American Workers $6 Trillion Short
A new study conducted by Boston College’s Center for Retirement Research states that Americans are $6.6 trillion short of what they need to fund their retirement, due in part to declines in stock and housing values.
The study, based on American workers ages 32-64, used conservative assumptions including: a 3% rate of return on assets, no further cuts in pension coverage or Social Security benefits, and no increase in the age of retirement. While 3% may be appropriate for this study, most people are still thinking in terms of 5%, 6% or even 8% returns, and these may not be attainable as long-term returns with conservative investments.
What does this mean? No, it’s not time to panic, but it does means these workers need to become more self reliant in their retirement planning. This includes the use of insurance-based products such as annuities to provide underlying guarantees for lifetime income, and life insurance for capital and income replacement in the event of an early death.
Start planning today. Your retirement future and security is up to you.
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Are You an Ostrich With Your Head in the Sand?
The Society of Actuaries (SOA) just released a survey showing that nearly half (48%) of Americans ages 45 to 70 have no financial plans in place to protect themselves against outliving their assets and the rising cost of health care should they live longer than they expected. Additional findings show more than one-third are worried about running out of money during retirement, but only 20% plan to purchase an annuity or other form of guaranteed lifetime income to protect their assets. Many Baby Boomers are finding themselves unprepared to maintain their lifestyle in retirement. They see the potential problem but are taking no action. The survey found that nearly three-quarters (71%) of respondents plan to claim Social Security before the age of 70. View full story
Buy & Hold
Panic. This is where many of you are now with your variable annuities. You just received your 4th quarter reports and want to cash it in now before it loses more value. But wait!
What do you want to accomplish with your variable annuity money? Will it be used for your retirement or do you intend to pass the money in the account to your children?
Don’t make the rush to liquidate the account if the intent is to pass these funds to your heirs. Your variable annuity may have a provision or rider which provides a guaranteed death benefit of the initial premium paid or the highest value reached in the policy.
For example, assume you paid an initial premium into your variable annuity of $100,000. The account reached a peak value of $200,000 before the market downturn and is now worth $90,000. If you cash in the contract, you may receive the current value of $90,000 less any surrender charges, if any.
Assume you invest the $90,000 in a no-risk fixed investment with a 5% return. It will take you 16 years to grow the investment back to $200,000, and if you are paying tax at a 25% level, the net return is only 3.75%, increasing that growth period to 21 years.
If you hold the contract (and I’d suggest you seriously consider this), you may have upside potential when the market finally recovers, and you may have a death benefit of either $100,000, the initial premium paid, or $200,000, the maximum value reached, depending on the specific guarantee provided in the policy.
And what if you are using or plan to use the policy values for retirement income? Well, that is an entirely different blog (coming soon!).
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Guarantees in an Uncertain World
Martin Crutsinger, an Associated Press economics writer, recently wrote that household net worth has taken a record tumble caused by falling stock and home prices.
He said the net worth of American households fell by the largest amount in more than a half-century of record keeping during the fourth quarter of last year which was the biggest decline on record going back to 1951.
The drop represented a loss of $5.1 trillion in family net worth caused by the stock market and from the continued fall in housing prices, the biggest asset held by most American families.
The decline in net worth in the fourth quarter represented the sixth-straight quarterly drop in net worth and underscored the battering that U.S. families are undergoing in the midst of a steep recession that has led to surging unemployment and plunging home and investment values.
The plunge in net worth has sent families tightening their belts by cutting back on spending. Economists predict further cutbacks in spending in the months ahead as families continue to face the prospect of rising layoffs and the need to repair their tattered household balance sheets.
“Families’ cracked nest eggs are going to be a long-term drag on spending,” said Mark Zandi, chief economist at Moody’s Economy.com. “Even when consumers go back to the stores, they will be spending less, particularly high-income families who are finding they have not saved enough for retirement given the big declines in their net worth.”
Is it any wonder that consumers are having a flight to safety to the tried and true values present in permanent life insurance and traditional fixed annuities?
These products provide guarantees that the stock market and real estate investments can’t. Permanent life insurance remains in force for the life of the policyholder and guarantees payment in the amount of the policy contract. With a fixed annuity, an insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.
While our industry may be having some bumps and bruises, the guarantees in our products still provide the peace of mind consumers are searching for.
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High Anxiety Over AIG
Anxiety. That’s what many people are experiencing over the current financial meltdown and concerns about AIG, one of the largest insurance companies in the world. According to USA Today, AIG issues more fixed rate annuities than any other company in the United States, and it is the ninth largest seller of variable annuities.
Should you be concerned about their current financial problems, and what should you be doing, if anything, if you own an AIG product?
The answer to the first question is yes. Being concerned is understandable. But I have good news. It is the AIG holding company which has the problems. According to the state regulators, the AIG life insurance subsidiaries are highly regulated and well capitalized. Take it from Consumer Reports, which released an article this week that read: AIG policyholders . . . need not worry that their claims will be denied. With that being said, if you are holding a general account product and the insurance company fails, these cash values may be subject to the claims of AIG’s creditors.
If you own a variable account product, the underlying values invested in the subaccounts are segregated accounts and not subject to the claims of the creditors. They are, however subject to the changes in the market.
All of these products are protected by your state insurance guarantee association. While each state guarantee may vary, the typical amounts protected are up to $100,000 in cash values and up to $300,000 in death benefits.
So, back to the second question. What should you do now? First and foremost, don’t panic and make a decision based on emotions. Talk to your professional insurance agent or financial advisor to insure you are making an informed decision after reviewing all your options. If you don’t have an agent, go to the LIFE website’s agent locator and click on the agent locator to find an agent near you. The agent/advisor will help you make the decision which is right for you.
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