Financial Planning Stuff You Need to Know

I don’t really like variable annuities. They are very complicated and have a lot of hidden fees that most people don’t understand. Nonetheless, many of my new clients arrive at our first meeting with statements from variable annuities they have been sold.

Many of the annuities have a guaranteed value, or a guaranteed withdrawal amount. Most of my boomer clients with variable annuities are way over invested in stock funds within the annuity for people their ages so the cash out value would be substantially less than the initial investment or the guaranteed value with the market declines of 2008.

So were stuck with them for now. Now I’m wondering will the insurance companies be able to make good on all those guarantees my clients have been paying for. The Wall Street Journal just ran a great story on variable annuities.

Here is a quick quote from the article about the financial strength of some of the major annuity companies:

“Moody’s has “negative outlooks” on units of top-10 U.S. annuity sellers Lincoln, Hartford Financial Services Group Inc., Prudential Financial Inc., and Canadian giant Manulife Financial Corp., while ratings of units of American International Group Inc. are under review for possible downgrade. Last week, Moody’s downgraded units of Europe-based ING Groep NV to A1 from Aa3, giving them stable outlooks.”

Read the whole article

The states that regulate insurance companies do provide some protection for annuity owners. You can find out about your state’s insurance at www.nolhga.com

Here are some links to ratings agencies that rate insurance company financial strength

A.M. Best

Fitch, IBCA, Duff & Phelps

Moody’s

Standard & Poor’s

Weiss Ratings

In his inauguration speech President Obama told our nation that it’s time to make the difficult decisions we have put off in the past, and the sacrifice is needed to achieve a better future.

In the spirit of Obama’s call to action what would you be willing to pledge to do to improve you own future and the future of the country?  The pledge can be in time, money, effort or a combination of those.

Please send me your ideas at mypledge@longfinancialplanning.com.

Look for your ideas on a future post.

Obama will inherit twin economic crises. The immediate financial crisis and recession and a longer-term crisis (Medicare, Social Security, Infrastructure)

What should you expect?

In the next year:

• Obama’s tax plan will likely be passed by congress meaning a tax cut for most Americans earning less than $200,000/year and a tax increase for those earning more than $250,000. There will possibly be a capital gains tax rate increase for these taxpayers as well.

• Some sort of fiscal stimulus plan although more focused on infrastructure rebuilding vs. checking sent directly to taxpayers.

• A re-evaluation of the current economic rescue plan and an expansion of the plan to other industries and to some homeowners facing foreclosure.

Over the next few years:

• Some type of health care plan that would be similar to the one in Massachusetts which requires everyone to buy health insurance if their employer doesn’t provide it. It will likely offer a Medicare-type like option for people who could not afford to purchase private insurance.

• Possible changes in Medicare and Social Security, more likely Medicare which is in more trouble. Expect Medicare to be allowed to negotiate prices for prescription drugs (which it cannot do by law now) and higher premiums. The very complicated Medicare+Choice options are likely to stay.

• A tougher economic climate (not due to Obama) but due to our country’s desire to live on borrowed money. Eventually living off newly borrowed money becomes unsustainable, especially if we use that money for current consumption (flat screen TVs, cars, etc.) vs. investments that increase our long-term wealth (education, bridges, etc.)

What should you do?

• Save more. Long-term returns on stocks will average in the single digits as they did from 1966-1982. Although you cannot control what returns you get in the market you can control how much money you save. Plus if I am wrong, you can retire that much earlier.

• If you earn more than $250,000 and can shift your income into 2008 from 2009, or possibly 2010 into 2009, then doing so will reduce your tax bill.

• If you earn more than $250,000 and have capital gains that you are thinking about realizing, do it now. Capital gains tax rates will be higher for you in the future.

Major economic transformations are always difficult, and usually lead to major political transformations (as happened yesterday). If Obama can navigate the political and economic waters he could set the nation on the course to a much better future.

We are facing some difficult economic times. I’m challenging you to figure out how to live on 30% less income than you have if you had to.

What are your top priorities and what would you cut? What is really necessary? Should you have a decline in your income due to a job loss, reduced business income, or for a medical reason it’s much easier to cope with the change if you have already figured out how you would adjust your spending.

Check out the November, 2008 issue of Kiplinger’s to see how people have dealt with a reduction in income.

The world economy is having its worst financial crisis in decades. The stock market has dropped by over 30% from its peak. Several major banks have failed. Many people are worried.

At times like this having a long-term plan is more important than ever. If you don’t you are likely to be swept up by the emotions of the moment and make decisions that will hurt you in the long-run. Making decisions under stress causes us to go into “fight or flight mode.” When we are in this mode, all of our higher reasoning ability is shut down in order to make sure we can escape from the imminent danger. Unfortunately for our brains a financial crisis is not the same as being chased by a tiger and responding to it instinctively vs. using our higher reasoning ability often leads to a poor long-term outcome.

Below is a logically true statement that goes against emotional sentiment:

• What ever happens in the future now is a better time to buy stocks than in Oct 2007.

The statement is true because on average stocks are more than 30% cheaper than they were in Oct 2007. Even if the market declines more someone who buys today will be better off than someone who bought in Oct 2007.

However, stocks were selling like the proverbial hotcakes in 2007 and now it’s hard to give them away. Why?

Our emotions tell us that the recent past always predicts the future, even though intellectually we know that is incorrect. In 2007 with the market reaching new highs we felt that it could only go up, and now with the financial crisis we feel it can only go down.

Having a long-term plan allows you to weather the financial and emotional storms and make better decisions for your future. Not having a plan could allow you succumb to emotions and make investment decisions on the “Sell-Low, Buy-High” philosophy which never works.

Changes are coming that will affect most Americans who will seek to borrow money in the future. Here are some of my predictions: (Note some of these changes have already occurred).

1. You will need a substantial down payment to purchase a home. Yup, we essentially back to the 20% down payment requirement of the past.
2. It will be harder to qualify for a mortgage. To get the best rates a FICO score of over 760 will likely be necessary.
3. It will be harder to get a home equity line of credit and the loan-to-value ratio of the credit line will be lower than in the past
4. It will be harder to get an auto loan unless you have great credit.
5. Fewer auto lease deals will be available (We’re already seeing that with domestic makes).
6. It will be harder to get credit cards and credit lines will be lower.You will see fewer credit card offers in the mail.

In essence the days of living on borrowed money are over. For those of you who are working with me, most of you have already made that transition and are ahead of the game. For the rest of you it’s coming if it hasn’t already.