3 Things 6-13
Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it.
Common Retirement Income Mistakes
A writer at Kiplinger.com recently reported on three mistakes people make when it comes to retirement income. See the summary below:
#1 Investing In Bonds or Bond Funds In a Rising Rate Environment
We’ve talked about this one before, but here are the highlights from Kiplinger’s take:
“…Table 1 [below] reveals how low the income that you could gain from investing in a 10-Year U.S. Treasury Bond has fallen. If you invested $100,000 in the 10-year U.S. Treasury bond in 1990, you would receive $7,940 in income per year. However, that same investment of $100,000 today would yield $1,310 in income, more than six times less.
Much lower interest rates translate into much less income from bond investing. Not only that but if interest rates rise, the value of existing bonds declines. That means that any bonds you buy today to provide income in retirement will be worth less in the future…”
#2 Purchasing An Immediate Annuity
The pros and cons of annuities, in general, have also been discussed here. We add to that the essence of Kiplinger’s take on immediate annuities specifically:
“…If you are close to or already in retirement, you may be attracted to an immediate annuity. When you buy an immediate annuity, you hand over a lump sum of money to an insurance company, and in return receive a guaranteed payout, sometimes for your whole life. This arrangement seems like it could create an attractive income stream.
However, immediate annuities definitely have some drawbacks. Like U.S. Treasury bonds, rates are pretty low, meaning that you won’t get much bang for your buck. When you buy an annuity, you tie up your money for the rest of your life. That means you won’t be able to access it in the event of an emergency.
Another concern is that many immediate annuities lack inflation protection. That means that over time, due to rising pricing, the income you receive from an immediate annuity wouldn’t go as far. That is significant during retirement, which may last 25 or 30 years or longer.
#3 Purchasing a Variable Annuity
As with most insurance products, the guarantees come at a cost. Here’s Kiplinger’s synopsis on variable annuities:
“…annuities tend to be complex, expensive products. Fees can include mortality and expense fees, mutual fund account management, contract maintenance fees, transactions, and other costs that can range as high as 4% a year. Variable annuities also charge back-end surrender fees that go into effect if you cash out of your annuity before 10 years – or longer, in certain cases – after you purchase it… When you buy a variable annuity, there’s the option to purchase various riders or optional add-ons… These riders can seem very attractive. However, they can come at a steep cost. That’s because you will have to spend more to get the same amount of income or accept reduced income in exchange for the benefits you want…”
While explicitly advising against the purchase of immediate and variable annuities, Kiplinger does suggest that fixed indexed annuities might make some sense in certain situations as long as the buyer is comfortable with the liquidity constraints, potentially high fees, and opaque contract language. Of course, there are alternatives to annuities and Kiplinger points out that in any case, the buyer would be well served to consult with an advisor. We stand ready to help.
Thing Two Cash Is Still Trash, But It’s Also Okay In The Short-Term Long-term investors will be familiar with the phrase, cash is trash. For those that aren’t, it is rooted in the idea that in an inflationary environment, the real value of cash (its purchasing power) will degrade. That said, there are times when the financial environment seems so uncertain that it makes sense to have what might be considered in normal times a disproportionate cash balance in your investment portfolio. As interest rates have fallen over the years, the return on cash deposits at banks has fallen as well. But as rates have begun rising recently, so have interest rates on deposits. Still, the current APYs at the traditional banks (think Bank of America, Wells Fargo, Chase, PNC, etc.) range from .01% to .05%. There is an alternative that pays significantly more and that is the internet banks. The APYs at some of these banks are currently 1% or higher with 1.25% appearing to be the current top rate. Bankrate.com has this to say about the safety of internet banks and the pros and cons of doing business with them: “...Yes, online banks are safe. As long as an online bank is insured by the Federal Deposit Insurance Corp., it will offer the same coverage as the FDIC-insured bank down the street. FDIC covers up to $250,000 per account for each individual customer. Confirm whether a bank is FDIC insured by using the FDIC’s BankFind tool, which permits searches by bank name or web address. Pros
Online banks typically offer some of the highest APYs nationwide.
Many online accounts offer fee-free access to a large ATM network, making it more convenient to find free ATMs than going to your brick-and-mortar bank’s ATM.
Online banks typically charge no maintenance fees and are easily found.
It can be easier to access and manage your accounts by simply going online or contacting a bank representative virtually.
Consumers who appreciate face-to-face interactions with a bank may not be good candidates for an online-only bank, since they don’t usually operate branches. A compromise could be to keep both a bank account at a brick-and-mortar bank and a high-yield savings account at an online bank to have the best of both worlds.
Online banks may have fewer options and less variety of account types than traditional banks.
It can be more difficult to deposit cash into an online bank account. Customers may need to deposit the cash into a separate account first and then transfer it into the online bank account.
With the recently announced CPI (headline inflation rate) of 8.6%, even an APY of 1.25%, which is 25 times the current high-end APY at traditional banks, loses ground in real terms. Cash is still trash in that sense. But for short periods, in unusually volatile times, moving to an FDIC-insured internet bank just might be the best option for at least some of your money. And the upside, if there is one in a rising rate environment, is that the interest rates on deposits at these banks will continue to rise as well.
Thing Three Just A Thought “I had some great things and I had some bad things. The best and the worst. In other words, I had a life." - Richard Pryor