Tuesday, July 10, 2012

Immediate Annuities Remain The Best Bet to Secure A Decent Retirement

The recent (July-August)  AARP Bulletin carried ominous news for Americans near to or planning retirement. According to A. Barry Rand ('Financial Capability', p. 38):

"Half of those working have no sense of how much savings they will need in retirement. According to the Center for Retirement Research at Boston College, almost 44% of working households, ages 36 to 62, are at risk of having insufficient savings for their retirement years. This puts even greater pressure on national retirement systems that already face insolvency challenges."

The last especially comes to mind as President Obama is once again hoist on the Bush Tax cuts petard, challenging the Repubs to allow those tax cuts to expire for the wealthiest, but allowing the "middle class" cuts to remain (e.g. for those earning $250,000 or less a year.)   But as we know, this is not a serious economic proposal but political gamesmanship. It might energize a few of the base, but isn't a long term economic strategy. In fact as I've blogged on before,


ALL the BUSH TAX CUTS need to go!

We need that total allottment of money saved not only to pay for implementation of Mr. Obama's health care reform plan (especially expanding Medicaid, and especially as the SC ruled the mandate is only allowable under the government's tax authority), but to sustain the health of those "national retirement systems", e.g. Social Secuity and Medicare, that the AARP author indicates will be under more pressure on account of inadequate American saving.

Mr. Obama said in a speech Monday:

"Let's not hold the vast majority of Americans and our economy hostage while we debate the merits of another tax cut for the wealthy"

But that is exactly what we are doing! We are doing it by: 1) Playing on the Republican perpetual tax cut wicket,  hence allowing them to control the economic narrative 2) engendering less revenues and higher deficits the next ten years - which will then demand severe cuts to Social Security, Medicare, Medicaid and even basic benefits like food stamps.

This is a false choice. The middle class, in any case, will be held hostage to Simpson-Bowles (the Obama Deficit Commission, or some other mutant commission hatched by Romney) and having major future benefits cut, perhaps by adjustment of the S.S. COLA or raising premiums for Medicare, if not also the age threshold (to 67). Thus, rather than play this absurd political game with the toxic Bushie tax cuts, Obama needs to come clean and ask people what they want:  minor tax cut benefits for a year or two (or likely more) , or preserving their Social Security and Medicare? They cannot have both and politicians, no matter how much they want to game this, ought not let their constituents believe so.

As today's Denver Post editorial put it (p. 17A):

"We have no objection in principle to the wealthy paying more. However, the point is not to punish the wealthy, it's to put the federal budget on a sound footing...that simply can't be done through tax hikes on the wealthy alone."

Which is exactly correct and the numbers don't lie. By GAO reckoning, hitting the wealthy alone (though it may feel good and perceived as politically advantageous) will save $700 billion over ten years. Repealing the tax cuts for everyone will save $3.7 TRILLION.  That is enough to accomplish a lot, and spare middle class retirees from the future deficit-incited axe to the federal budget that Obama doesn't mention as a consequence of his tax-cut decoupling extension politics. (And we already know from the last time this farce played out two years ago, the Reeps won't go for it. So it will be 'all or nothing' and once more a one or two year extension,... possibly leading to a permanent extension of these insane tax cuts if Romney is elected....paid for by gutting all social programs)

People need to wake up to this and stop blinding themselves to how the tax cuts are actually terrible for our economy. Since I've already exposed the false nature of all tax cuts and any "benefits" for our economy (including jobs) , see e.g.


I want to focus on the financial strategies to adopt if our politicos go down this horrid path once again, risking the future retirement security of millions and threatening to make the nation a permanent hostage to bond traders and rating agencies (Greece anyone?). As I noted earlier, in proposing my retirement solution  (which I seriously hope she adopted) for former bus driver Karen Klein,


the answer is immediate fixed annuities. Let us say that (under a worst case scenario) Mitt Romney is elected in November and on taking office one of his first acts - aided and abetted by a total Reep congress - is to make the Bush tax cuts permanent. This will mean adopting a rigorous Ryan-style budget and cutting Social Security (probably by altering its COLA, so seniors can no longer remotely keep up with inflation) and also voucherizing Medicare, which, contrary to Reepo spin, will also affect the costs for current beneficiaries. I estimate the total hit from all these cuts may be as large as $10,000 a year for each retiree. Maybe a third of the added cost will come from the S.S. COLA change, a third from raising the Medicare premiums or age to receive it or both, and a third will come from further Medicare privatization, generating much larger co-pays, and higher costs for certain interventions, from hip replacements to prostatectomies. (As well as putting a ceiling cost on such procedures, say of $5,000 each with the patient to pay the rest.)

This means at least $10,000 more in annual income will be needed on top of what is already received. In years past, of course, people were led into the stock market, but as the recent (May) Kiplinger Retirement Report noted, those days are gone. Before, given a portfolio of "60% in stocks, 40% in bonds you could withdraw 4% of your assets initially and increase that in subsequent years to keep pace with inflation. Such a strategy offered a 90% probability of not outliving your money over a 30-year retirement."

As Kiplinger then noted, that probability was fine so long as the stock market was growing or bonds performed well when stocks took a hit, but it was exposed as useless in the wake of the 2008 market meltdown when ALL asset classes were clobbered. In fact, the equities market has been essentially flat since 2000. Bonds (i.e. bond funds)  have mainly been exposed as fraudulent, often marked AAA by unscrupulous ratings agencies when they were actually at junk level. (BB or below, because of harboring 'toxic waste' like credit default swaps.)

The alternative now proposed, instead of attempting to get rich quick with huge returns via equities or bond investments, is to use immediate fixed annuities.  I already provided a link in the previous cite for my Karen Klein blog but for those who'd like to see or get an instant estimate of different immediate fixed annuities for differing amounts and ages, go to:


According to Kiplinger's, for a 65-year old man in Virginia who wants to spend a total of $300,000 on an immediate annuity the payback now is $1,737 a month. This would add up to more than $20,000 of added income per year, or more than enough to cover the increased costs of social benefits arising from the advent of the deficit mongers....if the tax cut mavens can't halt their addiction to the Bush tax cuts.

I encourage readers to play with the immediate annuities link - plugging in different amounts-  and try to determine what they'd need to invest in a single fixed annuity to generate an additonal $10,000 a year of income for life. Another piece of advice given in the Kiplinger Report is worth repeating:

"Consider buying products from several insurance companies to spread your risk if one of the insurance companies goes under."

This strategy then is one of "laddering" to hedge your bets. I also invite readers to try to ladder a set that would also deliver $10k a year for their needs.

Remember, folks, as long as our politicos are playing the odious tax cut game your future benefits WILL be cut - those cuts will have to pay for your temporary piddling tax cuts. Only someone living in Financial Fantasyland will not see this. It is your job to be proactive and seek to protect yourself now, since you obviously won't be able to depend on our tax cut hostage government to do so!


nomzam said...

That is why I never follow them. I do my own and I always ask to my annuity experts for any changes and updates.

Esay Web said...

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