Archive for the 'Bonds and Investments' Category Page 2 of 21

Can You Teach a Young Dog New Tricks Too?

Is Our Youth Finally Learning?

Market Watch, October 24th, 2013

In today’s high expense society, an alarming percentage of seniors are having a difficult time transitioning into their retirement years, financially speaking.  More and more are struggling to make ends meet on their 401K’s and Social Security alone.  And while many people in this age bracket like to talk about the “ignorance of youth,” is it possible that our younger generations are taking notice of the struggles they see their parents and grandparents are going through?  And beyond that, is it conceivable that they are actually taking pro-active steps to make sure they don’t face the same hardships?

A new study conducted by Wells Fargo & Co. says yes.  While 75% of people in their 40’s and 50’s are saying they regret that they have not started saving for retirement sooner, 34% of people in their 30’s stated that they already have a written retirement plan in place.  A pretty impressive number when compared to the 24% of those in their 40’s.  Read the article at the link below to read more about how our young people seem to be wising up to the need to plan ahead.

Retiring Abroad, Fantasy or Reality?

Can Retiring Abroad be a Realistic Option?

BBC Capital, September 19th, 2013

With the cost of living in the United States being as high as it is in many places, many retirees are considering taking their retirement elsewhere.  Places where the climate might be a little warmer, where the cost of housing might be a little (or a lot) less expensive, and the healthcare might be more affordable.  But is it realistic to think you can afford to spend your retirement years living in some exotic locale?

Not only is retiring abroad plausible, the number of retirees who have actually done this has more than doubled since 2006.  And the kicker?  They’re doing it for a lot less money than you might think, some as low as $40 per day!  Concerned about a language barrier?  There are communities, much like here in America, where you can find many fellow English speaking retirees.  See the article listed below for some examples of people who are actually living their retirement dream.

New Rules to Make Reverse Mortgage Qualification More Difficult

The U.S. Department of Housing and Urban Development will be instituting major changes to the Reverse Mortgage program.

Changes taking effect this month, effective September 30, 2013 include:

  • Limits to the amount of money that you can access in the first year of the loan
  • A new mortgage insurance fee structure which may mean higher fees for some borrowers
  • Lower loan amounts – experts estimate that total loan amounts will be about 15 percent lower after Sept. 30, 2013
  • Instructions for setting aside money to be used to pay property taxes and insurance

An additional change will take effect, but not until January 13, 2013

  • Borrowers who are assigned a case number after January 13, 2013 will be required to undergo a financial assessment. The assessment will include a credit history analysis, a cash flow/residual income analysis, analyzing compensating factors and extenuating circumstances and determining if the HECM applicant has the financial means to continue paying property taxes, insurance and other obligations.

These changes are significant and will take effect very quickly. If you are interested in a Reverse Mortgage, talking with a Reverse Mortgage lender immediately may work to your advantage.

Get Matched to Prescreened Licensed Reverse Mortgage Lenders Now.

Estimate Your Current Reverse Mortgage Loan Amount.

Reverse Mortgages Can Benefit Retirees, Both Wealthy and Not

A recent published article on The Wall Street Journal has explained the nature of reverse mortgage and how it can benefit seniors who are in need of money and those are well off. Some of the benefits are covering expenses for home modifications, repairs, medical expenses or home care, having a reliable credit line and lowering tax bills. To read the full article, please click “Reverse Mortgages Can Benefit Retirees, Both Wealthy and Not”.




How much stock to put in stocks?

Stock Certificate
ATT Shares

Back in March, the Wall Street Journal ran a cover story by NewRetirement Advisor Dr. Zvi Bodie, and Dr. Rachelle Taqqu, concerning the dangers of investing in stocks to build wealth for retirement.  The crux of the argument was that while the prevailing Wall Street wisdom is that stocks always outperform bonds over the long term (having done so in every thirty year period since 1861), the fact is that building your retirement plan around the stock market, whatever your diversification, is inherently risky, as the longer you hold stocks, the greater your chances of running into an inconvenient, if temporary, bear market, which if timed near the end of your retirement plan, can ruin decades of careful wealth management.  Anyone who was in the stock market around 2008 can certainly attest to that much, but the article has generated a great deal of discussion, with the Journal posting a follow-up piece containing readers’ objections to the authors’ thesis, and other sites such as Seeking Alpha posting their own thoughts on the endless debate as to what the perfect portfolio should really look like.

The key point to this debate (like everything to do with investment) is the proper calibration of risk vs. gain in one’s investment strategy.  Dr. Bodie and Taqqu aren’t claiming that stocks have no place in a portfolio, but that too many people employ them too freely, relying on old adages like “stocks always outperform bonds over the long term” (see above) instead of looking at what the actual risks of their investments are.  Their position is that most people underestimate the risks of stock ownership, and their suggested solution is additional investment in I-Bonds or TIPS (Treasury Inflation-Protected Securities), extremely low-risk securities indexed to the inflation rate, commonly used as a hedge against bear markets or as inflation protection for already-accumulated assets that need to retain their value for a long time.

Of course the flip side to this argument (as the follow-up articles point out) is that reducing risk has a corresponding effect on one’s ability to amass wealth, and that while removing stocks (or reducing them proportionately) in one’s portfolio will lower risk and reduce volatility, it will almost certainly also reduce the overall amount of money one ends up with.  TIPS and I-Bonds definitionally do not grow at all beyond the inflation rate, and other low-risk investments, such as standard bonds, have traditionally yielded less than stocks, especially over the short-medium term.  How then to make up the shortfall?  Remember, we are talking about retirement savings amassed over the course of decades.  A difference of a few percent in average yearly growth can make a massive difference in the endgame, and while “saving more” can help, most of us cannot easily increase our savings rate by 30%.

So what do you do?  Well obviously, there’s no one answer to that question (all three of the pieces above take pains to point that out), but one element that’s key to a lot of modern thinking on retirement is the idea of weighting risk relative to age.  Long-term retirement planners often advise people to take different thresholds of risk at different ages, investing more heavily in risky stocks early on, when the negative effects of risks can be more easily mitigated, and switching progressively to bonds or even TIPS later on, when a sudden downturn like the recent recession could be devastating without enough time to recover.

Of course none of this matters if you’ve already suffered major losses to your retirement plan, but that’s where other retirement planning tools come in handy.  As always, we suggest that you consider the services of a retirement financial advisor to determine what the best plan is for you.


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The Decline of Stocks and Bonds

Pimco’s CEO, Bill Gross, claims that stock investors should think twice before applying the well established investing maxim of buying and holding into practice, “the cult of equity is dying”.

According to an article on The Wall Street Journal, Gross points out stocks have averaged a 6.6% annual gain on an inflation-adjusted scale for the past century. However, he believes that this rate of return is unlikely to be duplicated anytime soon due to a downward spiriling economy around the globe and goes on to say that the 6.6% return will not ever be duplicated without productivity and innovation that resembles that of Apple. In fact, the U.S. second-quarter GDP grew at a meager 1.5% rate, well below historical standards.

In addition to criticizing stock’s dismal return returns, Gross also chastises bonds, “What you see is what you get more often than not in the bond market, so momentum-following investors are bound to be disappointed if they look to the bond market’s past 30-year history for future salvation, instead of mere survival at the current level of interest rates.”

With lower expected returns for stocks and bonds, the average American is the big loser in this new investing environment. Investors seeking a cure that will solve the world’s problems shouldn’t hold their breath as policy makers in the past have tried to “inflate their way out of the corner.” However, people speculate that the Fed will commence on another bond buying program in order to stimulate the economy.

Bottom line for America: Cut your spending, up your savings, and reset the retirement planning tool ‘rate of return’ to about 1% a year.


Use our free Newretirement Retirement Calculator to plan for a safer retirement


Easy Math for Retirement Investments

Investing your retirement savings can be stressful and confusing.  An easy rule of thumb though is to subtract your age from 100 — the difference is the suggested percentage to be in stocks or other risky investments.  For example, if you are 65 years old, you should have 35 percent of your assets in the stock market.

However, that equation probably doesn’t really give you enough information for the right way to safely and efficiently invest your money.  Luckily there are many relatively new investment advisors that have automated their investment advice online – making it a potentially less expensive option than hiring a full service financial advisor.

NewRetirement has researched and screened these asset allocation services.  Companies like MarketRiders can help you identify the right investments, reduce fees, and alert you when you need to rebalance.


What is your Pension Really Worth?

This is a contribution from Bud Hebeler who runs

Lots of people plan to retire on a pension and Social Security with little savings.  They have never done any serious retirement planning or sought any professional help. That can be a very big mistake unless they have taken into account the damage that can come from future inflation.

Inflation for retirees is a very serious matter.  My own pension lost 30% of its purchasing power in the first ten years.  Inflation compounds, just as do returns.   My father retired in 1965 and lost considerably more than that on his long-term bonds because of the oil crisis and Carter year’s inflation.  During those years, inflation destroyed 49% of the value of a dollar in just ten years.  See Figure 1.

During my father’s time as well as my early years of retirement, medical costs rose at about the same rate as the Consumer’s Price Index, CPI.  That’s because there were less exotic medical treatments and drugs.  Drug bills of $1,000 a month or more were unheard of as were hospital bills of thousands each day.  The fact is that retirees, especially those who are less healthy or elderly, will face inflation much higher than the general population.

Fig. 1 shows how dramatically inflation destroys $10,000 fixed payment annuity or pension.  Most people assume that inflation in the past was always around 3% but it has gone as high as 13.3%.  For most of the period after World War II, inflation averaged over 4%.  For the 35 years in Fig. 1, inflation averaged 5%.

The often quoted 3% inflation rate includes the years of the Great Depression and the Price Controlled years of World War II.  That’s not to say that we, too, won’t face depressions or price controls, but the need to print money with our current national debt problem points to higher inflation, not lower than historical averages.

I’m now telling people that, at the very least, they should multiply their estimated after-tax payments from a fixed pension or annuity times their age divided by 110 to get a better idea of its value in an inflationary environment.  I used to say to divide by 100, but I now believe that future returns will be lower than the past, and I believe that we will see inflation higher than the 3% often quoted.

Employers often mislead employees about the value of a pension.  People who are getting close to retirement should look at the payments they are promised from their pension realistically.  Employer quotes of future pensions can be terribly misleading.  They may assume some wage growth that older employees are unlikely to achieve.  They may not show the sizeable reductions from including a spouse as a beneficiary.  And they won’t show the deductions for maintaining an employer offered health insurance program nor withholding.  Even worse, they certainly won’t show the effect of inflation either from now until they retire or the devastating results after retirement.

Retirees on fixed income really feel the pinch from inflation.  That’s why we try to find inflation-adjusted income from secure sources.  But even those will not keep up with the kind of inflation many of the elderly will find with ever increasing medical costs.   Corporate and municipal bonds are extraordinarily vulnerable to inflation.  Bond funds will do worse when interest rates start to rise.  More secure and inflation-adjusted investments are Savings I Bonds, Treasury Inflation-Protected Securities (TIPS) that are laddered and held to maturity, and inflation-adjusted annuities.  It’s getting harder and harder to find the latter because insurers are afraid of what might happen to inflation in the future.  That’s true of long-term-care insurance as well.

How about those who have already retired?  Many people have already retired on a fixed pension or a fixed payment annuity and have too little savings.  They have already faced the reality of what spousal benefits, insurance deductions and withholding mean to their take-home income.  They don’t want to pay for professional advice, and they don’t want to take the time to make a plan of their own using a free Web program.  So, what’s a quick way to estimate how much they can really afford to spend?

If the savings are barely enough to provide reserves for an emergency fund and high value replacements like a new automobile, then they must rely on Social Security and a pension if they have one.  If they have savings in addition to an emergency reserve and a reserve for known large future expenses, they can get a fair idea of how much additional income they can get from investments (less reserves) by dividing the remaining investments by what they think may be the longest number of years they might still live.  This, in effect, is what the government makes you do when you take Required Minimum Distributions (RMDs) from an IRA after age 70 ½.  The RMD factors are life-expectancies plus about ten years in the seventies going down to about three years more than life-expectancies if you would live to 100.  People who have not reached age 70 yet could use age 95 less their current age to come close to the RMD assumptions for those younger ages.  See Figure 2 for a RMD table from IRS Publication 590, Appendix C.  Half of the population will live past life-expectancies, so you have to plan for the 50% chance you will live longer.  The extra years included in the RMDs do that nicely.

The theoretical assumption behind the analysis above is that the after-tax return equals inflation in each year, but it turns out that from a practical standpoint, this fits the experience of many retirees except in very recent years when it has been difficult to get such after-tax returns on fixed income securities plus miserable stock performance.

What if you are contemplating buying an immediate annuity?

You might first look for an immediate annuity that’s truly inflation-adjusted, not one that says payments will increase at 3%.  You should also look for a competitive quote for a fixed payment annuity.  Assuming that both come from very high quality insurers and have the same survivor options, you can use one of the immediate annuity programs from to see which is best for your case.

If you can’t do that, you can get a reasonable idea which might be best for you by multiplying the quote for the fixed payment annuity times your current age / 110 as above.  If the resulting payment is significantly better than the inflation-adjusted quote, go for the fixed payment IF you feel you can maintain a separate reserve with secure investments that will have returns that are close to, or better than, inflation.  Such a reserve might be dominated by Savings I Bonds or TIPS.  The former is better for a non-qualified account (taxable) and the latter for a qualified account (IRA).

If you choose the fixed payment immediate annuity, then you can use some simple math each year to determine how much you must save from each payment for future inflation protection or how much you can withdraw.  You are going to be your own inflation insurance company.  This has an advantage.  If you die early, your heirs will inherit this reserve—or in some bad emergency, you could choose to use this reserve until you can sell your house or try to make up the shortage some other way.

That’s all there is to it.  Figure 3 illustrates the differences between simply spending all of the after-tax money from a fixed payment pension or annuity versus using the simple calculations above each year.  It’s not perfect inflation protection but it has the advantage of you having the investments from it rather than the insurer.  See Fig. 4 for investments.

Figure 3 shows that spending the whole of the after-tax payments requires a drastic change in life style throughout retirement as did my father how downsized his home three times.  Early in retirement, a retiree can spend a lot more, but this advantage disappears about at age 77.  For the following twenty years, the adjustments really pay off.  And those years are when health care is really expensive.

The other telling difference between the two methods is what happens to savings.  When you buy an immediate annuity or get a pension, it’s the insurer that has your savings—and you can’t get them back.  With the adjusted payment method you build up some savings.  This is illustrated in Figure 4.  If you end up using the investments for something else and can’t restore it, perhaps the worst that can happen is that you go back to the fixed payments spending at what will amount to greatly reduced purchasing power as illustrated with examples in Figures 1 and 3.

If you haven’t done any retirement planning, do it NOW!   You are going to be spending the last quarter to a third of your life without wages, and the future may be even tougher than the past.

  • If you would like to find out how much lifetime retirement income your savings could buy or want to look for a competitive quote for a fixed payment annuity, check out our Free Lifetime Annuity Calculator.
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A Generation at Loss

Things are not going according to plan for people from the “Baby Boomer” generation. The post war generation is living longer and the economy is forcing them to deplete their savings faster than they expected. But just how much longer are people from the Baby Boomer generation living? According to the Wall Street Journal article,

  • A 65-year-old man has a 60% chance of living to age 80
  • A 40% chance of reaching 85.
  • For women, the odds are 71% and 53%, respectively

The result, according to a recent Wall Street Journal article, is that, as a group, boomers likely won’t be getting as much of an inheritance as they hoped. According to Boston College’s Center for Retirement Research, from June 2006 to June 2010, falling asset values reduced projected inheritances for baby boomers an estimated 13%. For example, Nancy Becker, an offspring of the baby boomer generation, inherited her parent’s house but was eventually at loss due to the expenses paid to keep her mother alive to the age of 97.

To combat falling asset values and to get the most out of your assets, there are some steps that should be taken. Re-calibrating budgets, downsizing to a smaller residence, buying an annuity or longevity insurance to lock in a lifelong income, and taking out a reverse mortgage are all measures that should at least be considered.

Have any questions about calculating Annuities or Reverse Mortgages? Use our Annuity Calculator and Reverse Mortgage Calculator for free!



Facebook’s Stock should be under $14


According to a recent article on Marketwatch, Facebook’s stock should trade for under $14.00. Researchers have found that the revenue of the average company going public grew by 212% over the five years after its IPO. Assuming Facebook’s revenue grows just as fast, and given that the company’s latest-year revenue was $3.71 billion, it’s projected annual revenue in five years’ time will be a staggering $11.58 billion.

What does this mean?

It means that Facebook’s market cap in five years will 30% less than where it stands today – roughly be $63.8 billion. Who would invest in Facebook if its stock price will be 30% lower in 5 years? That’s right, nobody. Assuming that its five-year return is equal to the stock market’s long-term average return of 11% annualized, Facebook shares currently would need to be trading at just $13.80.


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