16, compared to the $40 to $60 it usually costs to get the more widely-distributed level of digital cable service, which includes ESPN, MTV, TNT and other basic cable channels.
Although cable operators don't widely market it, a federal law requires them to allow consumers to tack on premium channels such as HBO or Showtime for roughly $17 a month, even if they only have the most basic cable package.
Some consumers say they can finagle long-term extensions of special promotional rates used to attract new subscribers that normally expire after a year or two.
Getting Down to Basics
Negotiate. Many providers offer less-expensive packages with fewer channels but don't advertise them widely. Providers often will allow customers to continue cost-saving promotions well after they expire. Other providers will cut you a new deal every six months—but you have to call and ask. Often, if customers threaten to cancel service, they are transferred to the "retention department" staffed with representatives who are trained to offer customers deals to stay put.
Don't be beholden to the bundle. Service representatives are trained to push various bundled services (cable, Internet, telephone) because it's more profitable for the company. Some customers don't need a landline and can save a lot by avoiding that service. If you are offered a promotion or discount, suggest how it could be modified to meet your needs and make the company a counter-offer.
Go basic. If you love premium channels, you can still get HBO, Showtime and others with the most basic, broadcast-channels-only service—and knock your bill down to less than $50 a month. Just ask to add those channels onto the most basic offering.
Give up the DVR. Digital video recorders can increase bills by as much as $20 to $30 in some cases. When companies introduced the DVR in the early 2000s, charges were roughly $8 to $9 in addition to the cable box. Now they often cost as much as an additional $12.
Keep tabs on promotions. Place reminders on your calendar for when a special offer expires so you can negotiate a new deal before the promotion ends and you end up paying full price.
Russell Bailyn, a 29-year-old wealth manager in New York City, says he has threatened to switch service in order to keep the new-subscriber promotional rate for television, broadband, and telephone service, even though he originally signed up for Time Warner Cable back in 2004.
Mr. Bailyn says he keeps meticulous notes of his conversations, but it isn't always an easy negotiation. "Time Warner has people trained to deal with people like me," he adds. "They won't just give into an angry, articulate New Yorker easily."
A spokesman from Time Warner Cable declined to comment on customer negotiations and extending promotional pricing.
Other subscribers say they bend the truth to score promotional rates years after signing up by cancelling service and asking someone else in the household—a spouse, grandparent, or older child—sign up for service at the cheaper, "new customer" rate.
Switching to a bundled TV, phone and Internet package can work, if you really need all three services.
Mark Nitzberg, who lives with his wife and two kids in Westmont, N.J., says he now saves about $70 a month as a result of switching his family from Comcast TV and Internet service and Verizon phone service to bundling everything together with Verizon's FIOS service earlier this year.
They used the extra money to buy a new flat-screen TV and upgrade the living room couch to a new sectional sofa. "After seeing how much we're saving, our friends constantly ask how we got the $79.99 deal," he says.
Write to Lauren A. E. Schuker at lauren.schuker@wsj.com
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
Annuities: Getting the Most Income (Morningstar)
Improving Your Finances
Four Strategies for Combating Low Annuity Yields
By Christine Benz | 12-22-11 | 06:00 AM
To help avoid outliving their assets, more retirees should defer Social Security and consider income annuities, according to a report prepared by the General Accounting Office for the U.S. Senate's Special Committee on Aging.
Yet many retirees do just the opposite, according to data presented in the report. Between 1997 and 2005, roughly 43% of Social Security-eligible individuals began taking benefits within one month of turning 62, even though waiting until their full retirement age would've translated into a substantially higher payout.
Retirees also skimp on annuities, according to the study, even though several research papers, including one from Ibbotson Associates, have demonstrated that the products can help ensure that individuals don't outlive their savings. Between 2000 and 2006, just 6% of retirees with defined-contribution plans such as 401(k) and 403(b) plans chose to move their assets into an annuity upon retirement, according to the GAO study; nearly 40% of these folks left their money in their accounts following retirement, while another one third rolled the assets over into an IRA. (The GAO's data follows participant behavior shortly after individuals retired; the report acknowledges that these same retirees may have chosen a different strategy for their retirement savings at a later time.)
Why Are People Avoiding Them?
Academics and finance professionals specializing in retirement income have conducted research into why investors are so resistant to annuities. One key impediment is pretty straightforward: loss of control. In contrast with traditional investment assets that you can alter and tap whenever you see fit, a key premise behind annuities is that you fork over a lump sum in exchange for a stream of payments throughout your life. Those payments may ultimately add up to more than you'd be able to take out of a nest egg composed of stocks, bonds, and cash, particularly if you live a long time, but the irrevocability of the decision to purchase an annuity is a key psychological barrier.
Another woefully underdiscussed reason that so few retirees opt for annuities is that payouts from plain-vanilla, single-premium immediate annuities are painfully low. In mid-2010, the difference between fixed annuity payouts and five-year certificate of deposit rates actually dipped into negative territory. Although the situation for fixed-annuity buyers has improved somewhat recently, the payouts still aren't compelling: In early 2011, fixed-annuity rates, on average, were just 0.39% higher than five-year CD rates. Of course, immediate-annuity buyers are guaranteed their income for life, even if they live to be 115. But they're also giving up control of their assets.
Annuity payouts have been depressed in part by increasing longevity: With payouts being spread over very long lives and few purchasers dying prematurely, that has the net effect of shrinking payouts for everyone in the annuity pool. (There's also some evidence that those purchasing annuities tend to be healthier with the likelihood of living longer than the general population, which could serve to depress annuity payouts further.)
Those factors are likely to be long-term headwinds for annuities. But the other factor depressing annuity payouts is apt to be more temporal: rock-bottom interest rates. For an immediate annuity, your payout will consist of just a few key elements: whatever interest rate the insurer can safely earn on your money as well as any mortality credits (the amount the insurer expects to be able to reallocate from those who die prematurely to those who survive), less the insurance company's fees. With interest rates on very safe investments barely breaking into the black, it's no wonder that annuity payouts have sunk, too.
The current rate environment argues against plowing a lot of one's assets into an immediate annuity all in one go, but that doesn't mean that investors should completely dismiss annuities (and the promise of lifetime income they provide) out of hand.
Here are four strategies for playing it smart with an immediate-annuity purchase.
1. Consider Your Need
Fixed immediate annuities will tend to make more sense for some retirees than others. Those who have a substantial share of their lifetime living expenses accounted for via pension income or Social Security will likely want to diversify into investments over which they exert a higher level of control and have the opportunity to earn a higher rate of return, such as stocks. Those who don't have a substantial source of guaranteed retirement income, meanwhile, will find greater utility from annuity products.
2. Be Patient
Although the negative effects of longevity are unlikely to go away soon, rising interest rates will eventually translate into higher annuity payouts. Don't expect substantially higher payouts right out of the box, particularly given that the still-shaky economy is apt to keep a damper on interest rates, and in turn annuity payouts, in the near term. But interest rates don't have much more room to move down, and it's worth noting that as recently as a decade ago, annuity rates were nearly double what they are today.
3. Build Your Own Ladder
One of the key attractions of sinking a lump sum into an annuity is the ability to receive a no-maintenance, pensionlike stream of income, which is particularly appealing for retirees who don't have the time or inclination to manage their portfolios on an ongoing basis. However, a slightly higher-maintenance strategy of laddering multiple annuities can help mitigate the risk of sinking a sizable share of your portfolio into an annuity at what in hindsight could turn out to be an inopportune time. If, for example, you were planning to put $200,000 into an annuity overall, you could invest $40,000 into five annuities during each of the next five years. Such a program, while not particularly simple or streamlined, would also have a beneficial side effect in that it would give you the opportunity to diversify your investments across different insurance companies, thereby offsetting the risk that an insurance company would have difficulty meeting its obligations.
4. Consider More Flexible Options
Throughout this article, I've been focusing on the simplest of annuity types--fixed-rate immediate annuities. These vehicles are typically the cheapest and most transparent in the annuity world, but they're also the most beholden to whatever interest-rate environment prevails at the time the purchaser signs the contract. It's worth noting, however, that the annuity universe includes many products with more bells and whistles, including some that address the current yield-starved climate by allowing for an interest-rate adjustment if and when interest rates head back up. Such products offer an appealing safeguard to those concerned about buying an annuity with interest rates as low as they are now, but the trade-off is that the initial payout on such an annuity would tend to be lower than the payout on an annuity without such a feature. A key rule to remember when shopping for annuities is that as you layer on safety features, such as survivor benefits and the ability to participate in higher payout rates in the future, you'll likely increase your costs and reduce your monthly payout, at least at the outset of your contract.
A version of this article appeared July 14, 2011.
Four Strategies for Combating Low Annuity Yields
By Christine Benz | 12-22-11 | 06:00 AM
To help avoid outliving their assets, more retirees should defer Social Security and consider income annuities, according to a report prepared by the General Accounting Office for the U.S. Senate's Special Committee on Aging.
Yet many retirees do just the opposite, according to data presented in the report. Between 1997 and 2005, roughly 43% of Social Security-eligible individuals began taking benefits within one month of turning 62, even though waiting until their full retirement age would've translated into a substantially higher payout.
Retirees also skimp on annuities, according to the study, even though several research papers, including one from Ibbotson Associates, have demonstrated that the products can help ensure that individuals don't outlive their savings. Between 2000 and 2006, just 6% of retirees with defined-contribution plans such as 401(k) and 403(b) plans chose to move their assets into an annuity upon retirement, according to the GAO study; nearly 40% of these folks left their money in their accounts following retirement, while another one third rolled the assets over into an IRA. (The GAO's data follows participant behavior shortly after individuals retired; the report acknowledges that these same retirees may have chosen a different strategy for their retirement savings at a later time.)
Why Are People Avoiding Them?
Academics and finance professionals specializing in retirement income have conducted research into why investors are so resistant to annuities. One key impediment is pretty straightforward: loss of control. In contrast with traditional investment assets that you can alter and tap whenever you see fit, a key premise behind annuities is that you fork over a lump sum in exchange for a stream of payments throughout your life. Those payments may ultimately add up to more than you'd be able to take out of a nest egg composed of stocks, bonds, and cash, particularly if you live a long time, but the irrevocability of the decision to purchase an annuity is a key psychological barrier.
Another woefully underdiscussed reason that so few retirees opt for annuities is that payouts from plain-vanilla, single-premium immediate annuities are painfully low. In mid-2010, the difference between fixed annuity payouts and five-year certificate of deposit rates actually dipped into negative territory. Although the situation for fixed-annuity buyers has improved somewhat recently, the payouts still aren't compelling: In early 2011, fixed-annuity rates, on average, were just 0.39% higher than five-year CD rates. Of course, immediate-annuity buyers are guaranteed their income for life, even if they live to be 115. But they're also giving up control of their assets.
Annuity payouts have been depressed in part by increasing longevity: With payouts being spread over very long lives and few purchasers dying prematurely, that has the net effect of shrinking payouts for everyone in the annuity pool. (There's also some evidence that those purchasing annuities tend to be healthier with the likelihood of living longer than the general population, which could serve to depress annuity payouts further.)
Those factors are likely to be long-term headwinds for annuities. But the other factor depressing annuity payouts is apt to be more temporal: rock-bottom interest rates. For an immediate annuity, your payout will consist of just a few key elements: whatever interest rate the insurer can safely earn on your money as well as any mortality credits (the amount the insurer expects to be able to reallocate from those who die prematurely to those who survive), less the insurance company's fees. With interest rates on very safe investments barely breaking into the black, it's no wonder that annuity payouts have sunk, too.
The current rate environment argues against plowing a lot of one's assets into an immediate annuity all in one go, but that doesn't mean that investors should completely dismiss annuities (and the promise of lifetime income they provide) out of hand.
Here are four strategies for playing it smart with an immediate-annuity purchase.
1. Consider Your Need
Fixed immediate annuities will tend to make more sense for some retirees than others. Those who have a substantial share of their lifetime living expenses accounted for via pension income or Social Security will likely want to diversify into investments over which they exert a higher level of control and have the opportunity to earn a higher rate of return, such as stocks. Those who don't have a substantial source of guaranteed retirement income, meanwhile, will find greater utility from annuity products.
2. Be Patient
Although the negative effects of longevity are unlikely to go away soon, rising interest rates will eventually translate into higher annuity payouts. Don't expect substantially higher payouts right out of the box, particularly given that the still-shaky economy is apt to keep a damper on interest rates, and in turn annuity payouts, in the near term. But interest rates don't have much more room to move down, and it's worth noting that as recently as a decade ago, annuity rates were nearly double what they are today.
3. Build Your Own Ladder
One of the key attractions of sinking a lump sum into an annuity is the ability to receive a no-maintenance, pensionlike stream of income, which is particularly appealing for retirees who don't have the time or inclination to manage their portfolios on an ongoing basis. However, a slightly higher-maintenance strategy of laddering multiple annuities can help mitigate the risk of sinking a sizable share of your portfolio into an annuity at what in hindsight could turn out to be an inopportune time. If, for example, you were planning to put $200,000 into an annuity overall, you could invest $40,000 into five annuities during each of the next five years. Such a program, while not particularly simple or streamlined, would also have a beneficial side effect in that it would give you the opportunity to diversify your investments across different insurance companies, thereby offsetting the risk that an insurance company would have difficulty meeting its obligations.
4. Consider More Flexible Options
Throughout this article, I've been focusing on the simplest of annuity types--fixed-rate immediate annuities. These vehicles are typically the cheapest and most transparent in the annuity world, but they're also the most beholden to whatever interest-rate environment prevails at the time the purchaser signs the contract. It's worth noting, however, that the annuity universe includes many products with more bells and whistles, including some that address the current yield-starved climate by allowing for an interest-rate adjustment if and when interest rates head back up. Such products offer an appealing safeguard to those concerned about buying an annuity with interest rates as low as they are now, but the trade-off is that the initial payout on such an annuity would tend to be lower than the payout on an annuity without such a feature. A key rule to remember when shopping for annuities is that as you layer on safety features, such as survivor benefits and the ability to participate in higher payout rates in the future, you'll likely increase your costs and reduce your monthly payout, at least at the outset of your contract.
A version of this article appeared July 14, 2011.
Social Security Tips (from Smartmoney.com)
SEPTEMBER 6, 2011, 2:09 P.M. ET.
10 Things Social Security Won't Tell You
The secret of bigger benefits, and the truth about the agency's bottom line.
. By JONNELLE MARTE
1. "Long-term deficit? We can hardly afford our bills today."
Worried about the future of Social Security? You're far from alone. The Social Security Administration itself has said that unless something is done to reform the system, it will burn through its funds within the next few decades. Less talked about, perhaps, is the concern about the present: the program is having a hard time paying its bills. In 2010, the Social Security Administration collected less revenue in taxes than it needed to cover its benefit payments -- the first time expenditures have exceeded income since 1983. As a result, the program had to tap its $2.5 trillion trust fund, sooner than some had expected. The same is expected to happen this year. "The depth of the recession has slowed down revenues to the system," say Eugene Steuerle, an economist with the Urban Institute, a non-partisan think tank in Washington, D.C.
.A Social Security spokeswoman points out that interest income from the Treasury bonds held in the trust fund will allow it to keep growing until 2022 -- even if the agency has to siphon off some money to offset any shortages in tax revenue -- and won't be exhausted until 2036, when the first Gen Xers begin retiring. But that's already one year earlier than previous projections. After that, the agency says tax income under the current system will only cover about 75% of benefit payments through 2085.
2. "The more you make, the less you get back."
It's common to think of Social Security as an individual account of sorts -- what you pay in, you get back, more or less. That's far from accurate. By design, the Social Security Administration says, the system is tilted in favor of lower-income workers who have fewer resources to save for retirement. In practice, that means that the more money you make, the less you get back, at least as a percentage of your salary. For example, a single, 66-year-old man who earned $50,000 per year on average and retired in 2011 would get an annual benefit payment of about $22,800, or about 45% of his annual salary. If he had earned $150,000 per year, he would get annual benefits of about $30,670 -- just 20% of his annual salary. "People act like the percentage of benefits of your salary you get is the same for everyone and it really isn't," says Jo Anne Barnhart, former Social Security Commissioner.
That's particularly true for the highest earners. Benefits are calculated on a maximum average salary of $106,800, which means anyone who made that much or more -- whether by a few dollars or by a few hundred thousand dollars -- gets the same annual Social Security payment. To be fair, earnings over that threshold aren't taxed, either, and the agency spokeswoman says benefits are meant as supplemental retirement income, not full freight.
3. "This used to be a much better deal."
Today's workers -- boomers, Gens X and Y -- like to carp about Social Security, but it's not all sour grapes or skepticism about paying into a system with an uncertain future. Employees today pay more in Social Security taxes than previous generations did. They're also likely to get smaller benefits when it's their turn to retire.
Over the years, as the Social Security Administration has come to grips with the cost of its benefit program -- and the ranks of eligible beneficiaries has swollen -- taxes to fund the program have gone up and up, a trend that experts say is likely to continue over the coming years. As a result, workers now pay 6.2% in payroll taxes (reduced to 4.2% in 2011) -- nearly double the 3.6% tax rate workers paid in 1965. Over the same time period, the maximum earnings eligible for taxation have also increased from $4,800 (equivalent to about $34,500 in 2011 dollars) to $106,800.
For example, a single man who retired in 1980 at age 65 after earning an average wage of $43,500 would have paid about $96,000 in Social Security taxes, and probably received $203,000 in lifetime benefits, according to a study by the Urban Institute, a non-partisan policy think tank in Washington D.C. By contrast, a single man making the same average wage today and retiring in 2030 will likely pay $398,000 in lifetime taxes but receive just $336,000 in lifetime benefits -- about 16% less than he paid in. "People who were first in the system got a great rate of return," says Alan Gustman, chair of the economics department at Dartmouth College. "It's the younger generation that is going to be in the most difficult position."
The agency spokeswoman says the imbalance is partly due to the fact that the earliest beneficiaries only paid taxes in the later stages of their careers.
4. "Want a bigger check? Go back to work."
Most people within ten years of age 62 have already started doing the Social Security math problem: How much do I get if I wait one year to take payments? How much if I wait two years? To get the biggest bump in benefits, workers have to delay their benefits beyond full retirement age -- around 66 for people born before 1957, closer to 67 for people born after. (To find your exact date, see Social Security Online http://www.socialsecurity.gov/retire2/agereduction.htm.) For every additional year you wait, you'll get an 8% increase in payments until you hit age 70. Someone who earned, on average, $50,000 per year over their working life would get $1,900 per month at 66, but $2,505 if he waited until age 70 -- a 32% boost. "You'll get a bigger benefit amount for the rest of your life," says Dennis Marvin, a financial planner in Cleveland.
If you've already started collecting benefits and you're under full retirement age, it's not too late to get a raise. One strategy: Go back to work. If you earn more than $14,160, the Social Security Administration will dock $1 in benefits for every $2 you earn. But once you reach full retirement age, your benefits will be recalculated to account for the money you didn't get while working. So, for example, someone who took their benefits at 62 -- at a 25% reduction compared to full benefits -- but went back to work from ages 63 to 66 and earned enough to zero out his entire Social Security check could end up collecting close to full benefits at age 66.
5. "Good luck qualifying for disability."
More than 8 million people receive Social Security Disability Insurance, which is awarded to people who are unable to work because of a long-term physical or mental disability. But qualifying is no easy task, says John Roberts, manager of Myler Disability, an advocacy group. Only 30% who applied in 2009 were awarded benefits, down from 44% in 1999, according to agency data.
Some of that change can be attributed to more people applying for benefits -- 2.8 million in 2009 compared to 1.5 million a decade earlier. That's common when the economy is tough, says Gustman: The number of applications rises, along with an increase in claims that fall short of the agency's standards. Even for people with true and serious disabilities, it can be difficult to qualify. The process can take years and often requires legal help. Most people have to wait for a hearing, says Roberts: "Best case, it is 18 months before you get approved." In some cases, the battle goes to federal court.
To improve your chances, Roberts recommends applying for benefits as soon as you become disabled. Waiting too long could leave you in a situation where you haven't worked long enough to qualify for disability benefits. You must generally have worked at least three to ten years before you became disabled, depending on your age. The spokeswoman for the Social Security Administration says it does not pay benefits for partial or short-term disability and taxpayers must be able to show that they cannot do work they did before or adjust to other work because of their medical condition.
6. "You can be unemployed and retired."
A growing number of people in their 60s are collecting unemployment and Social Security benefits at the same time. Since 2002, seventeen states have changed the rules to allow people to qualify for more unemployment benefits while they receive Social Security, according to the National Employment Law Project, which has advocated on behalf of allowing seniors to claim both. It's perfectly legal; you just have to report the income to both agencies.
There is no clear data on how many people are drawing both. About 10% percent of people who collected unemployment benefits in 2010 were 60 or older, according to the Department of Labor; the minimum age to collect Social Security retirement benefits is age 62. For those who qualify, the option has obvious appeal for older Americans struggling to find work in today's weak job market. "We are generally talking about older workers who lose their jobs involuntarily, who are trying to survive," says George Wentworth, an attorney with the National Employment Law Project.
Receiving unemployment benefits doesn't affect your Social Security payments, but the reverse is not always true: In some states, collecting Social Security can reduce your unemployment checks. In Illinois, Louisiana, South Dakota, Utah and Colorado, your unemployment benefits can be reduced by half of your monthly Social Security benefit.
7. "Your Social Security number is no state secret."
Don't carry your social security card in your wallet. Don't give your number over the phone. Don't use it as a password. For all the precautions workers are told to take to protect that nine-digit number, a Social Security number is still surprisingly vulnerable. So far this year, more than 13 million names and Social Security numbers have been exposed to potential theft as a result of more than 270 data breaches at state governmental agencies, according to the Identity Theft Resource Center, a nonprofit that helps victims of identity theft.
But a social security number need not even be stolen to be compromised. A 2009 study from Carnegie Mellon University finds that it's possible -- and not too difficult -- to guess a Social Security number using details easily gleaned from a Facebook profile, such as date of birth and home town. Researchers were able to accurately guess the first five digits of 44% of Social Security numbers issued after 1988 on the first try, just by using the date and the state the number was issued in; they were able to guess the complete numbers almost 9% of the time. The authors used a list of known Social Security numbers from the Social Security Death Master Files to find patterns on how the last four digits are assigned -- the first five digits are based on the state the number was issued in -- and they found that they are largely assigned in order, based on when the number was issued.
A spokeswoman for the agency says it implemented a new system starting in June that randomly assigns numbers, making more nine digit combinations available in every state. Anyone with a number issued before then might want to guard their birth date and place of birth as carefully as they do their Social Security number -- or at least tighten their Facebook privacy settings.
8. "We think you're dead."
The distinction between dead -- cold, no pulse -- and alive -- just went for a jog! -- seems pretty obvious. But the Social Security Administration commonly records living people in its Death Master File -- a public database that includes Social Security numbers, dates of birth and addresses -- an error that can have grave financial consequences. Of the 2.8 million deaths the Social Security Administration reports each year, about 14,000 people added to the Death Master File are very much alive, according to agency statistics.
People who are incorrectly reported dead can rack up bank fees for bounced checks after Social Security payments stop without warning, and will have to follow up with credit bureaus and other institutions once they get their names off the death file, says Gabriela Beltran, a spokeswoman for the Identity Theft Resource Center. Some people don't find out until they're applying for a loan and they're denied because records show them as decease, she says.
A spokeswoman for the Social Security Administration says it takes "immediate action to correct and reinstate benefits" once it notices an error. Getting off of the list and resuming Social Security payments requires beneficiaries to bring identification to a Social Security office where they can have a face-to-face interview, the administration says.
9. "If you make too much, we'll tax your benefits."
Your Social Security benefits come from paying taxes while you were working, so surely they can't be taxed, right? Wrong. You may in fact be taxed on your Social Security benefits if you have substantial income from other sources, such as dividends, self employment, investment interest and other sources. And studies find many Americans aren't aware of the fact: Some 42% of pre-retirees surveyed by the Financial Literacy Center did not know that benefits could be taxed if their income in retirement exceeded a certain amount.
The rule is that if your combined income -- a measure that includes other sources of income and half of your Social Security benefits -- exceeds $25,000 for an individual or $32,000 for a married couple filing a joint return, you may be taxed on up to 85% of your benefits. People who find themselves in this group can make quarterly estimated payments or choose to have federal taxes withheld from their benefits. The Social Security Administration says the provision to tax benefits became law in 1983 and was "intended to restore the financial soundness" of the Social Security program and Medicare.
10. "Your cost-of-living adjustments come up short."
Every year, Social Security recipients get a cost-of-living adjustment, a little bump based on the current rate of inflation and designed to cover the rising cost of everything from toothpaste to airline tickets. But some critics say the current measurement of inflation doesn't reflect the higher costs that seniors truly face. For example, many older people spend a large share of their budgets on health care, where prices have risen about twice as fast as overall prices, according to a 2010 paper published by the Congressional Research Service. "In many parts of the country a monthly Social Security benefit is not enough to cover basic living expenses," says Catherine Collinson, president of the Transamerica Center for Retirement Studies.
The pricing pressure means some retirees could find themselves struggling to cover essentials like gas, medicine and groceries, says Collinson, meaning they will have to cut spending in other areas. For pre-retirees, it means ramping up your savings today so that you can struggle less in your golden years, she adds. The Social Security Administration says it has been using the Consumer Price Index since legislation instituting automatic cost-of-living increases was enacted in 1972, and changing the benchmark would take an act of Congress.
10 Things Social Security Won't Tell You
The secret of bigger benefits, and the truth about the agency's bottom line.
. By JONNELLE MARTE
1. "Long-term deficit? We can hardly afford our bills today."
Worried about the future of Social Security? You're far from alone. The Social Security Administration itself has said that unless something is done to reform the system, it will burn through its funds within the next few decades. Less talked about, perhaps, is the concern about the present: the program is having a hard time paying its bills. In 2010, the Social Security Administration collected less revenue in taxes than it needed to cover its benefit payments -- the first time expenditures have exceeded income since 1983. As a result, the program had to tap its $2.5 trillion trust fund, sooner than some had expected. The same is expected to happen this year. "The depth of the recession has slowed down revenues to the system," say Eugene Steuerle, an economist with the Urban Institute, a non-partisan think tank in Washington, D.C.
.A Social Security spokeswoman points out that interest income from the Treasury bonds held in the trust fund will allow it to keep growing until 2022 -- even if the agency has to siphon off some money to offset any shortages in tax revenue -- and won't be exhausted until 2036, when the first Gen Xers begin retiring. But that's already one year earlier than previous projections. After that, the agency says tax income under the current system will only cover about 75% of benefit payments through 2085.
2. "The more you make, the less you get back."
It's common to think of Social Security as an individual account of sorts -- what you pay in, you get back, more or less. That's far from accurate. By design, the Social Security Administration says, the system is tilted in favor of lower-income workers who have fewer resources to save for retirement. In practice, that means that the more money you make, the less you get back, at least as a percentage of your salary. For example, a single, 66-year-old man who earned $50,000 per year on average and retired in 2011 would get an annual benefit payment of about $22,800, or about 45% of his annual salary. If he had earned $150,000 per year, he would get annual benefits of about $30,670 -- just 20% of his annual salary. "People act like the percentage of benefits of your salary you get is the same for everyone and it really isn't," says Jo Anne Barnhart, former Social Security Commissioner.
That's particularly true for the highest earners. Benefits are calculated on a maximum average salary of $106,800, which means anyone who made that much or more -- whether by a few dollars or by a few hundred thousand dollars -- gets the same annual Social Security payment. To be fair, earnings over that threshold aren't taxed, either, and the agency spokeswoman says benefits are meant as supplemental retirement income, not full freight.
3. "This used to be a much better deal."
Today's workers -- boomers, Gens X and Y -- like to carp about Social Security, but it's not all sour grapes or skepticism about paying into a system with an uncertain future. Employees today pay more in Social Security taxes than previous generations did. They're also likely to get smaller benefits when it's their turn to retire.
Over the years, as the Social Security Administration has come to grips with the cost of its benefit program -- and the ranks of eligible beneficiaries has swollen -- taxes to fund the program have gone up and up, a trend that experts say is likely to continue over the coming years. As a result, workers now pay 6.2% in payroll taxes (reduced to 4.2% in 2011) -- nearly double the 3.6% tax rate workers paid in 1965. Over the same time period, the maximum earnings eligible for taxation have also increased from $4,800 (equivalent to about $34,500 in 2011 dollars) to $106,800.
For example, a single man who retired in 1980 at age 65 after earning an average wage of $43,500 would have paid about $96,000 in Social Security taxes, and probably received $203,000 in lifetime benefits, according to a study by the Urban Institute, a non-partisan policy think tank in Washington D.C. By contrast, a single man making the same average wage today and retiring in 2030 will likely pay $398,000 in lifetime taxes but receive just $336,000 in lifetime benefits -- about 16% less than he paid in. "People who were first in the system got a great rate of return," says Alan Gustman, chair of the economics department at Dartmouth College. "It's the younger generation that is going to be in the most difficult position."
The agency spokeswoman says the imbalance is partly due to the fact that the earliest beneficiaries only paid taxes in the later stages of their careers.
4. "Want a bigger check? Go back to work."
Most people within ten years of age 62 have already started doing the Social Security math problem: How much do I get if I wait one year to take payments? How much if I wait two years? To get the biggest bump in benefits, workers have to delay their benefits beyond full retirement age -- around 66 for people born before 1957, closer to 67 for people born after. (To find your exact date, see Social Security Online http://www.socialsecurity.gov/retire2/agereduction.htm.) For every additional year you wait, you'll get an 8% increase in payments until you hit age 70. Someone who earned, on average, $50,000 per year over their working life would get $1,900 per month at 66, but $2,505 if he waited until age 70 -- a 32% boost. "You'll get a bigger benefit amount for the rest of your life," says Dennis Marvin, a financial planner in Cleveland.
If you've already started collecting benefits and you're under full retirement age, it's not too late to get a raise. One strategy: Go back to work. If you earn more than $14,160, the Social Security Administration will dock $1 in benefits for every $2 you earn. But once you reach full retirement age, your benefits will be recalculated to account for the money you didn't get while working. So, for example, someone who took their benefits at 62 -- at a 25% reduction compared to full benefits -- but went back to work from ages 63 to 66 and earned enough to zero out his entire Social Security check could end up collecting close to full benefits at age 66.
5. "Good luck qualifying for disability."
More than 8 million people receive Social Security Disability Insurance, which is awarded to people who are unable to work because of a long-term physical or mental disability. But qualifying is no easy task, says John Roberts, manager of Myler Disability, an advocacy group. Only 30% who applied in 2009 were awarded benefits, down from 44% in 1999, according to agency data.
Some of that change can be attributed to more people applying for benefits -- 2.8 million in 2009 compared to 1.5 million a decade earlier. That's common when the economy is tough, says Gustman: The number of applications rises, along with an increase in claims that fall short of the agency's standards. Even for people with true and serious disabilities, it can be difficult to qualify. The process can take years and often requires legal help. Most people have to wait for a hearing, says Roberts: "Best case, it is 18 months before you get approved." In some cases, the battle goes to federal court.
To improve your chances, Roberts recommends applying for benefits as soon as you become disabled. Waiting too long could leave you in a situation where you haven't worked long enough to qualify for disability benefits. You must generally have worked at least three to ten years before you became disabled, depending on your age. The spokeswoman for the Social Security Administration says it does not pay benefits for partial or short-term disability and taxpayers must be able to show that they cannot do work they did before or adjust to other work because of their medical condition.
6. "You can be unemployed and retired."
A growing number of people in their 60s are collecting unemployment and Social Security benefits at the same time. Since 2002, seventeen states have changed the rules to allow people to qualify for more unemployment benefits while they receive Social Security, according to the National Employment Law Project, which has advocated on behalf of allowing seniors to claim both. It's perfectly legal; you just have to report the income to both agencies.
There is no clear data on how many people are drawing both. About 10% percent of people who collected unemployment benefits in 2010 were 60 or older, according to the Department of Labor; the minimum age to collect Social Security retirement benefits is age 62. For those who qualify, the option has obvious appeal for older Americans struggling to find work in today's weak job market. "We are generally talking about older workers who lose their jobs involuntarily, who are trying to survive," says George Wentworth, an attorney with the National Employment Law Project.
Receiving unemployment benefits doesn't affect your Social Security payments, but the reverse is not always true: In some states, collecting Social Security can reduce your unemployment checks. In Illinois, Louisiana, South Dakota, Utah and Colorado, your unemployment benefits can be reduced by half of your monthly Social Security benefit.
7. "Your Social Security number is no state secret."
Don't carry your social security card in your wallet. Don't give your number over the phone. Don't use it as a password. For all the precautions workers are told to take to protect that nine-digit number, a Social Security number is still surprisingly vulnerable. So far this year, more than 13 million names and Social Security numbers have been exposed to potential theft as a result of more than 270 data breaches at state governmental agencies, according to the Identity Theft Resource Center, a nonprofit that helps victims of identity theft.
But a social security number need not even be stolen to be compromised. A 2009 study from Carnegie Mellon University finds that it's possible -- and not too difficult -- to guess a Social Security number using details easily gleaned from a Facebook profile, such as date of birth and home town. Researchers were able to accurately guess the first five digits of 44% of Social Security numbers issued after 1988 on the first try, just by using the date and the state the number was issued in; they were able to guess the complete numbers almost 9% of the time. The authors used a list of known Social Security numbers from the Social Security Death Master Files to find patterns on how the last four digits are assigned -- the first five digits are based on the state the number was issued in -- and they found that they are largely assigned in order, based on when the number was issued.
A spokeswoman for the agency says it implemented a new system starting in June that randomly assigns numbers, making more nine digit combinations available in every state. Anyone with a number issued before then might want to guard their birth date and place of birth as carefully as they do their Social Security number -- or at least tighten their Facebook privacy settings.
8. "We think you're dead."
The distinction between dead -- cold, no pulse -- and alive -- just went for a jog! -- seems pretty obvious. But the Social Security Administration commonly records living people in its Death Master File -- a public database that includes Social Security numbers, dates of birth and addresses -- an error that can have grave financial consequences. Of the 2.8 million deaths the Social Security Administration reports each year, about 14,000 people added to the Death Master File are very much alive, according to agency statistics.
People who are incorrectly reported dead can rack up bank fees for bounced checks after Social Security payments stop without warning, and will have to follow up with credit bureaus and other institutions once they get their names off the death file, says Gabriela Beltran, a spokeswoman for the Identity Theft Resource Center. Some people don't find out until they're applying for a loan and they're denied because records show them as decease, she says.
A spokeswoman for the Social Security Administration says it takes "immediate action to correct and reinstate benefits" once it notices an error. Getting off of the list and resuming Social Security payments requires beneficiaries to bring identification to a Social Security office where they can have a face-to-face interview, the administration says.
9. "If you make too much, we'll tax your benefits."
Your Social Security benefits come from paying taxes while you were working, so surely they can't be taxed, right? Wrong. You may in fact be taxed on your Social Security benefits if you have substantial income from other sources, such as dividends, self employment, investment interest and other sources. And studies find many Americans aren't aware of the fact: Some 42% of pre-retirees surveyed by the Financial Literacy Center did not know that benefits could be taxed if their income in retirement exceeded a certain amount.
The rule is that if your combined income -- a measure that includes other sources of income and half of your Social Security benefits -- exceeds $25,000 for an individual or $32,000 for a married couple filing a joint return, you may be taxed on up to 85% of your benefits. People who find themselves in this group can make quarterly estimated payments or choose to have federal taxes withheld from their benefits. The Social Security Administration says the provision to tax benefits became law in 1983 and was "intended to restore the financial soundness" of the Social Security program and Medicare.
10. "Your cost-of-living adjustments come up short."
Every year, Social Security recipients get a cost-of-living adjustment, a little bump based on the current rate of inflation and designed to cover the rising cost of everything from toothpaste to airline tickets. But some critics say the current measurement of inflation doesn't reflect the higher costs that seniors truly face. For example, many older people spend a large share of their budgets on health care, where prices have risen about twice as fast as overall prices, according to a 2010 paper published by the Congressional Research Service. "In many parts of the country a monthly Social Security benefit is not enough to cover basic living expenses," says Catherine Collinson, president of the Transamerica Center for Retirement Studies.
The pricing pressure means some retirees could find themselves struggling to cover essentials like gas, medicine and groceries, says Collinson, meaning they will have to cut spending in other areas. For pre-retirees, it means ramping up your savings today so that you can struggle less in your golden years, she adds. The Social Security Administration says it has been using the Consumer Price Index since legislation instituting automatic cost-of-living increases was enacted in 1972, and changing the benchmark would take an act of Congress.
How to get 7% Income (Barrons)
Barron's Cover | MONDAY, NOVEMBER 21, 2011 How to Get Safe Annual Payouts of 7%
By KAREN HUBE |
Despite rock-bottom interest rates, you can still earn investment income of 7%-plus per year. How to keep money flowing during retirement.
Not so long ago, you could build a reliable portfolio of income-producing investments with just a few simple steps: Buy some Treasuries, some corporate bonds and some munis, and then watch the money roll in. That kind of investing is a long-lost luxury. Yields on core bond holdings have been slim for three years in a row. And while 10-year Treasury yields, at 2%, are higher than they were a year ago, you aren't going to do much better any time soon. The Federal Reserve says it is going to hold rates low until mid-2013. Bottom line: Traditional fixed-income portfolios don't work anymore, and "if retirement investors don't start thinking differently, they're going to run out of money," says Erin Botsford, CEO of the Botsford Group, a Frisco, Texas-based financial advisory firm.
Thinking differently, however, raises new challenges for retirement. Yields of 5% and 7% are attainable, but you have to look globally and across asset classes that may seem unfamiliar, such as emerging-market bonds, global infrastructure stocks, master limited partnerships and mortgage real-estate investment trusts.
The hunt for higher yields requires vigilance. Some risks are obvious: Greek sovereign debt, now yielding over 100%, clearly is no way to finance a leisurely retirement. But more often risk is difficult to spot.
Take the Pimco High Income closed-end fund (ticker: PHK). The fund not only has a highly regarded brand name and widely respected manager, Bill Gross, but also an enticing 11.7% yield.
"But if you look at funds not to buy, this is the poster child," says Maury Fertig, chief investment officer at Relative Value Partners in Northbrook, Ill., who points out that the fund trades at a 67% premium to its net asset value. Investors who buy into the fund are paying far too much for a yield that isn't guaranteed, he says.
Then there's the risk of inaction. If you stick with the traditional income investments, you will be losing money in inflation-adjusted terms.
The 10-year Treasury, with its 2% yield, is a clear loser with today's 3%-plus inflation. Ditto for certificates of deposit and money-market funds.
"You may be preserving your principal, but you aren't going to keep up with inflation," says Malcolm Makin, an advisor at Professional Planning Group in Westerly, R.I. For example, you have to lock your money up in a CD for five years just to get an average 1.5% pretax return. "That isn't going to seem so safe in retrospect at age 70 or 75, when your money has dried up," Makin says.
To increase yield and balance the risks, income portfolios must be cobbled together with a number of investments, ranging from Treasuries to junk bonds. Some—those with the highest credit risk or illiquidity, for example—should make up 2% or less of a portfolio. But even at those levels they can add income and help diversify your holdings.
Here are 11 choices with attractive yields. If you haven't looked at these kinds of investments before, now is an excellent time to start.
Closed-End Corporate-Bond Funds
Regular corporate-bond mutual funds can give you an edge over Treasuries, with yields around 3%, but you can get much more from closed-end bond funds, which trade like stocks.
"There are funds available at substantial discounts to net asset value, and the fact that these funds employ leverage, and their cost of borrowing is very low, can provide additional yield," says Relative Value's Fertig, who recommends these as a piece of a diversified income portfolio.
Fertig likes AllianceBernstein Income fund (ACG), which specializes in investment-grade corporates, Treasuries and agency bonds—debt issued by the likes of Fannie Mae and Freddie Mac. The yield: 6%. "It's trading at a 10.7% discount to its net asset value," he points out.
BlackRock Credit Allocation Income Trust fund (BTZ) is another good prospect, trading at a 13% discount and with a yield of 7.7%. But it is a little more risky, with many AA-rated and BBB-rated bonds—still investment grade, but just barely.
Municipal Bonds
Municipal bonds offer a rare opportunity for investors because they yield more than their taxable-bond counterparts and provide tax breaks to boot. For individuals, leveraged closed-end muni funds are great choices. They are riskier because of their leverage, but that's limited by the Fed's pledge to keep rates low. With tax-free yields above 6%—and many muni funds selling at a discount to NAV—that's equivalent to a taxable yield over 9% for somebody in the 35% tax bracket. Two that look good are BlackRock Municipal Income Quality Trust (BAF), with a 6.3% yield, and Neuberger Berman Intermediate Municipal (NBH), yielding 5.6%. Those yields equate to 9.7% and 8.6%, respectively, for taxpayers in the top bracket.
Less risky, because it uses no leverage, is the Vanguard High Yield Tax Exempt fund (VWAHX), which yields 4.4%, equivalent to 6.8% for high earners.
High-Yield Bonds
Bonds that don't qualify as investment- grade—rated BB or lower—clearly come with more risk, "but you can pick up substantial yield if you look at BB ratings primarily," rather than lower-rated bonds, says Michael Persinski, managing director of U.S. Investment for Citi Private Bank. Yields on these issues are around 7.3%.
Investors have been flocking to high-yield, or junk, bonds lately because the difference between their yields and those of Treasuries widened significantly since April. The current spread is 7.2 percentage points. Valuations are still attractive, says Jamie Kramer, head of thematic advisory at J.P. Morgan. The market is pricing in default rates of around 8%, yet the current rate is 2%.
The best strategy for investing in junk bonds is through a fund or ETF, because they are broadly diversified and have low transaction costs. Eaton Vance Income Fund of Boston (EVIBX) yields 7.9%, and iShares iBoxx $ High Yield Corporate ETF (HYG) yields 7.5%
Emerging-Market Government Bonds
Compared with European sovereign debt, emerging-market government bonds look like safe bets. And with an average yield of 6%, they pay three times that of U.S. Treasuries. Once viewed as high risk, these bonds have become much sturdier amid the rapid growth of developing-world economies.
Emerging-market bond funds can minimize currency risk by using hedging strategies; or you can bet on currencies as well as yields. Funds with currency exposure can give added return when the dollar falls.
While emerging-market currencies are expected to strengthen over the long term, that is no steady trend. Lately, those currencies have declined about 20% relative to the dollar, making currency-exposed funds more volatile, says Michael Herbst, associate director of fund analysis at Morningstar. For currency diversification, he likes Pimco Emerging Local Bond (PELAX), yielding 6.8%. A solid fund that hedges currency risk is Fidelity New Markets Income (FNMIX), with a 5.4% yield.
If you want to leave it up to a manager whether or not to hedge currency risk, consider T. Rowe Price Emerging Markets Bond fund (PREMX), yielding 6.8%.
Dividend-Paying Stocks
Your grandfather may have scoffed at today's dividend yields, but don't pass them by. The average yield on Standard & Poor's 500 stocks that pay dividends, at 2.5%, is well below the historic average of 5.8%. But the last time the index had a higher yield than 10-year Treasuries was 1958. That means investors have an opportunity to capture capital appreciation as well as Treasury-beating yields. And payouts are likely to get stronger as the economy continues to recover, says Howard Silverblatt, senior index analyst at S&P.
By sector, telecom companies have the highest yields, at 6%, followed by utilities at 4.2% and health care at 3%.
For investors who like these yields but are concerned about the risk of investing in stocks, look for companies that have raised their dividends for the past 10 years and aren't straining to pay them, Silverblatt says.
He suggests making sure that companies' earnings are at least twice their payouts. Among those that make the cut: Chevron (CVX), which yields 3%; Johnson & Johnson (JNJ), 3.5%; and Northeast Utilities (NU), 3.2%.
Global Infrastructure Stocks
Companies that own and operate infrastructure such as sea ports, toll roads and utility lines not only are good for yield—expect about 5% from a basket of the stocks—but also tend to perform better than the market in downturns.
"These companies are rich on physical assets, and a lot of them have monopolies. For example, if a company builds a toll road, someone isn't going to build a toll road right next to it," says Mike Finnegan, chief investment officer of Principal Funds and manager of the Principal Global Diversified Income fund.
Among his funds' holdings are PPL (PPL), a utility with operations in the U.S. and Britain, and BCE (BCE), a Quebec-based telecom provider.
Master Limited Partnerships
Advisors like energy-related master limited partnerships not only for their solid dividend yields—often 6% or more—but because they are relatively stable investments and good for diversification.
MLPs are publicly traded limited partnerships. Because of their organizational structure, they don't pay corporate taxes and can pass much of their profits on to their investors. The safest bet is to stick with energy MLPs that own and operate oil and natural-gas pipelines, such as Kinder Morgan Energy Partners (KMP), yielding 6%, and Mark West Energy Partners (MWE), yielding 5.3%. These partnerships aren't closely correlated to stocks and aren't affected by the rise and fall in energy prices, because they collect fees for transporting oil and gas, no matter what happens to the prices.
REITs
Real-estate investment trusts have had strong returns in recent years, and right now they are paying respectable yields.
The apartment sector has been particularly strong, the result of millions of cash-strapped families deciding to rent instead of buy. David Campbell, a principal at Bingham Osborn & Scarborough in San Francisco, recommends two apartment REITs: Camden Properties Trust (CPT), yielding 3.3%, and AvalonBay Communities (AVB), yielding 2.9%.
Fidelity Real Estate Income fund (FRIFX), with a yield of 5.1%, and Vanguard REIT ETF (VNQ), 3.4%, each will give you a diversified basket of REITs.
But when it comes to income, mortgage REITs that invest in mortgage-backed securities issued by Fannie Mae and Freddie Mac may be your best bet. Since their portfolios are guaranteed by the federal government, there's very little credit risk. So the main risk is that the Fed raises interest rates, and it has told us that won't happen before 2013. Annaly Capital Management (NLY) is the biggest in the bunch, with $113 billion in assets and a whopping yield of 14.8%.
Equipment Leasing
When a company leases a piece of heavy equipment, such as an oil tanker or a railroad car, income investors stand to benefit.
Here's how: Independent firms buy up large quantities of leases with investors' pooled assets, "and then investors pick up the income stream from these leases," she says. Current yields are 7% to 8%.
Investors take on the risk of the leases, but Botsford thinks this risk is small.
"We're talking about low-tech equipment that doesn't get obsolete, and 20-year lease cycles," Botsford says. Companies leasing the equipment typically have long track records of making their lease payments. The default rate is minimal, and typically there are about 50 leases in an investment pool.
To participate you have to work through brokers or asset managers, whose firms ooften have access to specific pools, such as those managed by Icon Investments and Cyprus Financial.
The caveat: These lock up investors' money for five to seven years, so Botsford recommends keeping the allocation to about 2% of your portfolio.
Immediate Fixed Annuities
Major stock-market declines and wild volatility have increased the appeal of low-cost annuities. One of the most widely recommended types by advisors is the simplest kind: an immediate fixed annuity. You fund this annuity with a lump sum, and it immediately starts paying out a guaranteed income for life—or a term you specify.
Investors get a higher monthly payment than they could if they tried to create their own income stream from their investments. That's because of annuities' so-called "mortality credit," which is the benefit resulting from pooled assets of many investors. "Some investors are going to die early, and since the insurance company isn't going to have to make their payments, they use them to benefit those still living," says Steve Horan, head of private wealth at the CFA Institute.
With yields of 6% to 7%, a 65-year-old man in good health can turn a $200,000 annuity into monthly payments of $1,100 for life.
Longevity Insurance
If you knew you were going to live until, say, age 85, planning an income stream would be a lot easier. But what worries many retirees is their longevity risk—the chance that they will live a lot longer than they expect.
That's why insurers have recently come out with a new kind of annuity called longevity insurance. This is a kind of deferred annuity that you buy early on to secure an annuity stream five to 20 years down the line. At age 65, you can buy one to begin paying at age 85. "This fixes the time-horizon problem and makes planning a lot easier," Horan says. "These are cost efficient, and they transfer the longevity risk to the insurer," says Horan.
Solid longevity-insurance providers include New York Life Insurance and Metropolitan Life. Fees are embedded in the annuity calculation, but as with immediate fixed annuities, they are reasonable. Through NY Life, a 60-year-old healthy man who buys a $100,000 longevity insurance contract today can secure a $2,916-per-month annuity that begins at age 80 and pays out for life.
In all, our 11 investments offer solid income at a time when any income is hard to come by. In other words, yes, you can still retire comfortably.
.E-mail: editors@barrons.com
By KAREN HUBE |
Despite rock-bottom interest rates, you can still earn investment income of 7%-plus per year. How to keep money flowing during retirement.
Not so long ago, you could build a reliable portfolio of income-producing investments with just a few simple steps: Buy some Treasuries, some corporate bonds and some munis, and then watch the money roll in. That kind of investing is a long-lost luxury. Yields on core bond holdings have been slim for three years in a row. And while 10-year Treasury yields, at 2%, are higher than they were a year ago, you aren't going to do much better any time soon. The Federal Reserve says it is going to hold rates low until mid-2013. Bottom line: Traditional fixed-income portfolios don't work anymore, and "if retirement investors don't start thinking differently, they're going to run out of money," says Erin Botsford, CEO of the Botsford Group, a Frisco, Texas-based financial advisory firm.
Thinking differently, however, raises new challenges for retirement. Yields of 5% and 7% are attainable, but you have to look globally and across asset classes that may seem unfamiliar, such as emerging-market bonds, global infrastructure stocks, master limited partnerships and mortgage real-estate investment trusts.
The hunt for higher yields requires vigilance. Some risks are obvious: Greek sovereign debt, now yielding over 100%, clearly is no way to finance a leisurely retirement. But more often risk is difficult to spot.
Take the Pimco High Income closed-end fund (ticker: PHK). The fund not only has a highly regarded brand name and widely respected manager, Bill Gross, but also an enticing 11.7% yield.
"But if you look at funds not to buy, this is the poster child," says Maury Fertig, chief investment officer at Relative Value Partners in Northbrook, Ill., who points out that the fund trades at a 67% premium to its net asset value. Investors who buy into the fund are paying far too much for a yield that isn't guaranteed, he says.
Then there's the risk of inaction. If you stick with the traditional income investments, you will be losing money in inflation-adjusted terms.
The 10-year Treasury, with its 2% yield, is a clear loser with today's 3%-plus inflation. Ditto for certificates of deposit and money-market funds.
"You may be preserving your principal, but you aren't going to keep up with inflation," says Malcolm Makin, an advisor at Professional Planning Group in Westerly, R.I. For example, you have to lock your money up in a CD for five years just to get an average 1.5% pretax return. "That isn't going to seem so safe in retrospect at age 70 or 75, when your money has dried up," Makin says.
To increase yield and balance the risks, income portfolios must be cobbled together with a number of investments, ranging from Treasuries to junk bonds. Some—those with the highest credit risk or illiquidity, for example—should make up 2% or less of a portfolio. But even at those levels they can add income and help diversify your holdings.
Here are 11 choices with attractive yields. If you haven't looked at these kinds of investments before, now is an excellent time to start.
Closed-End Corporate-Bond Funds
Regular corporate-bond mutual funds can give you an edge over Treasuries, with yields around 3%, but you can get much more from closed-end bond funds, which trade like stocks.
"There are funds available at substantial discounts to net asset value, and the fact that these funds employ leverage, and their cost of borrowing is very low, can provide additional yield," says Relative Value's Fertig, who recommends these as a piece of a diversified income portfolio.
Fertig likes AllianceBernstein Income fund (ACG), which specializes in investment-grade corporates, Treasuries and agency bonds—debt issued by the likes of Fannie Mae and Freddie Mac. The yield: 6%. "It's trading at a 10.7% discount to its net asset value," he points out.
BlackRock Credit Allocation Income Trust fund (BTZ) is another good prospect, trading at a 13% discount and with a yield of 7.7%. But it is a little more risky, with many AA-rated and BBB-rated bonds—still investment grade, but just barely.
Municipal Bonds
Municipal bonds offer a rare opportunity for investors because they yield more than their taxable-bond counterparts and provide tax breaks to boot. For individuals, leveraged closed-end muni funds are great choices. They are riskier because of their leverage, but that's limited by the Fed's pledge to keep rates low. With tax-free yields above 6%—and many muni funds selling at a discount to NAV—that's equivalent to a taxable yield over 9% for somebody in the 35% tax bracket. Two that look good are BlackRock Municipal Income Quality Trust (BAF), with a 6.3% yield, and Neuberger Berman Intermediate Municipal (NBH), yielding 5.6%. Those yields equate to 9.7% and 8.6%, respectively, for taxpayers in the top bracket.
Less risky, because it uses no leverage, is the Vanguard High Yield Tax Exempt fund (VWAHX), which yields 4.4%, equivalent to 6.8% for high earners.
High-Yield Bonds
Bonds that don't qualify as investment- grade—rated BB or lower—clearly come with more risk, "but you can pick up substantial yield if you look at BB ratings primarily," rather than lower-rated bonds, says Michael Persinski, managing director of U.S. Investment for Citi Private Bank. Yields on these issues are around 7.3%.
Investors have been flocking to high-yield, or junk, bonds lately because the difference between their yields and those of Treasuries widened significantly since April. The current spread is 7.2 percentage points. Valuations are still attractive, says Jamie Kramer, head of thematic advisory at J.P. Morgan. The market is pricing in default rates of around 8%, yet the current rate is 2%.
The best strategy for investing in junk bonds is through a fund or ETF, because they are broadly diversified and have low transaction costs. Eaton Vance Income Fund of Boston (EVIBX) yields 7.9%, and iShares iBoxx $ High Yield Corporate ETF (HYG) yields 7.5%
Emerging-Market Government Bonds
Compared with European sovereign debt, emerging-market government bonds look like safe bets. And with an average yield of 6%, they pay three times that of U.S. Treasuries. Once viewed as high risk, these bonds have become much sturdier amid the rapid growth of developing-world economies.
Emerging-market bond funds can minimize currency risk by using hedging strategies; or you can bet on currencies as well as yields. Funds with currency exposure can give added return when the dollar falls.
While emerging-market currencies are expected to strengthen over the long term, that is no steady trend. Lately, those currencies have declined about 20% relative to the dollar, making currency-exposed funds more volatile, says Michael Herbst, associate director of fund analysis at Morningstar. For currency diversification, he likes Pimco Emerging Local Bond (PELAX), yielding 6.8%. A solid fund that hedges currency risk is Fidelity New Markets Income (FNMIX), with a 5.4% yield.
If you want to leave it up to a manager whether or not to hedge currency risk, consider T. Rowe Price Emerging Markets Bond fund (PREMX), yielding 6.8%.
Dividend-Paying Stocks
Your grandfather may have scoffed at today's dividend yields, but don't pass them by. The average yield on Standard & Poor's 500 stocks that pay dividends, at 2.5%, is well below the historic average of 5.8%. But the last time the index had a higher yield than 10-year Treasuries was 1958. That means investors have an opportunity to capture capital appreciation as well as Treasury-beating yields. And payouts are likely to get stronger as the economy continues to recover, says Howard Silverblatt, senior index analyst at S&P.
By sector, telecom companies have the highest yields, at 6%, followed by utilities at 4.2% and health care at 3%.
For investors who like these yields but are concerned about the risk of investing in stocks, look for companies that have raised their dividends for the past 10 years and aren't straining to pay them, Silverblatt says.
He suggests making sure that companies' earnings are at least twice their payouts. Among those that make the cut: Chevron (CVX), which yields 3%; Johnson & Johnson (JNJ), 3.5%; and Northeast Utilities (NU), 3.2%.
Global Infrastructure Stocks
Companies that own and operate infrastructure such as sea ports, toll roads and utility lines not only are good for yield—expect about 5% from a basket of the stocks—but also tend to perform better than the market in downturns.
"These companies are rich on physical assets, and a lot of them have monopolies. For example, if a company builds a toll road, someone isn't going to build a toll road right next to it," says Mike Finnegan, chief investment officer of Principal Funds and manager of the Principal Global Diversified Income fund.
Among his funds' holdings are PPL (PPL), a utility with operations in the U.S. and Britain, and BCE (BCE), a Quebec-based telecom provider.
Master Limited Partnerships
Advisors like energy-related master limited partnerships not only for their solid dividend yields—often 6% or more—but because they are relatively stable investments and good for diversification.
MLPs are publicly traded limited partnerships. Because of their organizational structure, they don't pay corporate taxes and can pass much of their profits on to their investors. The safest bet is to stick with energy MLPs that own and operate oil and natural-gas pipelines, such as Kinder Morgan Energy Partners (KMP), yielding 6%, and Mark West Energy Partners (MWE), yielding 5.3%. These partnerships aren't closely correlated to stocks and aren't affected by the rise and fall in energy prices, because they collect fees for transporting oil and gas, no matter what happens to the prices.
REITs
Real-estate investment trusts have had strong returns in recent years, and right now they are paying respectable yields.
The apartment sector has been particularly strong, the result of millions of cash-strapped families deciding to rent instead of buy. David Campbell, a principal at Bingham Osborn & Scarborough in San Francisco, recommends two apartment REITs: Camden Properties Trust (CPT), yielding 3.3%, and AvalonBay Communities (AVB), yielding 2.9%.
Fidelity Real Estate Income fund (FRIFX), with a yield of 5.1%, and Vanguard REIT ETF (VNQ), 3.4%, each will give you a diversified basket of REITs.
But when it comes to income, mortgage REITs that invest in mortgage-backed securities issued by Fannie Mae and Freddie Mac may be your best bet. Since their portfolios are guaranteed by the federal government, there's very little credit risk. So the main risk is that the Fed raises interest rates, and it has told us that won't happen before 2013. Annaly Capital Management (NLY) is the biggest in the bunch, with $113 billion in assets and a whopping yield of 14.8%.
Equipment Leasing
When a company leases a piece of heavy equipment, such as an oil tanker or a railroad car, income investors stand to benefit.
Here's how: Independent firms buy up large quantities of leases with investors' pooled assets, "and then investors pick up the income stream from these leases," she says. Current yields are 7% to 8%.
Investors take on the risk of the leases, but Botsford thinks this risk is small.
"We're talking about low-tech equipment that doesn't get obsolete, and 20-year lease cycles," Botsford says. Companies leasing the equipment typically have long track records of making their lease payments. The default rate is minimal, and typically there are about 50 leases in an investment pool.
To participate you have to work through brokers or asset managers, whose firms ooften have access to specific pools, such as those managed by Icon Investments and Cyprus Financial.
The caveat: These lock up investors' money for five to seven years, so Botsford recommends keeping the allocation to about 2% of your portfolio.
Immediate Fixed Annuities
Major stock-market declines and wild volatility have increased the appeal of low-cost annuities. One of the most widely recommended types by advisors is the simplest kind: an immediate fixed annuity. You fund this annuity with a lump sum, and it immediately starts paying out a guaranteed income for life—or a term you specify.
Investors get a higher monthly payment than they could if they tried to create their own income stream from their investments. That's because of annuities' so-called "mortality credit," which is the benefit resulting from pooled assets of many investors. "Some investors are going to die early, and since the insurance company isn't going to have to make their payments, they use them to benefit those still living," says Steve Horan, head of private wealth at the CFA Institute.
With yields of 6% to 7%, a 65-year-old man in good health can turn a $200,000 annuity into monthly payments of $1,100 for life.
Longevity Insurance
If you knew you were going to live until, say, age 85, planning an income stream would be a lot easier. But what worries many retirees is their longevity risk—the chance that they will live a lot longer than they expect.
That's why insurers have recently come out with a new kind of annuity called longevity insurance. This is a kind of deferred annuity that you buy early on to secure an annuity stream five to 20 years down the line. At age 65, you can buy one to begin paying at age 85. "This fixes the time-horizon problem and makes planning a lot easier," Horan says. "These are cost efficient, and they transfer the longevity risk to the insurer," says Horan.
Solid longevity-insurance providers include New York Life Insurance and Metropolitan Life. Fees are embedded in the annuity calculation, but as with immediate fixed annuities, they are reasonable. Through NY Life, a 60-year-old healthy man who buys a $100,000 longevity insurance contract today can secure a $2,916-per-month annuity that begins at age 80 and pays out for life.
In all, our 11 investments offer solid income at a time when any income is hard to come by. In other words, yes, you can still retire comfortably.
.E-mail: editors@barrons.com
Mileage Rates for Tax Deductible Business, Charity, Medical, Moving Expenses (IRS.gov)
IRS Announces 2012 Standard Mileage Rates
WASHINGTON — The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations
The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.
Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
WASHINGTON — The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations
The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.
Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
Cutting Pensions? They're Already Doing It (Sunday NY Times)
October 22, 2011
The Little State With a Big Mess
By MARY WILLIAMS WALSH
CRANSTON, R.I.
ON the night of Sept. 8, Gina M. Raimondo, a financier by trade, rolled up here with news no one wanted to hear: Rhode Island, she declared, was going broke.
Maybe not today, and maybe not tomorrow. But if current trends held, Ms. Raimondo warned, the Ocean State would soon look like Athens on the Narragansett: undersized and overextended. Its economy would wither. Jobs would vanish. The state would be hollowed out.
It is not the sort of message you might expect from Ms. Raimondo, a proud daughter of Providence, a successful venture capitalist and, not least, the current general treasurer of Rhode Island. But it is a message worth hearing. The smallest state in the union, it turns out, has a very big debt problem.
After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents. But the scary thing is that no one really knows. The Providence Journal recently tried to count all the municipal pension plans outside the state system and stopped at 155, conceding that it might have missed some. Even the Securities and Exchange Commission is asking questions, including the big one: Are these numbers for real?
“We’re in the fight of our lives for the future of this state,” Ms. Raimondo said in a recent interview. And if the fight is lost? “Either the pension fund runs out of money or cities go bankrupt.”
All of this might seem small in the scheme of national affairs. After all, this is Little Rhody (population: 1,052,567). But the nightmare scenario is that Ms. Raimondo has seen the future of America, and it is Rhode Island. As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won’t be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level.
Economists have talked endlessly about a financial reckoning for the United States, of a moment in the not-so-far-away when the nation’s profligate ways catch up with it. But for Rhode Island, that moment is now. The state has moved to safeguard its bond investors, to avoid being locked out of the credit markets. Last week, the General Assembly went into special session and proposed rolling back benefits for public employees, including those who have already retired. Whether the plan will succeed is anyone’s guess.
Central Falls, a small city north of Providence, didn’t wait for news from the Statehouse. In August, the city filed for bankruptcy rather than keep its pension promises to its retired firefighters and police officers.
Illinois, California, Connecticut, Oklahoma, Michigan — the list of stretched states runs on. In Pennsylvania, the capital city, Harrisburg, filed for bankruptcy earlier this month to avoid having to use prized assets to pay off Wall Street creditors. In New Jersey, Gov. Chris Christie wants to roll back benefits, too.
In most places, as in Rhode Island, the big issue is pensions. By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less. But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent. A phrase that gets thrown around here, Ã la Rick Perry describing Social Security, is “Ponzi scheme.”
That evening in September, Ms. Raimondo walked into the Cranston Portuguese Club to face yet another angry audience. People like Paul L. Valletta Jr., the head of Local 1363 of the firefighters union.
“I want to get the biggest travesty out of the way here,” Mr. Valletta boomed from the back of the hall. “You’re going after the retirees! In this economic time, how could you possibly take a pension away?”
Someone else in the audience said Rhode Island was reneging on a moral obligation.
Ms. Raimondo, 40, stood her ground. Rhode Island, she said, had a choice: it could pay for schoolbooks, roadwork, care for the elderly and so on, or it could keep every promise to its retirees.
“I would ask you, is it morally right to do nothing, and not provide services to the state’s most vulnerable citizens?” she asked the crowd. “Yes, sir, I think this is moral.”
FOR many Americans, the Ocean State conjures images of Newport mansions and Narragansett chic. The overall reality is more prosaic. Rhode Island today is a place where the roads and bridges rank among the worst in the nation and where jobs are particularly hard to find. Unemployment rose faster during the 2008-9 recession than in any other state. The official jobless rate is now 10.6 percent, versus the national average of 9.1 percent.
The textile mills and jewelry manufacturers that once employed thousands here have dwindled away. The big employers today are in health care and education, both of which rely heavily on government spending that has been drying up.
Many states and cities can credibly say their pension plans are viable, even when those plans are not fully funded. That is because state retirement funds, like Social Security, pay out benefits bit by bit, over many years.
But unlike, say, California, with its large, diverse economy, Rhode Island is so small that there is little margin for error. Leaving the state, to escape its taxes, is almost as easy as moving to the other side of town. Efforts to balance the state budget by shrinking the public work force have left Rhode Island with a problem like the one that plagues General Motors: the state has more public-sector retirees than public-sector workers.
More ominous still, in each of the last 10 years, the state pension fund paid more money to retirees than the fund collected from state employees and taxpayers combined. The fund is shrinking, even though the benefits coming due are growing.
For all the pain here, one important constituency — Wall Street — seems satisfied enough. To reassure its bond investors, Rhode Island passed a special law this year giving them first dibs on tax revenue. In other words, bondholders will be paid, whatever happens. Ms. Raimondo has at times been accused of selling out ordinary Rhode Islanders to Wall Street interests, but she says hard choices must be made.
Ms. Raimondo remembers better times in Rhode Island. She grew up in a suburb of Providence, rode public buses to public schools and played in public parks. Her grandfather, who arrived from Italy, studied English in the evenings at the Providence Public Library. (That library system lost its financing from the city in 2009, closed branches and shortened its hours. These days, it is seldom open after 6 p.m.)
But Ms. Raimondo also learned early on about economic forces at work in her state. When she was in sixth grade, the Bulova watch factory, where her father worked, shut its doors. He was forced to retire early, on a sharply reduced pension; he then juggled part-time jobs.
“You can’t let people think that something’s going to be there if it’s not,” Ms. Raimondo said in an interview in her office in the pillared Statehouse, atop a hill in Providence. No one should be blindsided, she said. If pensions are in trouble, it’s better to deliver the news and give people time to make other plans.
BY any standard, Ms. Raimondo is a high achiever. She graduated from Harvard, collected a law degree from Yale and attended Oxford as a Rhodes scholar. After a stint in New York in the venture capital business, she helped found Rhode Island’s first venture capital firm, Point Judith Capital.
Then, in 2009, with zero political experience, she ran for the state office of treasurer. Although she is a Democrat in a heavily Democratic state, she stood out because she refused to promise that state jobs and pension benefits would be protected no matter what. She won by a landslide, receiving more votes than any other candidate for any state office. Her long-term ambitions, in politics, business or both, are the subject of speculation in Providence.
No sooner had she been sworn in than the S.E.C. called. She learned that the commission was investigating the finances of various cities and states, including Rhode Island, to determine whether bond investors were receiving truthful information. At the heart of the S.E.C. inquiry were pension funds.
Ms. Raimondo said she wasn’t entirely surprised. When she disclosed the investigation, she said: “For months, Rhode Island has been listed among several states with precarious finances. This challenging position is, in part, due to our significant and growing unfunded pension liability.” Her first priority, she vowed, would be to ensure that the numbers were right.
Others made similar pledges before. Rhode Island has been trying to fix its pension system for years; it has announced four “reform” plans since 2005, each of which has claimed to reduce costs for the state and cities. It has raised minimum retirement ages, slowed accrual rates, capped cost-of-living adjustments — but always for the youngest or least senior public workers. Retirees, and workers poised to retire, were spared, even though the numbers clearly showed that reducing payments to retirees was the only sure way to fix things quickly.
In recent months Ms. Raimondo has crisscrossed the state in an attempt to sell a different remedy, one in which everyone takes a hit. Yes, it would hurt. But at least the state would avoid having to come up with yet another plan in a year or two. The defined-benefit structure, very popular with public employees, could survive. Still, the battle lines are clear. Eight public workers’ unions have already sued, saying the pension changes of 2009 and 2010 were illegal.
On a September evening out in North Scituate, at the historic Old Congregational Church, Ms. Raimondo told a crowd about what had happened in Vallejo, Calif. That city filed for bankruptcy in 2009 and, after grueling negotiations, left pensions intact but drastically cut bus service, police patrols and other government functions, along with the pay of the city workers who provide all those services.
“That’s not what we want for Rhode Island,” Ms. Raimondo said. “That’s not the future we want for our children.”
Others in the crowd had their own stories. Several retired teachers said they had played by the rules and sent a part of every paycheck to the pension fund, as required by law. One man demanded pension cuts for state troopers and judges. A woman said her aged father would be unable to buy medicine if the state stopped adjusting his pension for inflation.
“I feel your anger,” Ms. Raimondo told the crowd. “In many ways, I’m angry myself. Many of the shenanigans that went on in past years were just wrong.”
In some ways, the central question is not only what the government owes to pensioners but what citizens owe to one another. From the pews of the church, Cindy Gould, a fourth-grade teacher, said that under the current system, she had 11 years to go until retirement. Under Ms. Raimondo’s plan, she might have to work longer. But, Ms. Gould, 54, said she was willing to do so if that meant the elderly would get the medical care they need.
Since the last recession hit, states and cities around the country have embarked on pension changes, often following the Rhode Island pattern. Benefits for state employees who have not yet been hired are usually the first to be cut. Then come changes for those now on the payroll, often in the form of higher mandatory contributions.
Retirees have mostly been off-limits, until now. In many instances, laws or legal precedent shield them. In the corporate sphere, they are supposed to bear losses only in bankruptcy. But those rules do not apply to states, which may not declare bankruptcy in any case. If a government homes in on retirees, a lawsuit is sure to follow, and the resolution will take years. But Ms. Raimondo says Rhode Island doesn’t have years. This isn’t a question of politics or law, she says, but of simple math. To get the numbers right, Ms. Raimondo quickly assembled a panel of experts that included academics, mayors and union officials. The goal was to figure out what a public pension should be and what Rhode Island could afford. Inflation protection every year, for people who in some cases retired in their 40s, started coming into focus.
Analysts also took a close look at the projected long-term investment return for the pension system: 8.25 percent. Everything rested on hitting that target, but the state’s actuary said there was less than a 30 percent chance that would happen over the next 20 years. The board voted to lower the assumption to 7.5 percent. (Given the recent run in the financial markets, even that figure may seem optimistic.)
As a result of that change, the state’s pension shortfall instantly rose to $9 billion from $7 billion. The unions said Ms. Raimondo had manufactured a crisis.
She denied it. “This is about the truth,” she said, “and about doing the right thing.”
Then, as if on cue, Central Falls declared bankruptcy. The city’s pension fund wasn’t just underfunded. It was completely out of money. A receiver for the city sought court permission to reduce by as much as half the base pensions of retired police officers and firefighters.
Suddenly the pension crisis wasn’t an abstraction any more. The unthinkable had happened, and the odds were that it would happen again unless the state acted quickly.
Other mayors began stepping forward and warning that their communities were on the brink, too. Here in Cranston, Mayor Allan W. Fung said that unless things changed, he would have to eliminate trash collection, services to the elderly and recreation programs for children, as well as reduce the size of the police force and fire department.
Over in Woonsocket, John W. Ward, the president of the City Council, said that all summer parks programs had been eliminated and that teachers were working with larger classes than their contracts allowed. Half of Woonsocket’s streetlights were out because the city couldn’t afford to replace them. His son, daughter-in-law and granddaughter had moved to another state.
“To allow the pension system to remain largely unchanged will make it impossible for Woonsocket, and every other urban community, to survive,” Mr. Ward said.
AT the Portuguese Club in Cranston, José M. Berto raised his hand. At 62, he told Ms. Raimondo, he was on the cusp of retirement.
“We’re looking at a Ponzi scheme that would make Bernie Madoff look like a Boy Scout,” said Mr. Berto, a supply officer for the state.
He asked if Rhode Island’s pension problem was the worst in the nation.
Ms. Raimondo said it was.
“I don’t like her message,” Mr. Berto said after the session. “But she has been honest, forthcoming. We’re in trouble. We’re just in so much trouble.”
The Little State With a Big Mess
By MARY WILLIAMS WALSH
CRANSTON, R.I.
ON the night of Sept. 8, Gina M. Raimondo, a financier by trade, rolled up here with news no one wanted to hear: Rhode Island, she declared, was going broke.
Maybe not today, and maybe not tomorrow. But if current trends held, Ms. Raimondo warned, the Ocean State would soon look like Athens on the Narragansett: undersized and overextended. Its economy would wither. Jobs would vanish. The state would be hollowed out.
It is not the sort of message you might expect from Ms. Raimondo, a proud daughter of Providence, a successful venture capitalist and, not least, the current general treasurer of Rhode Island. But it is a message worth hearing. The smallest state in the union, it turns out, has a very big debt problem.
After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents. But the scary thing is that no one really knows. The Providence Journal recently tried to count all the municipal pension plans outside the state system and stopped at 155, conceding that it might have missed some. Even the Securities and Exchange Commission is asking questions, including the big one: Are these numbers for real?
“We’re in the fight of our lives for the future of this state,” Ms. Raimondo said in a recent interview. And if the fight is lost? “Either the pension fund runs out of money or cities go bankrupt.”
All of this might seem small in the scheme of national affairs. After all, this is Little Rhody (population: 1,052,567). But the nightmare scenario is that Ms. Raimondo has seen the future of America, and it is Rhode Island. As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won’t be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level.
Economists have talked endlessly about a financial reckoning for the United States, of a moment in the not-so-far-away when the nation’s profligate ways catch up with it. But for Rhode Island, that moment is now. The state has moved to safeguard its bond investors, to avoid being locked out of the credit markets. Last week, the General Assembly went into special session and proposed rolling back benefits for public employees, including those who have already retired. Whether the plan will succeed is anyone’s guess.
Central Falls, a small city north of Providence, didn’t wait for news from the Statehouse. In August, the city filed for bankruptcy rather than keep its pension promises to its retired firefighters and police officers.
Illinois, California, Connecticut, Oklahoma, Michigan — the list of stretched states runs on. In Pennsylvania, the capital city, Harrisburg, filed for bankruptcy earlier this month to avoid having to use prized assets to pay off Wall Street creditors. In New Jersey, Gov. Chris Christie wants to roll back benefits, too.
In most places, as in Rhode Island, the big issue is pensions. By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less. But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent. A phrase that gets thrown around here, Ã la Rick Perry describing Social Security, is “Ponzi scheme.”
That evening in September, Ms. Raimondo walked into the Cranston Portuguese Club to face yet another angry audience. People like Paul L. Valletta Jr., the head of Local 1363 of the firefighters union.
“I want to get the biggest travesty out of the way here,” Mr. Valletta boomed from the back of the hall. “You’re going after the retirees! In this economic time, how could you possibly take a pension away?”
Someone else in the audience said Rhode Island was reneging on a moral obligation.
Ms. Raimondo, 40, stood her ground. Rhode Island, she said, had a choice: it could pay for schoolbooks, roadwork, care for the elderly and so on, or it could keep every promise to its retirees.
“I would ask you, is it morally right to do nothing, and not provide services to the state’s most vulnerable citizens?” she asked the crowd. “Yes, sir, I think this is moral.”
FOR many Americans, the Ocean State conjures images of Newport mansions and Narragansett chic. The overall reality is more prosaic. Rhode Island today is a place where the roads and bridges rank among the worst in the nation and where jobs are particularly hard to find. Unemployment rose faster during the 2008-9 recession than in any other state. The official jobless rate is now 10.6 percent, versus the national average of 9.1 percent.
The textile mills and jewelry manufacturers that once employed thousands here have dwindled away. The big employers today are in health care and education, both of which rely heavily on government spending that has been drying up.
Many states and cities can credibly say their pension plans are viable, even when those plans are not fully funded. That is because state retirement funds, like Social Security, pay out benefits bit by bit, over many years.
But unlike, say, California, with its large, diverse economy, Rhode Island is so small that there is little margin for error. Leaving the state, to escape its taxes, is almost as easy as moving to the other side of town. Efforts to balance the state budget by shrinking the public work force have left Rhode Island with a problem like the one that plagues General Motors: the state has more public-sector retirees than public-sector workers.
More ominous still, in each of the last 10 years, the state pension fund paid more money to retirees than the fund collected from state employees and taxpayers combined. The fund is shrinking, even though the benefits coming due are growing.
For all the pain here, one important constituency — Wall Street — seems satisfied enough. To reassure its bond investors, Rhode Island passed a special law this year giving them first dibs on tax revenue. In other words, bondholders will be paid, whatever happens. Ms. Raimondo has at times been accused of selling out ordinary Rhode Islanders to Wall Street interests, but she says hard choices must be made.
Ms. Raimondo remembers better times in Rhode Island. She grew up in a suburb of Providence, rode public buses to public schools and played in public parks. Her grandfather, who arrived from Italy, studied English in the evenings at the Providence Public Library. (That library system lost its financing from the city in 2009, closed branches and shortened its hours. These days, it is seldom open after 6 p.m.)
But Ms. Raimondo also learned early on about economic forces at work in her state. When she was in sixth grade, the Bulova watch factory, where her father worked, shut its doors. He was forced to retire early, on a sharply reduced pension; he then juggled part-time jobs.
“You can’t let people think that something’s going to be there if it’s not,” Ms. Raimondo said in an interview in her office in the pillared Statehouse, atop a hill in Providence. No one should be blindsided, she said. If pensions are in trouble, it’s better to deliver the news and give people time to make other plans.
BY any standard, Ms. Raimondo is a high achiever. She graduated from Harvard, collected a law degree from Yale and attended Oxford as a Rhodes scholar. After a stint in New York in the venture capital business, she helped found Rhode Island’s first venture capital firm, Point Judith Capital.
Then, in 2009, with zero political experience, she ran for the state office of treasurer. Although she is a Democrat in a heavily Democratic state, she stood out because she refused to promise that state jobs and pension benefits would be protected no matter what. She won by a landslide, receiving more votes than any other candidate for any state office. Her long-term ambitions, in politics, business or both, are the subject of speculation in Providence.
No sooner had she been sworn in than the S.E.C. called. She learned that the commission was investigating the finances of various cities and states, including Rhode Island, to determine whether bond investors were receiving truthful information. At the heart of the S.E.C. inquiry were pension funds.
Ms. Raimondo said she wasn’t entirely surprised. When she disclosed the investigation, she said: “For months, Rhode Island has been listed among several states with precarious finances. This challenging position is, in part, due to our significant and growing unfunded pension liability.” Her first priority, she vowed, would be to ensure that the numbers were right.
Others made similar pledges before. Rhode Island has been trying to fix its pension system for years; it has announced four “reform” plans since 2005, each of which has claimed to reduce costs for the state and cities. It has raised minimum retirement ages, slowed accrual rates, capped cost-of-living adjustments — but always for the youngest or least senior public workers. Retirees, and workers poised to retire, were spared, even though the numbers clearly showed that reducing payments to retirees was the only sure way to fix things quickly.
In recent months Ms. Raimondo has crisscrossed the state in an attempt to sell a different remedy, one in which everyone takes a hit. Yes, it would hurt. But at least the state would avoid having to come up with yet another plan in a year or two. The defined-benefit structure, very popular with public employees, could survive. Still, the battle lines are clear. Eight public workers’ unions have already sued, saying the pension changes of 2009 and 2010 were illegal.
On a September evening out in North Scituate, at the historic Old Congregational Church, Ms. Raimondo told a crowd about what had happened in Vallejo, Calif. That city filed for bankruptcy in 2009 and, after grueling negotiations, left pensions intact but drastically cut bus service, police patrols and other government functions, along with the pay of the city workers who provide all those services.
“That’s not what we want for Rhode Island,” Ms. Raimondo said. “That’s not the future we want for our children.”
Others in the crowd had their own stories. Several retired teachers said they had played by the rules and sent a part of every paycheck to the pension fund, as required by law. One man demanded pension cuts for state troopers and judges. A woman said her aged father would be unable to buy medicine if the state stopped adjusting his pension for inflation.
“I feel your anger,” Ms. Raimondo told the crowd. “In many ways, I’m angry myself. Many of the shenanigans that went on in past years were just wrong.”
In some ways, the central question is not only what the government owes to pensioners but what citizens owe to one another. From the pews of the church, Cindy Gould, a fourth-grade teacher, said that under the current system, she had 11 years to go until retirement. Under Ms. Raimondo’s plan, she might have to work longer. But, Ms. Gould, 54, said she was willing to do so if that meant the elderly would get the medical care they need.
Since the last recession hit, states and cities around the country have embarked on pension changes, often following the Rhode Island pattern. Benefits for state employees who have not yet been hired are usually the first to be cut. Then come changes for those now on the payroll, often in the form of higher mandatory contributions.
Retirees have mostly been off-limits, until now. In many instances, laws or legal precedent shield them. In the corporate sphere, they are supposed to bear losses only in bankruptcy. But those rules do not apply to states, which may not declare bankruptcy in any case. If a government homes in on retirees, a lawsuit is sure to follow, and the resolution will take years. But Ms. Raimondo says Rhode Island doesn’t have years. This isn’t a question of politics or law, she says, but of simple math. To get the numbers right, Ms. Raimondo quickly assembled a panel of experts that included academics, mayors and union officials. The goal was to figure out what a public pension should be and what Rhode Island could afford. Inflation protection every year, for people who in some cases retired in their 40s, started coming into focus.
Analysts also took a close look at the projected long-term investment return for the pension system: 8.25 percent. Everything rested on hitting that target, but the state’s actuary said there was less than a 30 percent chance that would happen over the next 20 years. The board voted to lower the assumption to 7.5 percent. (Given the recent run in the financial markets, even that figure may seem optimistic.)
As a result of that change, the state’s pension shortfall instantly rose to $9 billion from $7 billion. The unions said Ms. Raimondo had manufactured a crisis.
She denied it. “This is about the truth,” she said, “and about doing the right thing.”
Then, as if on cue, Central Falls declared bankruptcy. The city’s pension fund wasn’t just underfunded. It was completely out of money. A receiver for the city sought court permission to reduce by as much as half the base pensions of retired police officers and firefighters.
Suddenly the pension crisis wasn’t an abstraction any more. The unthinkable had happened, and the odds were that it would happen again unless the state acted quickly.
Other mayors began stepping forward and warning that their communities were on the brink, too. Here in Cranston, Mayor Allan W. Fung said that unless things changed, he would have to eliminate trash collection, services to the elderly and recreation programs for children, as well as reduce the size of the police force and fire department.
Over in Woonsocket, John W. Ward, the president of the City Council, said that all summer parks programs had been eliminated and that teachers were working with larger classes than their contracts allowed. Half of Woonsocket’s streetlights were out because the city couldn’t afford to replace them. His son, daughter-in-law and granddaughter had moved to another state.
“To allow the pension system to remain largely unchanged will make it impossible for Woonsocket, and every other urban community, to survive,” Mr. Ward said.
AT the Portuguese Club in Cranston, José M. Berto raised his hand. At 62, he told Ms. Raimondo, he was on the cusp of retirement.
“We’re looking at a Ponzi scheme that would make Bernie Madoff look like a Boy Scout,” said Mr. Berto, a supply officer for the state.
He asked if Rhode Island’s pension problem was the worst in the nation.
Ms. Raimondo said it was.
“I don’t like her message,” Mr. Berto said after the session. “But she has been honest, forthcoming. We’re in trouble. We’re just in so much trouble.”
Beware the Wealth Killers (from Ken and Daria Dolan)
Dolans.com
Beware These 9 Wealth Killers
by Ken Dolan October 22, 2008 10:13 AM
Posted in: Family & Money
These are scary times, indeed. Even the talking heads on TV tell us that we're in uncharted territory. And based on our 20+ years of experience in the financial business, this is one of the few times that we actually agree with them!
Between economic (and natural) catastrophes...banking disasters...more and more scams…and bad news upon more bad news, it's no wonder that people are tempted to stuff their cash under their mattress!
Yes, it's been a tough year to grow your money. But to make matters even worse, there are also serious threats that can eat away at your hard-earned dollars.
As they say, "Forewarned is forearmed." If you know what threats are out there, you can take steps now to protect your money.
To that end, we've pulled together these top 9 threats to guard against AND what you must do about them. Read on...
Money Threat #1: Inflation.
Dare we say the dreaded "I" word? (May as well since we're in the thick of inflation now!)
Inflation affects more than just the cost of the products you buy – it can also affect the price of your loans since inflation generally pushes interest rates up…not to mention that it can negatively influence your investments because many companies grow more slowly during inflationary times.
Sit tight. Prices will eventually drop again – they always do. In the meantime, cut corners where you can. Save more. You should also start a "rainy day" fund, if you don't have one already. You can quickly calculate how much you need to set aside for emergencies here. (/calculators/How_Much_Do_I_Need_For_Emergencies.html)
Money Threat #2: Stock market losses.
In the midst of the banking crisis and the tumbling real estate and mortgage markets, woe is Wall Street. This turmoil in the stock market affects your retirement, your savings and your financial health as a whole.
Whatever you do, don't spend one more day invested in stocks if you're uncomfortable doing so. Rule #1 in our 10 Simple Rules of Investing (/invest_wisely/dolans_10_rules_of_investing.html) is to "Know thy sleep quotient." In a nutshell, that means reduce your risk if you're staying awake at night worrying about your investments.
Remember: There are always safer places to put your money. Just don't lose your shirt in THESE investments.
Money Threat #3: Bank problems
Many of us who never worried about the safety of our assets in a bank are now very concerned…with good reason. This whole financial crisis is FAR from over.
You can never be too cautious, so first check the safety of your bank through Veribanc (http://www.veribanc.com/ConsumerReports.php) (800/44-BANKS). They provide ratings on all U.S. federally-insured financial institutions. Another source is Weiss Ratings (http://www.weissratings.com/) , which includes a free list of the strongest- and weakest-rated banks in the nation. (You should also be aware of our 5 Warning Signs Your Bank Could Be In Trouble. (/banking/bank-failure-warning-signs.html) )
Also, make sure that your bank is FDIC insured. But don't be hasty – you need to know specifically what's covered and what's not. Find out in How to Protect Your Bank Deposits (/banking/fdic-insurance.html)
Money Threat #4: Weak dollar.
You may think that our weak dollar only affects us if we travel overseas. Not true.
It actually poses a lot of problems for our personal wealth as well. Since we don't manufacture much in the U.S. anymore, a lot of the products we purchase – from cars and wines to toys and clothes – are imported from foreign markets. A weak dollar makes them more expensive.
Also, since we're so dependent on foreign oil, a weak dollar keeps fuel costs high AND, as interest rates remain low, we don't earn as much on investments like CDs and bonds.
One solution, if you can stand the volatility and risk, is to consider a small investment in gold. (Click here for 4 ways to profit from a weak dollar. (/invest_wisely/investing_with_a_weak_dollar.html) )
Money Threat #5: The Presidential election.
We're not about to tell you who to vote for, but you need to know how Wall Street reacts when it comes to electing our highest public official.
Typically, if a Democrat is winning in the weeks leading up to an election, the stock market goes crazy and sells off in advance. It then usually rallies sometime after the new president takes his oath.
On the other hand, if a Republican is winning, the market usually rallies beforehand, then typically sells off not long after he takes office.
No matter what happens, if you plan to stay in the market (and we think it's treacherous to be there at the moment), be prepared for some short-term losses at the very least.
[Money Threat #6: Fluctuating energy prices.
Sure, gas prices are dropping...but for how long? (As long as we're importing oil, the risk of skyrocketing prices will always be there!)
Higher energy prices affect more than just the prices at the pump. They often lead to higher prices not only for essential goods such as food, but for just about anything that needs to be transported by truck or air.
They have a profound impact on your everyday products, not to mention the economy at large. And historically speaking, recessions often follow oil price surges.
What to do? The key is conservation. Slow down the demand. Carpool to work or take public transportation (or work from home a few days a week if your company allows it). You can find four other ways to save gas here (/save_more/gallery/high-gas-prices.html) .
Money Threat #7: Excessive household debt.
In The Millionaire Next Door, authors Thomas Stanley and William Danko noted that most self-made millionaires save or invest 15 to 20 percent of their income. The other side of the coin is that average Americans spend 18% of their disposable income paying off their debts. What a nightmare!
The obvious lesson learned is you'll never become a millionaire when you have a desk full of loans and credit card bills to pay each month. Find out how to become completely debt-free in 10 simple steps. (/debt_management/gallery/living-debt-free.html)
Money Threat #8: Being under-insured.
It's estimated that two out of three homes nationwide are under-insured. That's a scary statistic – especially in light of all of the natural disasters over the last few months.
Here's another frightening fact: Many homeowners with older insurance policies don't know that since the late 1990s they've had to specifically request a "guaranteed replacement" policy. Meaning if they don't, their policy may set pay-out limits that may not be enough to cover the cost to repair or rebuild their home. In the unlikely event of a disaster, the potential financial loss is staggering.
Eliminate your risk. Check your homeowner's policy. Then get our checklist to be sure you're prepared, just in case: What to Do When Disaster Strikes (/family_money/gallery/what-to-do-when-disaster-strikes.html) .
Money Threat #9: Money scams
If you receive an offer in the mail (or from a telemarketer) that sounds too good to be true, either look at it more closely…or, even better, pitch it.
One piece of mail you're much better off ignoring is a letter promising "mortgage rescue assistance." It has 'scam' written all over it. Remember, you do not and should not pay money to ANYONE to stay out of foreclosure. If you need help, consult a real estate attorney or call HOPE NOW at 1-800-995-HOPE
And…if you have a child applying to colleges this year, beware the scholarship scams, which "guarantee" a scholarship for a $50 to $1,500 fee. Ha!
Don't forget to forward this information to a friend who may need it!
Copyright © 2011 Dolans.com. All Rights Reserved.
Beware These 9 Wealth Killers
by Ken Dolan October 22, 2008 10:13 AM
Posted in: Family & Money
These are scary times, indeed. Even the talking heads on TV tell us that we're in uncharted territory. And based on our 20+ years of experience in the financial business, this is one of the few times that we actually agree with them!
Between economic (and natural) catastrophes...banking disasters...more and more scams…and bad news upon more bad news, it's no wonder that people are tempted to stuff their cash under their mattress!
Yes, it's been a tough year to grow your money. But to make matters even worse, there are also serious threats that can eat away at your hard-earned dollars.
As they say, "Forewarned is forearmed." If you know what threats are out there, you can take steps now to protect your money.
To that end, we've pulled together these top 9 threats to guard against AND what you must do about them. Read on...
Money Threat #1: Inflation.
Dare we say the dreaded "I" word? (May as well since we're in the thick of inflation now!)
Inflation affects more than just the cost of the products you buy – it can also affect the price of your loans since inflation generally pushes interest rates up…not to mention that it can negatively influence your investments because many companies grow more slowly during inflationary times.
Sit tight. Prices will eventually drop again – they always do. In the meantime, cut corners where you can. Save more. You should also start a "rainy day" fund, if you don't have one already. You can quickly calculate how much you need to set aside for emergencies here. (/calculators/How_Much_Do_I_Need_For_Emergencies.html)
Money Threat #2: Stock market losses.
In the midst of the banking crisis and the tumbling real estate and mortgage markets, woe is Wall Street. This turmoil in the stock market affects your retirement, your savings and your financial health as a whole.
Whatever you do, don't spend one more day invested in stocks if you're uncomfortable doing so. Rule #1 in our 10 Simple Rules of Investing (/invest_wisely/dolans_10_rules_of_investing.html) is to "Know thy sleep quotient." In a nutshell, that means reduce your risk if you're staying awake at night worrying about your investments.
Remember: There are always safer places to put your money. Just don't lose your shirt in THESE investments.
Money Threat #3: Bank problems
Many of us who never worried about the safety of our assets in a bank are now very concerned…with good reason. This whole financial crisis is FAR from over.
You can never be too cautious, so first check the safety of your bank through Veribanc (http://www.veribanc.com/ConsumerReports.php) (800/44-BANKS). They provide ratings on all U.S. federally-insured financial institutions. Another source is Weiss Ratings (http://www.weissratings.com/) , which includes a free list of the strongest- and weakest-rated banks in the nation. (You should also be aware of our 5 Warning Signs Your Bank Could Be In Trouble. (/banking/bank-failure-warning-signs.html) )
Also, make sure that your bank is FDIC insured. But don't be hasty – you need to know specifically what's covered and what's not. Find out in How to Protect Your Bank Deposits (/banking/fdic-insurance.html)
Money Threat #4: Weak dollar.
You may think that our weak dollar only affects us if we travel overseas. Not true.
It actually poses a lot of problems for our personal wealth as well. Since we don't manufacture much in the U.S. anymore, a lot of the products we purchase – from cars and wines to toys and clothes – are imported from foreign markets. A weak dollar makes them more expensive.
Also, since we're so dependent on foreign oil, a weak dollar keeps fuel costs high AND, as interest rates remain low, we don't earn as much on investments like CDs and bonds.
One solution, if you can stand the volatility and risk, is to consider a small investment in gold. (Click here for 4 ways to profit from a weak dollar. (/invest_wisely/investing_with_a_weak_dollar.html) )
Money Threat #5: The Presidential election.
We're not about to tell you who to vote for, but you need to know how Wall Street reacts when it comes to electing our highest public official.
Typically, if a Democrat is winning in the weeks leading up to an election, the stock market goes crazy and sells off in advance. It then usually rallies sometime after the new president takes his oath.
On the other hand, if a Republican is winning, the market usually rallies beforehand, then typically sells off not long after he takes office.
No matter what happens, if you plan to stay in the market (and we think it's treacherous to be there at the moment), be prepared for some short-term losses at the very least.
[Money Threat #6: Fluctuating energy prices.
Sure, gas prices are dropping...but for how long? (As long as we're importing oil, the risk of skyrocketing prices will always be there!)
Higher energy prices affect more than just the prices at the pump. They often lead to higher prices not only for essential goods such as food, but for just about anything that needs to be transported by truck or air.
They have a profound impact on your everyday products, not to mention the economy at large. And historically speaking, recessions often follow oil price surges.
What to do? The key is conservation. Slow down the demand. Carpool to work or take public transportation (or work from home a few days a week if your company allows it). You can find four other ways to save gas here (/save_more/gallery/high-gas-prices.html) .
Money Threat #7: Excessive household debt.
In The Millionaire Next Door, authors Thomas Stanley and William Danko noted that most self-made millionaires save or invest 15 to 20 percent of their income. The other side of the coin is that average Americans spend 18% of their disposable income paying off their debts. What a nightmare!
The obvious lesson learned is you'll never become a millionaire when you have a desk full of loans and credit card bills to pay each month. Find out how to become completely debt-free in 10 simple steps. (/debt_management/gallery/living-debt-free.html)
Money Threat #8: Being under-insured.
It's estimated that two out of three homes nationwide are under-insured. That's a scary statistic – especially in light of all of the natural disasters over the last few months.
Here's another frightening fact: Many homeowners with older insurance policies don't know that since the late 1990s they've had to specifically request a "guaranteed replacement" policy. Meaning if they don't, their policy may set pay-out limits that may not be enough to cover the cost to repair or rebuild their home. In the unlikely event of a disaster, the potential financial loss is staggering.
Eliminate your risk. Check your homeowner's policy. Then get our checklist to be sure you're prepared, just in case: What to Do When Disaster Strikes (/family_money/gallery/what-to-do-when-disaster-strikes.html) .
Money Threat #9: Money scams
If you receive an offer in the mail (or from a telemarketer) that sounds too good to be true, either look at it more closely…or, even better, pitch it.
One piece of mail you're much better off ignoring is a letter promising "mortgage rescue assistance." It has 'scam' written all over it. Remember, you do not and should not pay money to ANYONE to stay out of foreclosure. If you need help, consult a real estate attorney or call HOPE NOW at 1-800-995-HOPE
And…if you have a child applying to colleges this year, beware the scholarship scams, which "guarantee" a scholarship for a $50 to $1,500 fee. Ha!
Don't forget to forward this information to a friend who may need it!
Copyright © 2011 Dolans.com. All Rights Reserved.
Preferred Stocks for Real Estate Investment Trusts (Forbes.com)
Investing
A Preferred Path To REIT Income
Peter Slatin, 11.07.11, 6:00 PM ET
I'll put it to you plainly: REITs are overpriced. Many investors have bought into a broad recovery in this sector, but I am afraid prices have gotten ahead of themselves. Yes, I am aware that REITs, as measured by SNL's index, fell 15% in the third quarter. Still, I believe most are richly priced.
The problem, of course, is fading economic growth, and it's a bit of a vicious cycle. The weak economy and uncertainty at home is causing violent stock market gyrations. Things are even worse in Europe. This is gnawing away at banks' health and wellbeing, and they are reluctant to step up and make loans. Economic expansions that fill space in the real estate market require financing. With lenders under pressure and whining about woes, it's hard to imagine a speedy restart to the recovery. It sounds pretty bad, but there are still a few compelling opportunities for investors willing to take a little risk. “Buying on bad news” or when a nervous market clouds valuations is one of the core strategies of successful value investing. When this economy and the REIT market turn, the forward momentum will be sharp: REITs have slashed their debt levels and stocked up on cash, which means that, barring total disaster, it is only a matter of time before the best among the group move ahead again.
In the meantime there is a somewhat safer place for weary real estate investors looking for big yields: REIT preferred shares. These securities are less well-known, but since they are higher up in the companies' capital structure, they take priority over REIT common share owners when it comes to paying out cash dividends.
These days REIT preferreds tend to sell at a 10% to 15% discount to their par value, which is typically $25. Oh, and did I mention that the dividend yields now are averaging about 8%? REIT preferreds tend to be less volatile than REIT common shares, but the downside of lower volatility is lower liquidity. Trading volume is low. The higher yields mean that there is some risk that management could call in shares. But they can't do so for the first five years after issuance and, with their current discounts, an early call translates into capital gains.
Buying individual preferred issues is challenging, though not impossible. You want companies with great balance sheets and a good track record. Longtime REIT watchers often cite the preferred shares of Public Storage as the gold standard. Today Public Storage's preferreds are trading slightly above par and have a current yield of 6.7%.
I recommend using funds to play the REIT preferred-yield game. My top pick is FORWARD SELECT INCOME FUND (KIFAX, 21), a ten-year-old no-load mutual fund with $1.1 billion in assets under management. Its current yield is 9.4%.
Another good bet just got better. Lazard Asset Management just acquired the REIT mutual funds from Grubb & Ellis Alesco Global Advisors, still managed by Jay Leupp and David Ronco. Lazard is sure to add seed capital to bulk up these underfunded yet well-performing funds, which languished under prior sponsorship but still produced great results. Buy LAZARD U.S. REALTY INCOME PORTFOLIO (LRIOX, 9), currently weighted about 60% toward preferreds. Among its holdings are the Glimcher Realty Trust Series F, a mall REIT, and Hersha Hospitality Trust Series B, a hotel REIT, yielding 9.4% and 9.2%, respectively. The tiny fund is offering a current yield of 6%.
COHEN & STEERS REIT & PREFERRED INCOME FUND (RNP, 13) is a closed-end fund that has just under $1.2 billion in assets and is run by the 800-pound gorilla of REIT managers. If you want quality, New York City's Cohen & Steers has a sterling reputation, and this fund has a yield of 6.7%.
If preferreds are too slow and steady for you, here's a health care REIT whose common shares provide preferred-type yields as well as strong growth prospects. LTC PROPERTIES (LTC, 26) is the owner of a basket of long-term, net-leased properties devoted to senior care, from assisted living to skilled nursing. The 19-year-old southern California company has a $790 million market cap and a dividend yield of 6.6%. LTC has 207 properties in 30 states, plenty of cash on hand and a solid management team. I expect it to continue growing despite the sluggisheconomy.
--------------------------------------------------------------------------------
PETER SLATIN IS EDITOR OF THE FORBES/SLATIN REAL ESTATE REPORT (SEE FORBES.COM/SLATIN ) AND EDITORIAL DIRECTOR OF REAL CAPITAL ANALYTICS
A Preferred Path To REIT Income
Peter Slatin, 11.07.11, 6:00 PM ET
I'll put it to you plainly: REITs are overpriced. Many investors have bought into a broad recovery in this sector, but I am afraid prices have gotten ahead of themselves. Yes, I am aware that REITs, as measured by SNL's index, fell 15% in the third quarter. Still, I believe most are richly priced.
The problem, of course, is fading economic growth, and it's a bit of a vicious cycle. The weak economy and uncertainty at home is causing violent stock market gyrations. Things are even worse in Europe. This is gnawing away at banks' health and wellbeing, and they are reluctant to step up and make loans. Economic expansions that fill space in the real estate market require financing. With lenders under pressure and whining about woes, it's hard to imagine a speedy restart to the recovery. It sounds pretty bad, but there are still a few compelling opportunities for investors willing to take a little risk. “Buying on bad news” or when a nervous market clouds valuations is one of the core strategies of successful value investing. When this economy and the REIT market turn, the forward momentum will be sharp: REITs have slashed their debt levels and stocked up on cash, which means that, barring total disaster, it is only a matter of time before the best among the group move ahead again.
In the meantime there is a somewhat safer place for weary real estate investors looking for big yields: REIT preferred shares. These securities are less well-known, but since they are higher up in the companies' capital structure, they take priority over REIT common share owners when it comes to paying out cash dividends.
These days REIT preferreds tend to sell at a 10% to 15% discount to their par value, which is typically $25. Oh, and did I mention that the dividend yields now are averaging about 8%? REIT preferreds tend to be less volatile than REIT common shares, but the downside of lower volatility is lower liquidity. Trading volume is low. The higher yields mean that there is some risk that management could call in shares. But they can't do so for the first five years after issuance and, with their current discounts, an early call translates into capital gains.
Buying individual preferred issues is challenging, though not impossible. You want companies with great balance sheets and a good track record. Longtime REIT watchers often cite the preferred shares of Public Storage as the gold standard. Today Public Storage's preferreds are trading slightly above par and have a current yield of 6.7%.
I recommend using funds to play the REIT preferred-yield game. My top pick is FORWARD SELECT INCOME FUND (KIFAX, 21), a ten-year-old no-load mutual fund with $1.1 billion in assets under management. Its current yield is 9.4%.
Another good bet just got better. Lazard Asset Management just acquired the REIT mutual funds from Grubb & Ellis Alesco Global Advisors, still managed by Jay Leupp and David Ronco. Lazard is sure to add seed capital to bulk up these underfunded yet well-performing funds, which languished under prior sponsorship but still produced great results. Buy LAZARD U.S. REALTY INCOME PORTFOLIO (LRIOX, 9), currently weighted about 60% toward preferreds. Among its holdings are the Glimcher Realty Trust Series F, a mall REIT, and Hersha Hospitality Trust Series B, a hotel REIT, yielding 9.4% and 9.2%, respectively. The tiny fund is offering a current yield of 6%.
COHEN & STEERS REIT & PREFERRED INCOME FUND (RNP, 13) is a closed-end fund that has just under $1.2 billion in assets and is run by the 800-pound gorilla of REIT managers. If you want quality, New York City's Cohen & Steers has a sterling reputation, and this fund has a yield of 6.7%.
If preferreds are too slow and steady for you, here's a health care REIT whose common shares provide preferred-type yields as well as strong growth prospects. LTC PROPERTIES (LTC, 26) is the owner of a basket of long-term, net-leased properties devoted to senior care, from assisted living to skilled nursing. The 19-year-old southern California company has a $790 million market cap and a dividend yield of 6.6%. LTC has 207 properties in 30 states, plenty of cash on hand and a solid management team. I expect it to continue growing despite the sluggisheconomy.
--------------------------------------------------------------------------------
PETER SLATIN IS EDITOR OF THE FORBES/SLATIN REAL ESTATE REPORT (SEE FORBES.COM/SLATIN ) AND EDITORIAL DIRECTOR OF REAL CAPITAL ANALYTICS
Estate Planning Blunders of the Stars (Investment News)
Infamous estate fights
By Andrew Osterland
Investment News
September 11, 2011
You don't have to be a celebrity to make a famous mess of your estate planning, but it might help, according to Danielle and Andrew Mayoras, estate-planning attorneys from Troy, Mich.
They use well-publicized battles over the estates of famous people to illustrate why regular people need sound estate planning. Several famous cases are detailed on their website TrialAndHeirs.com.
“Even when there's not a lot of money involved, people fight over it, particularly in this economy,” Ms. Mayoras said.
The following estate cases provide good examples of what not to do:
Former entertainer and California congressman Sonny Bono, who died in a skiing accident in 1998 at 62, didn't have a will. His estate is still being contested in court by, among others, former wife Cher.
Lesson: Don't put it off.
Retired Supreme Court Chief Justice Warren Burger may have been a great legal mind, but he wasn't an estate attorney. He prepared his own will and cost his heirs huge sums in court expenses and taxes.
Lesson: Don't do it yourself.
James Brown, the Godfather of Soul, wanted to leave most of his estate to charity, but he never updated his will, which is being contested by the mother of one of his children.
Lesson: Update your estate plan for life-changing events — even the purchase or sale of a business.
Zsa Zsa Gabor, the ailing 94-year-old celebrity may have another child, if her ninth husband has his way. Prince Frederic von Anhalt, who has power of attorney for his wife, allegedly wants to arrange for an egg donor, a surrogate mother and artificial insemination to allow it.
Ms. Gabor's only daughter, Francesca Hilton, alleges that the prince has been spending her mother's money unwisely.
Lesson: Choose the right person to have power of attorney for you.
By Andrew Osterland
Investment News
September 11, 2011
You don't have to be a celebrity to make a famous mess of your estate planning, but it might help, according to Danielle and Andrew Mayoras, estate-planning attorneys from Troy, Mich.
They use well-publicized battles over the estates of famous people to illustrate why regular people need sound estate planning. Several famous cases are detailed on their website TrialAndHeirs.com.
“Even when there's not a lot of money involved, people fight over it, particularly in this economy,” Ms. Mayoras said.
The following estate cases provide good examples of what not to do:
Former entertainer and California congressman Sonny Bono, who died in a skiing accident in 1998 at 62, didn't have a will. His estate is still being contested in court by, among others, former wife Cher.
Lesson: Don't put it off.
Retired Supreme Court Chief Justice Warren Burger may have been a great legal mind, but he wasn't an estate attorney. He prepared his own will and cost his heirs huge sums in court expenses and taxes.
Lesson: Don't do it yourself.
James Brown, the Godfather of Soul, wanted to leave most of his estate to charity, but he never updated his will, which is being contested by the mother of one of his children.
Lesson: Update your estate plan for life-changing events — even the purchase or sale of a business.
Zsa Zsa Gabor, the ailing 94-year-old celebrity may have another child, if her ninth husband has his way. Prince Frederic von Anhalt, who has power of attorney for his wife, allegedly wants to arrange for an egg donor, a surrogate mother and artificial insemination to allow it.
Ms. Gabor's only daughter, Francesca Hilton, alleges that the prince has been spending her mother's money unwisely.
Lesson: Choose the right person to have power of attorney for you.
emerging markets: CIVETS and BRICS (wsj)
Monday, September 19, 2011
The Wall Street Journal Wealth Adviser
By JOHN GREENWOOD
Ten years after Brazil, Russia, India and China were dubbed the BRICs, any early mover advantage for investing in those economies has long gone.
.But lovers of acronyms will be relieved to learn the latest investment theme claiming to steal a march on emerging markets also has a catchy name: CIVETS.
The so-called CIVETS group of countries—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—are being touted as the next generation of tiger economies, even if they are named after a more shy and retiring feline mammal.
These nations all have large, young populations with an average age of 27. This, or so the theory goes, means these countries will benefit from fast-rising domestic consumption. They also are all fast-growing, relatively diverse economies, meaning they shouldn't be as heavily dependent on external demand as the BRICs.
HSBC Global Asset Management launched the first fund specifically targeting these countries, the HSBC GIF CIVETS fund, in May. HSBC points to rising levels of foreign direct investment across the grouping, low levels of public debt—except for Turkey—and sovereign credit ratings moving toward investment grade.
Critics say CIVETS countries have nothing in common beyond their youthful populations. Furthermore, they say, liquidity and corporate governance are patchy and political risk remains a factor, particularly in Egypt.
"This sounds like a gimmick to me," says Darius McDermott, managing director at Chelsea Financial Services. "What does Egypt have in common with Vietnam? At least the BRIC countries were the four biggest emerging economies, so there was some rationale for grouping them together. A general emerging-markets fund would be a less risky way to get similar exposure."
Still, early numbers suggest that CIVETS investors could prosper. The S&P CIVETS 60 index, established in 2007, is ahead of two other emerging-markets indexes—the S&P BRIC 40 and S&P Emerging BMI—over one and three years.
Colombia: Colombia is emerging as an attractive destination for investors. Improved security measures have led to a 90% decline in kidnappings and a 46% drop in the murder rate over the past decade, which has helped per-capita gross domestic product double since 2002. Colombia's sovereign debt was promoted to investment grade by all three ratings agencies this year.
Colombia has substantial oil, coal and natural-gas deposits. Foreign direct investment totaled $6.8 billion in 2010, with the U.S. its principal partner.
HSBC Global Asset Management likes Bancolombia SA, the country's largest private bank, which has posted a return on equity of more than 19% for each of the last eight years.
Indonesia: The world's fourth-most populous nation, Indonesia weathered the global financial crisis better than most, helped by its massive domestic consumption market. After growing 4.5% in 2009, it rebounded above the 6% mark last year and is predicted to stay there for the next few years. Its sovereign debt rating has risen to one notch below investment grade in the last year.
Although Indonesia has the lowest unit labor costs in the Asia-Pacific region and a government ambitious to make the nation a manufacturing hub, corruption is a problem.
Some fund managers see exposure best achieved through local subsidiaries of multinationals. Andy Brown, investment manager at Aberdeen Asset Management, holds PT Astra International, an auto conglomerate that is majority-owned by Jardine Matheson Group.
Vietnam: Vietnam has been one of the fastest-growing economies in the world for the past 20 years, with the World Bank projecting 6% growth this year rising to 7.2% in 2013. Its proximity to China has led some analysts to describe it as a potential new manufacturing hub.
But communist Vietnam only became a member of the World Trade Organization in 2007. "The reality is that investing in Vietnam is still a very laborious process," Mr. Brown says.
Cynics suggest Vietnam is included within the CIVETS to make the acronym work. The HSBC fund has only a 1.5% target allocation to the country.
Egypt: Revolution may have put the brakes on the Egyptian economy—the World Bank is predicting growth of just 1% this year, compared with 5.2% last year—but analysts expect it to regain its growth trajectory when political stability returns.
Egypt's many assets include fast-growing ports on the Mediterranean and Red Sea linked by the Suez Canal and its vast untapped natural-gas resources.
Egypt has a big, young population—82 million strong and with a median age of 25. Aberdeen says National Société Générale Bank (NSGB), a subsidiary of Société Générale SA, is well-positioned to take advantage of Egypt's underdeveloped domestic consumption.
Turkey: Located between Europe and major energy producers in the Middle East, Caspian Sea and Russia, Turkey has major natural-gas pipeline projects that make it an important energy corridor between Europe and Central Asia.
"Turkey is a dynamic economy that has trading links with the European Union but without the constraints of the euro-zone or EU membership," says Phil Poole of HSBC Global Asset Management.
The World Bank is predicting growth of 6.1% this year, falling back to 5.3% in 2013.
Mr. Poole rates national air carrier Türk Hava Yollari as a good investment, while Mr. Brown prefers fast-growing retailer BIM Birlesik Magazalar A.S. and Anadolu Group, which owns brewer Efes Beer Group.
South Africa: Rising commodity prices, renewed demand in its automotive and chemical industries and spending on the World Cup have helped South Africa—a diversified economy rich in resources such as gold and platinum—resume growth after it slipped into recession during the global economic downturn.
Many see the nation as a gateway to investment into the rest of Africa.
HSBC sees long-term growth potential in mining, energy and chemical firm Sasol Ltd.
Mr. Greenwood is a personal-finance writer in London. He can be reached at reports@wsj.com.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
The Wall Street Journal Wealth Adviser
By JOHN GREENWOOD
Ten years after Brazil, Russia, India and China were dubbed the BRICs, any early mover advantage for investing in those economies has long gone.
.But lovers of acronyms will be relieved to learn the latest investment theme claiming to steal a march on emerging markets also has a catchy name: CIVETS.
The so-called CIVETS group of countries—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—are being touted as the next generation of tiger economies, even if they are named after a more shy and retiring feline mammal.
These nations all have large, young populations with an average age of 27. This, or so the theory goes, means these countries will benefit from fast-rising domestic consumption. They also are all fast-growing, relatively diverse economies, meaning they shouldn't be as heavily dependent on external demand as the BRICs.
HSBC Global Asset Management launched the first fund specifically targeting these countries, the HSBC GIF CIVETS fund, in May. HSBC points to rising levels of foreign direct investment across the grouping, low levels of public debt—except for Turkey—and sovereign credit ratings moving toward investment grade.
Critics say CIVETS countries have nothing in common beyond their youthful populations. Furthermore, they say, liquidity and corporate governance are patchy and political risk remains a factor, particularly in Egypt.
"This sounds like a gimmick to me," says Darius McDermott, managing director at Chelsea Financial Services. "What does Egypt have in common with Vietnam? At least the BRIC countries were the four biggest emerging economies, so there was some rationale for grouping them together. A general emerging-markets fund would be a less risky way to get similar exposure."
Still, early numbers suggest that CIVETS investors could prosper. The S&P CIVETS 60 index, established in 2007, is ahead of two other emerging-markets indexes—the S&P BRIC 40 and S&P Emerging BMI—over one and three years.
Colombia: Colombia is emerging as an attractive destination for investors. Improved security measures have led to a 90% decline in kidnappings and a 46% drop in the murder rate over the past decade, which has helped per-capita gross domestic product double since 2002. Colombia's sovereign debt was promoted to investment grade by all three ratings agencies this year.
Colombia has substantial oil, coal and natural-gas deposits. Foreign direct investment totaled $6.8 billion in 2010, with the U.S. its principal partner.
HSBC Global Asset Management likes Bancolombia SA, the country's largest private bank, which has posted a return on equity of more than 19% for each of the last eight years.
Indonesia: The world's fourth-most populous nation, Indonesia weathered the global financial crisis better than most, helped by its massive domestic consumption market. After growing 4.5% in 2009, it rebounded above the 6% mark last year and is predicted to stay there for the next few years. Its sovereign debt rating has risen to one notch below investment grade in the last year.
Although Indonesia has the lowest unit labor costs in the Asia-Pacific region and a government ambitious to make the nation a manufacturing hub, corruption is a problem.
Some fund managers see exposure best achieved through local subsidiaries of multinationals. Andy Brown, investment manager at Aberdeen Asset Management, holds PT Astra International, an auto conglomerate that is majority-owned by Jardine Matheson Group.
Vietnam: Vietnam has been one of the fastest-growing economies in the world for the past 20 years, with the World Bank projecting 6% growth this year rising to 7.2% in 2013. Its proximity to China has led some analysts to describe it as a potential new manufacturing hub.
But communist Vietnam only became a member of the World Trade Organization in 2007. "The reality is that investing in Vietnam is still a very laborious process," Mr. Brown says.
Cynics suggest Vietnam is included within the CIVETS to make the acronym work. The HSBC fund has only a 1.5% target allocation to the country.
Egypt: Revolution may have put the brakes on the Egyptian economy—the World Bank is predicting growth of just 1% this year, compared with 5.2% last year—but analysts expect it to regain its growth trajectory when political stability returns.
Egypt's many assets include fast-growing ports on the Mediterranean and Red Sea linked by the Suez Canal and its vast untapped natural-gas resources.
Egypt has a big, young population—82 million strong and with a median age of 25. Aberdeen says National Société Générale Bank (NSGB), a subsidiary of Société Générale SA, is well-positioned to take advantage of Egypt's underdeveloped domestic consumption.
Turkey: Located between Europe and major energy producers in the Middle East, Caspian Sea and Russia, Turkey has major natural-gas pipeline projects that make it an important energy corridor between Europe and Central Asia.
"Turkey is a dynamic economy that has trading links with the European Union but without the constraints of the euro-zone or EU membership," says Phil Poole of HSBC Global Asset Management.
The World Bank is predicting growth of 6.1% this year, falling back to 5.3% in 2013.
Mr. Poole rates national air carrier Türk Hava Yollari as a good investment, while Mr. Brown prefers fast-growing retailer BIM Birlesik Magazalar A.S. and Anadolu Group, which owns brewer Efes Beer Group.
South Africa: Rising commodity prices, renewed demand in its automotive and chemical industries and spending on the World Cup have helped South Africa—a diversified economy rich in resources such as gold and platinum—resume growth after it slipped into recession during the global economic downturn.
Many see the nation as a gateway to investment into the rest of Africa.
HSBC sees long-term growth potential in mining, energy and chemical firm Sasol Ltd.
Mr. Greenwood is a personal-finance writer in London. He can be reached at reports@wsj.com.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
Combat Inflation with Floating Rate Securities (Forbes)
Fixed-Income Watch
Inflation Protection For Free
Richard Lehmann, 09.12.11, 6:00 PM ET
I have been pounding the table warning about rising interest rates for some time now. Well, it hasn't happened yet, and the latest Fed pronouncement makes it clear that short- and long-term rates will likely stay low for the next two years. My fear of rising rates caused me to recommend adjustable-rate securities. I was wrong on inflation, but my floating-rate picks have done quite well.
Since 2009 the adjustable-rate securities have enjoyed a spectacular resurgence, because most of them were issued by banks and other financial institutions that suffered huge declines during the financial crisis. These "too big to fail" institutions needed capital, and they issued all kinds of paper to bolster their books.
While fixed-rate issues experienced a similar rise, they are hurt by their call provisions. Specifically, most of the issues with a 5% or higher coupon rate are likely to be refinanced. This means they're trading on a yield-to-call basis with measly returns measured in basis points rather than percentages (100 basis points equals one percentage point). Most are trading above the par value at which they will be redeemed. Those who bought fixed-rate capital note preferreds with high coupons, issued by the troubled banks in 2008, thought they would be safe from call until 2013. Not so.
Congress and the Dodd-Frank Act foiled this seemingly smart strategy. That act says these preferreds can no longer be considered part of a bank's tier-one capital. This triggers a "statutory change" loophole that now allows banks to call these fixed-rate preferreds early. Think of it as Chris Dodd's going away present to his banker buddies.
Adjustable-rate securities normally trade at lower yields than comparable fixed-rate securities. They pay interest monthly or quarterly based on a Treasury bond index, LIBOR or changes in the CPI. The floating rate means these notes are designed to trade at par. But this hasn't been happening. That is because these securities come with an interest rate floor, typically at about 4%. When these bonds were issued that was considered meager. Today a 4% yield is a king's ransom.
Despite the healthy yield floor, most of these adjustables are selling below par today because they are viewed as inflation hedges in a period when inflation fears are absent. Thus you can still buy these adjustable-rate securities below par value. That is like getting a dollar for 90 cents. Hence, inflation protection is free, and the call risk is a positive. Once inflation fears are rekindled and rates spike, you'll be all set with these floating-rate securities.
Here are some adjustables you should consider buying:
AEGON NV SERIES 1 (AEB, 17) PERPETUAL PREFERRED RATED BAA2/BBB/BBB. This Dutch multi-line insurance giant was hard-hit during the financial crisis and still suffers under the weight of European banking concerns. This preferred is adjustable quarterly based on three-month LIBOR plus 87.5 basis points. It has a 4% floor and no ceiling, so at its current price it yields 5.71%. Even better, it's eligible for the 15% qualified dividend income tax rate for those in the highest tax bracket.
Closer to home I like GOLDMAN SACHS SERIES A PERPETUAL PREFERRED (GS A, 19) RATED BAA2/BBB–/A–. It has a floor rate of 3.75% and no ceiling and is tied to three-month LIBOR plus 75 basis points. It yields 4.93%, and it also benefits from the preferable tax rate on dividend income.
If you are willing to accept more risk buy the SLM CORP. 0% OF 3/15/17 (OSM, 21) RATED BA1/BBB–, yielding 6.15%. SLM is better known as Sallie Mae, the student loan organization, which went private in 2004. This adjustable is different in that it pays monthly, based on the percentage change in the year-over-year Consumer Price Index, plus 200 basis points. It has no floor or ceiling rate and currently pays 5.164%. I like it because there is no delay in recognizing an uptick in inflation, but unfortunately it isn't eligible for lower tax treatment.
I thought rates would climb because the Fed would use inflation as its primary tool in curing our economic woes. Bernanke flooded our economy with dollars, but inflation failed to materialize. Our economy was much weaker than I thought. Dark clouds still hang over global markets. While inflation is not an immediate concern, it can and does crop up when it's least expected. Given the current international turmoil and clearly nervous markets, investments offering inflation protection at no cost are a gift I find hard to resist.
Inflation Protection For Free
Richard Lehmann, 09.12.11, 6:00 PM ET
I have been pounding the table warning about rising interest rates for some time now. Well, it hasn't happened yet, and the latest Fed pronouncement makes it clear that short- and long-term rates will likely stay low for the next two years. My fear of rising rates caused me to recommend adjustable-rate securities. I was wrong on inflation, but my floating-rate picks have done quite well.
Since 2009 the adjustable-rate securities have enjoyed a spectacular resurgence, because most of them were issued by banks and other financial institutions that suffered huge declines during the financial crisis. These "too big to fail" institutions needed capital, and they issued all kinds of paper to bolster their books.
While fixed-rate issues experienced a similar rise, they are hurt by their call provisions. Specifically, most of the issues with a 5% or higher coupon rate are likely to be refinanced. This means they're trading on a yield-to-call basis with measly returns measured in basis points rather than percentages (100 basis points equals one percentage point). Most are trading above the par value at which they will be redeemed. Those who bought fixed-rate capital note preferreds with high coupons, issued by the troubled banks in 2008, thought they would be safe from call until 2013. Not so.
Congress and the Dodd-Frank Act foiled this seemingly smart strategy. That act says these preferreds can no longer be considered part of a bank's tier-one capital. This triggers a "statutory change" loophole that now allows banks to call these fixed-rate preferreds early. Think of it as Chris Dodd's going away present to his banker buddies.
Adjustable-rate securities normally trade at lower yields than comparable fixed-rate securities. They pay interest monthly or quarterly based on a Treasury bond index, LIBOR or changes in the CPI. The floating rate means these notes are designed to trade at par. But this hasn't been happening. That is because these securities come with an interest rate floor, typically at about 4%. When these bonds were issued that was considered meager. Today a 4% yield is a king's ransom.
Despite the healthy yield floor, most of these adjustables are selling below par today because they are viewed as inflation hedges in a period when inflation fears are absent. Thus you can still buy these adjustable-rate securities below par value. That is like getting a dollar for 90 cents. Hence, inflation protection is free, and the call risk is a positive. Once inflation fears are rekindled and rates spike, you'll be all set with these floating-rate securities.
Here are some adjustables you should consider buying:
AEGON NV SERIES 1 (AEB, 17) PERPETUAL PREFERRED RATED BAA2/BBB/BBB. This Dutch multi-line insurance giant was hard-hit during the financial crisis and still suffers under the weight of European banking concerns. This preferred is adjustable quarterly based on three-month LIBOR plus 87.5 basis points. It has a 4% floor and no ceiling, so at its current price it yields 5.71%. Even better, it's eligible for the 15% qualified dividend income tax rate for those in the highest tax bracket.
Closer to home I like GOLDMAN SACHS SERIES A PERPETUAL PREFERRED (GS A, 19) RATED BAA2/BBB–/A–. It has a floor rate of 3.75% and no ceiling and is tied to three-month LIBOR plus 75 basis points. It yields 4.93%, and it also benefits from the preferable tax rate on dividend income.
If you are willing to accept more risk buy the SLM CORP. 0% OF 3/15/17 (OSM, 21) RATED BA1/BBB–, yielding 6.15%. SLM is better known as Sallie Mae, the student loan organization, which went private in 2004. This adjustable is different in that it pays monthly, based on the percentage change in the year-over-year Consumer Price Index, plus 200 basis points. It has no floor or ceiling rate and currently pays 5.164%. I like it because there is no delay in recognizing an uptick in inflation, but unfortunately it isn't eligible for lower tax treatment.
I thought rates would climb because the Fed would use inflation as its primary tool in curing our economic woes. Bernanke flooded our economy with dollars, but inflation failed to materialize. Our economy was much weaker than I thought. Dark clouds still hang over global markets. While inflation is not an immediate concern, it can and does crop up when it's least expected. Given the current international turmoil and clearly nervous markets, investments offering inflation protection at no cost are a gift I find hard to resist.
Potential for Countrywide Default (Bloomberg)
BofA Keeps Countrywide Bankruptcy as Option
By Hugh Son and Dawn Kopecki - Sep 16, 2011
Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy.
The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.
The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.
“If the losses become so great, how can Bank of America at least not discuss internally the relative tradeoff of a Countrywide bankruptcy?” Mayo, who has an “underperform” rating on the bank, said in an interview. “And if you pull out the bazooka, you’d better be prepared to use it.”
Countrywide Practices
Just before former CEO Kenneth D. Lewis bought Calabasas, California-based Countrywide, the firm was the biggest mortgage lender in the U.S. with 17 percent of the market and $408 billion of loans originated in 2007, according to industry newsletter Inside Mortgage Finance. Regulators later found its growth was fueled by lax lending standards, with loans marred by false or missing data about borrowers and properties.
Bankruptcy for Countrywide has gained credence with some investors and analysts after Bank of America lost almost half its market value this year. The shares have been whipsawed as the caseload of lawsuits by mortgage bond investors expanded, along with doubts about whether the bank has enough reserves to handle claims.
A Countrywide bankruptcy could halt legal proceedings and consolidate litigation into one court that would split up the subsidiary’s remaining assets for creditors, said Jay Westbrook, a law professor at the University of Texas at Austin. In effect, this would trade one type of litigation for another, one of the people said. The decision would turn on whether the potential savings of a filing outweigh the risks involved in disavowing some of the firm’s obligations, the person said.
What Could Go Wrong
Pitfalls include the possibility that a bankruptcy filing would cast doubt on the entire company’s willingness to support its other subsidiaries and damage Bank of America’s standing in the credit markets or with rating firms, hurting its ability to borrow, according to analysts.
“It’s not some sort of magic elixir that makes it all just go away,” Westbrook said. “I suspect that’s one reason they haven’t done it yet.”
Moynihan, 51, has been asked publicly about a potential Countrywide bankruptcy at least three times in the past year, most recently this week at a conference in New York. The bank’s mortgage division is his only unprofitable business, reporting a $25.3 billion pretax loss in the first half of this year.
Larry DiRita, a Bank of America spokesman, said he couldn’t comment on whether the company planned to file a Countrywide bankruptcy. The bank “took great pains to preserve the separate identity of Countrywide,” DiRita said.
Separate Accounting
Those steps include using separate accounting systems and profit-and-loss statements for Countrywide units, according to a report prepared for Bank of New York Mellon Corp. (BK), the trustee for a group of investors who agreed to an $8.5 billion settlement in June with Bank of America over faulty loans.
Bankruptcy “makes absolute good sense if they can do that,” said David Felt, a Washington-based consultant and former deputy general counsel at the Federal Housing Finance Agency. The FHFA sued Bank of America and 16 other banks this month to recover losses on about $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mae, the government- backed mortgage firms. Bank of America and its subsidiaries created more than a quarter of those bonds.
“Given the size of these lawsuits, the potential liability could exceed the net worth of the subsidiary,” Felt said. “They could say the claims far exceed the amount that we have and therefore we need a bankruptcy court to pick and choose between those creditors.”
Assets Available
Countrywide has $11 billion in assets that could be depleted through demands to repurchase defective mortgages, Jonathan Glionna of Barclays Plc said in an Aug. 31 note. After that, Bank of America may not have any obligation to pay claims from Countrywide’s creditors, he said.
Typically, a corporation that acquires another firm’s assets isn’t liable for the seller’s debts, unless the transaction is considered a de facto merger or there was fraud in the takeover, Robert M. Daines, a Stanford Law School professor, wrote in a legal opinion prepared for BNY Mellon, trustee for the Countrywide mortgage bonds. Daines analyzed whether Bank of America would have to pay bond investors if Countrywide couldn’t.
American International Group Inc. (AIG), the insurer that sued Bank of America last month to recoup more than $10 billion in losses on Countrywide mortgage bonds, argued that the bank is a legal successor to the unit. New York-based AIG cited a series of transactions by Bank of America in 2008 that “were structured in such a way as to leave Countrywide unable to satisfy its massive contingent liabilities.”
Just in Case
Plaintiffs in the $8.5 billion settlement handled by BNY Mellon didn’t take any chances. Their agreement specified that Bank of America was responsible for making good on the payment because they were concerned that Countrywide might be thrown into bankruptcy, said Bob Madden, a Gibbs & Bruns LLP partner representing institutional investors that sued the bank.
“Bank of America didn’t do this stuff, it was Countrywide, which they had the misfortune of acquiring,” Madden said in an interview. “Anybody who tells you they have a solid handle on whether Bank of America can be forced to pay Countrywide liabilities hasn’t looked very closely at the issue.”
The chances of a bankruptcy filing rise “every time another suit gets put on the pile,” Madden said. Mark Herr, a spokesman for New York-based AIG and Stefanie Johnson of the FHFA declined to comment.
Bankruptcy’s Backlash
Bankruptcy would be a “last-ditch option,” and possibly a costly one, because counterparties might become hesitant to buy the parent company’s debt or open trading lines with its Merrill Lynch unit, David Hendler, a CreditSights Inc. analyst, said in a Sept. 8 note. Credit-rating firms could downgrade Bank of America subsidiaries, which benefit from the implicit support of their corporate parent, he said. That would drive up the bank’s cost of borrowing.
“Most counterparties I speak to think this would be a very difficult option for Bank of America and unlikely to be sanctioned by regulators,” said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that has bet against the lender’s stock in the past. “The whole reason they would pursue the nuclear option of a Countrywide bankruptcy would be to put this behind them, but all you would be doing is opening up a Pandora’s box.”
Outstanding Debt
Countrywide has $6.53 billion of debt outstanding, including $2.81 billion of senior unsecured notes, $2.2 billion of preferred securities and $529 million of mortgage-backed bonds, Bloomberg data and Bank of America figures show. The unit’s $1 billion in 6.25 percent notes have plunged 9.2 cents since Aug. 1 to 97.1 cents on the dollar as of Sept. 13, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
Management’s public stance on a potential Countrywide bankruptcy has evolved. In November, responding to a question from Mayo -- who had written a report that month entitled “Is a Countrywide Bankruptcy Possible?” -- Moynihan said he didn’t “see any liability that would make us think differently about working through it in the way we’re working.”
Since then, damage from Countrywide has steadily mounted as U.S.-owned Fannie Mae and Freddie Mac step up demands that the bank repurchase soured loans and new suits emerge, including from AIG and the FHFA. Further, New York Attorney General Eric Schneiderman is seeking to scuttle the $8.5 billion deal, which may result in greater mortgage costs, Bank of America has said.
Last month, when Moynihan was asked during a conference call held by fund manager and bank shareholder Bruce Berkowitz if a Chapter 11 restructuring would be a “viable solution” for Countrywide, the CEO declined to say what he’d do.
“When you face liabilities like this, we thought of every possible thing we could,” Moynihan said, “but I don’t think I’d comment on any outcome.”
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net
To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.
.®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
By Hugh Son and Dawn Kopecki - Sep 16, 2011
Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy.
The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.
The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.
“If the losses become so great, how can Bank of America at least not discuss internally the relative tradeoff of a Countrywide bankruptcy?” Mayo, who has an “underperform” rating on the bank, said in an interview. “And if you pull out the bazooka, you’d better be prepared to use it.”
Countrywide Practices
Just before former CEO Kenneth D. Lewis bought Calabasas, California-based Countrywide, the firm was the biggest mortgage lender in the U.S. with 17 percent of the market and $408 billion of loans originated in 2007, according to industry newsletter Inside Mortgage Finance. Regulators later found its growth was fueled by lax lending standards, with loans marred by false or missing data about borrowers and properties.
Bankruptcy for Countrywide has gained credence with some investors and analysts after Bank of America lost almost half its market value this year. The shares have been whipsawed as the caseload of lawsuits by mortgage bond investors expanded, along with doubts about whether the bank has enough reserves to handle claims.
A Countrywide bankruptcy could halt legal proceedings and consolidate litigation into one court that would split up the subsidiary’s remaining assets for creditors, said Jay Westbrook, a law professor at the University of Texas at Austin. In effect, this would trade one type of litigation for another, one of the people said. The decision would turn on whether the potential savings of a filing outweigh the risks involved in disavowing some of the firm’s obligations, the person said.
What Could Go Wrong
Pitfalls include the possibility that a bankruptcy filing would cast doubt on the entire company’s willingness to support its other subsidiaries and damage Bank of America’s standing in the credit markets or with rating firms, hurting its ability to borrow, according to analysts.
“It’s not some sort of magic elixir that makes it all just go away,” Westbrook said. “I suspect that’s one reason they haven’t done it yet.”
Moynihan, 51, has been asked publicly about a potential Countrywide bankruptcy at least three times in the past year, most recently this week at a conference in New York. The bank’s mortgage division is his only unprofitable business, reporting a $25.3 billion pretax loss in the first half of this year.
Larry DiRita, a Bank of America spokesman, said he couldn’t comment on whether the company planned to file a Countrywide bankruptcy. The bank “took great pains to preserve the separate identity of Countrywide,” DiRita said.
Separate Accounting
Those steps include using separate accounting systems and profit-and-loss statements for Countrywide units, according to a report prepared for Bank of New York Mellon Corp. (BK), the trustee for a group of investors who agreed to an $8.5 billion settlement in June with Bank of America over faulty loans.
Bankruptcy “makes absolute good sense if they can do that,” said David Felt, a Washington-based consultant and former deputy general counsel at the Federal Housing Finance Agency. The FHFA sued Bank of America and 16 other banks this month to recover losses on about $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mae, the government- backed mortgage firms. Bank of America and its subsidiaries created more than a quarter of those bonds.
“Given the size of these lawsuits, the potential liability could exceed the net worth of the subsidiary,” Felt said. “They could say the claims far exceed the amount that we have and therefore we need a bankruptcy court to pick and choose between those creditors.”
Assets Available
Countrywide has $11 billion in assets that could be depleted through demands to repurchase defective mortgages, Jonathan Glionna of Barclays Plc said in an Aug. 31 note. After that, Bank of America may not have any obligation to pay claims from Countrywide’s creditors, he said.
Typically, a corporation that acquires another firm’s assets isn’t liable for the seller’s debts, unless the transaction is considered a de facto merger or there was fraud in the takeover, Robert M. Daines, a Stanford Law School professor, wrote in a legal opinion prepared for BNY Mellon, trustee for the Countrywide mortgage bonds. Daines analyzed whether Bank of America would have to pay bond investors if Countrywide couldn’t.
American International Group Inc. (AIG), the insurer that sued Bank of America last month to recoup more than $10 billion in losses on Countrywide mortgage bonds, argued that the bank is a legal successor to the unit. New York-based AIG cited a series of transactions by Bank of America in 2008 that “were structured in such a way as to leave Countrywide unable to satisfy its massive contingent liabilities.”
Just in Case
Plaintiffs in the $8.5 billion settlement handled by BNY Mellon didn’t take any chances. Their agreement specified that Bank of America was responsible for making good on the payment because they were concerned that Countrywide might be thrown into bankruptcy, said Bob Madden, a Gibbs & Bruns LLP partner representing institutional investors that sued the bank.
“Bank of America didn’t do this stuff, it was Countrywide, which they had the misfortune of acquiring,” Madden said in an interview. “Anybody who tells you they have a solid handle on whether Bank of America can be forced to pay Countrywide liabilities hasn’t looked very closely at the issue.”
The chances of a bankruptcy filing rise “every time another suit gets put on the pile,” Madden said. Mark Herr, a spokesman for New York-based AIG and Stefanie Johnson of the FHFA declined to comment.
Bankruptcy’s Backlash
Bankruptcy would be a “last-ditch option,” and possibly a costly one, because counterparties might become hesitant to buy the parent company’s debt or open trading lines with its Merrill Lynch unit, David Hendler, a CreditSights Inc. analyst, said in a Sept. 8 note. Credit-rating firms could downgrade Bank of America subsidiaries, which benefit from the implicit support of their corporate parent, he said. That would drive up the bank’s cost of borrowing.
“Most counterparties I speak to think this would be a very difficult option for Bank of America and unlikely to be sanctioned by regulators,” said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that has bet against the lender’s stock in the past. “The whole reason they would pursue the nuclear option of a Countrywide bankruptcy would be to put this behind them, but all you would be doing is opening up a Pandora’s box.”
Outstanding Debt
Countrywide has $6.53 billion of debt outstanding, including $2.81 billion of senior unsecured notes, $2.2 billion of preferred securities and $529 million of mortgage-backed bonds, Bloomberg data and Bank of America figures show. The unit’s $1 billion in 6.25 percent notes have plunged 9.2 cents since Aug. 1 to 97.1 cents on the dollar as of Sept. 13, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
Management’s public stance on a potential Countrywide bankruptcy has evolved. In November, responding to a question from Mayo -- who had written a report that month entitled “Is a Countrywide Bankruptcy Possible?” -- Moynihan said he didn’t “see any liability that would make us think differently about working through it in the way we’re working.”
Since then, damage from Countrywide has steadily mounted as U.S.-owned Fannie Mae and Freddie Mac step up demands that the bank repurchase soured loans and new suits emerge, including from AIG and the FHFA. Further, New York Attorney General Eric Schneiderman is seeking to scuttle the $8.5 billion deal, which may result in greater mortgage costs, Bank of America has said.
Last month, when Moynihan was asked during a conference call held by fund manager and bank shareholder Bruce Berkowitz if a Chapter 11 restructuring would be a “viable solution” for Countrywide, the CEO declined to say what he’d do.
“When you face liabilities like this, we thought of every possible thing we could,” Moynihan said, “but I don’t think I’d comment on any outcome.”
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net
To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.
.®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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