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.