Retirement Income: REPLACING SOME BONDS WITH ANNUITIES

"If you want to maximize how much you can safely spend in retirement, some economists say, sell some of your bonds and buy lifetime income annuities," according to Neal Templin, writing for the Feb. 8, 2021 Wall Street Journal. 

"While you’re still working, a diversified portfolio of stocks and bonds is an efficient way to save for retirement. But once you’ve retired and are drawing down that nest egg, income annuities can outperform bonds, some economists’ research shows."

"The most efficient portfolio for retirees consists of stocks and income annuities, says Wade Pfau, a professor of retirement income at the American College of Financial Services. The annuities provide dependable income, while the stocks provide growth, cover unexpected expenses and help leave a legacy for heirs."

But what about the 4% rule or guideline? That's the strategy of spending 4% of your nest egg each year, adjusting for inflation. Lots of problems with this strategy, especially for non-nerds. It takes a lot of attention to detail, decisions on which investments to sell, an iron will to stick to the strategy when the market goes crazy (almost every month in this century), and potentially wide swings in yearly income. Do you still want (and be mentally able) play with spreadsheets and make wise decisions when you're 85? Remember the research that found our ability to handle money declines with age. The 4% guideline comes from research in 1994 based on the era when bonds actually paid a decent return. 

We know that retirees are happiest when they have a reliable source of income. Remember pensions? Annuities are a way to create your own pension.

Specific example from Dr. Pfau:

"Consider a 65-year-old retired woman who has a $1 million nest egg, is risk-averse and wants to finance her retirement entirely through bonds. She is a nonsmoker, in average health. According to actuarial tables, there is a 22% chance she’ll live 30 more years. She decides to build a bond ladder that will run out of money when she’s 95 years old. At current interest rates, such a portfolio could provide her with around $42,000 a year for 30 years, Dr. Pfau calculates. If she instead used her $1 million for an income annuity, she could currently get around $54,000 a year from a range of insurers. One insurer, American Equity, has been offering a payout of more than $61,500."

"Social Security is itself an inflation-adjusted income annuity, and it’s usually smart to max it out by not claiming until age 70 before you buy a private annuity. That’s because Social Security is more generous in how it calculates payouts than other annuities. Your Social Security pension rises 8% for each year you delay claiming beyond your full retirement age."

You don't want to devote all your nest egg to buying an income annuity but buy enough basic income to supplement your Social Security so that you can invest your remaining assets in growth investments. 

Check out the other blog posts about income annuities. Also Dr. Wade Pfau's website: https://retirementresearcher.com/

 

 

 

Thinking about long-term-care insurance?

 Readers of my blog know I'm not a fan of long-term-care insurance (LTCI) for a variety of reasons. Check out previous posts. One exception is when LTCI is combined with life insurance and/or an annuity in a hybrid policy. 

But... the Feb. 8 Wall Street Journal features an excellent article by Glenn Ruffenach: LTCI: "First, you should find an agent." 

First, shop for a knowledgeable, independent agent. Ruffenach explains that LTCI "is a ridiculously complicated product." An agent who specializes in LTCI and sells policies from multiple companies is what you need to find to start the process (after you've read and educated yourself). 

Sources: Certification for Long-Term Care has a locator on its website for its graduates: https://www.ltc-cltc.com/

Search online for LTCI experts in your area and ask other trusted professionals (attorneys, financial planners, accountants, tax professionals) if they can recommend a specialist. 

Once you have a few names, it is essential to interview some experts. What you don't want is someone who immediately starts in on policy features and costs. Instead you want someone who takes time to understand your situation and needs and how various options may help... before getting into policy perspectives. 

Questions to ask (from Bill Comfort, a LTCI specialist in Durham, NC): 

Experience: How many years have they sold LTCI? How many policies each year? 

How many insurance companies they represent, whether they sell hybrid as well as traditional policies.

Check out a list of questions at: https://www.comfortltc.com/

A Shopper's Guide to Long-term Care Insurance is a helpful resource from the national Association of Insurance Commissioners. You can find this guide on the NAIC website https://content.naic.org/ but any agent should offer you a copy before you have to ask for one. 

Tax implications for stock day traders

 Game Stop and the Robinhood trading app have been in the news lately. 

As we enter income tax filing season, day traders (People who buy and sell stocks on a daily basis resulting in short term losses and gains) will face the challenges of figuring out their gains and losses and the tax implications of their activities. 

As The Wall Street Journal's tax expert Laura Saunders writes: "Robinhood made the market feel like a game; the IRS hasn't followed suit." one of the day traders that Saunders describes in her article made about $8,000 on his trades last year. His IRS 1099 form summarizing a small portion of his trades is 34 pages long! "It's so convoluted, I have no idea what it means" reported the taxpayer in question. He expects hundreds more pages of tax forms and will have to hire a professional preparer this year. I wonder how much that will cost!

So the next time a friend brags or you read about 20 somethings making big profits in the stock market by day trading, remember the tax consequences and the cost of professional tax preparation. 

Main points: 

• Investment income is taxed very differently from earned income. 
• Long-term vs. short-term capital gains are treated differently
• The tax code allows investors with losses to offset capital gains up to $3,000/year
• Capital losses can't offset gains if the investor buys the same holding within 30 days
• If you've been day trading don't expect to prepare your return yourself; expect to pay a professional preparer a lot of money to deal with hundreds of pages of Form 1099-B.
  

Vehicle insurance prices dropped in 2020 due to fewer miles traveled

Rates fell on average 4% in 2020 but expect rates to increase in 2021.  

The average annual car insurance bill is $1,483, down 3.9%.

Gee, with so many people working from home, why didn't rates fall more than 4%? Car insurance companies are posting record quarterly profit gains. The Center for economic Justice and the Consumer Federation of America are asking insurers to reduce rates to reflect their growing profits. 

Insurers say the accidents that have occurred have higher property damage and higher medical cost because the fewer accidents have been far worse to the excessive speeding taking place during the pandemic. Also there is a lot more accidents attributed to distracted driving due to drivers texting and talking on smartphones.

Miles driven are returning to pre-pandemic levels even if a lot of employees are still WFH. More people are driving rather than flying to visit relatives and take vacations.