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.
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