Hill's Personal Finance

The New Living Benefits in Variable Annuities

These popular investments now have even more to offer.

 

 

GMIBs. GMWBs. GMABs. GLWBs. What do these acronyms mean? If you own a variable annuity (or think you might want to own one), they stand for a new class of living benefits that make these investments even more attractive.

 

Guarantees for a new market climate. You might say these new living benefits address the realities of a down market. Variable annuities are tax-deferred investments structured to pay you benefits over a set number of years, and a death benefit to your beneficiaries. They let you invest some of your annuity assets in investment subaccounts that suit your investment styles and goals. Some of these subaccounts have guaranteed return rates.

 

All of this appeals to people who want to build retirement savings conservatively. But with the financial markets so volatile of late, GMIBs, GMWBs, GLWBs, and GMABs are really appealing. These are riders in annuity contracts that guarantee certain benefits regardless of how the markets perform.

 

Guaranteed minimum income benefit (GMIB). A GMIB ensures that the annuity payments that come your way are at least a specified minimum amount, even if your investment subaccounts perform poorly (the insurer picks up the slack). How is the minimum payment amount figured out? It is based on the insurance company’s estimation of the future value of the initial annuity investment.¹ 

 

Guaranteed minimum withdrawal benefit (GMWB). If the principal of your variable annuity shrinks due to a downturn in the market, you can use this rider to recoup the amount of your entire initial investment. If you own a variable annuity with a GMWB with a 10% withdrawal rate, you can withdraw 10% of your entire investment each year until the initial investment amount has been recouped. That’s useful if the value of your annuity should decline. If you started your variable annuity with a $200,000 investment and it is now worth $180,000, you can use the 10% GMWB to withdraw 10% of the original principal amount each year ($20,000) until the entire $200,000 is recovered thanks to the guarantee set by the insurance company.²   

 

Guaranteed lifetime withdrawal benefit (GLWB). This means guaranteed income payments for life. Let’s say your variable annuity has an account balance of $100,000 and is structured to pay out $5,000 a year for 20 years. With a GMWB for life, you will continue to receive $5,000 a year from the insurer even if you have recouped the original principal and even if the account value falls due to poor investment returns.³

 

Guaranteed minimum accumulation benefit (GMAB). A GMAB gives you the confidence of knowing that after a set period of years, you will have at least X dollar amount of assets in your variable annuity. Usually, the GMAB is established for the end of a 10-year period, i.e., in ten years, the insurer guarantees that your annuity contract will be valued at a minimum of $100,000, even if the market drives the actual value down.⁴

 

Long term care insurance options. This is certainly a new wrinkle in variable annuities and worth knowing about. Some variable annuities now allow you to pay long-term care benefits from the life insurance death benefit promised in the annuity contract. While this will reduce the amount of the death benefit, it can certainly help during your life. If you don’t choose to spend some of the death benefit on long-term care, then the entire death benefit will be received by your heir. (You can also choose to receive the cash value of the death benefit as an income stream.)⁵

 

Very interesting, isn’t it? If you’d like to know more about the new living benefits in variable annuities, why not talk to a qualified insurance or investment professional today? These new annuity options may give you more financial confidence – and financial choices - for retirement.

 

 

Citations.

¹ investopedia.com/terms/g/gmib.asp     [11/11/08]

² investopedia.com/terms/g/gmwb.asp   [11/11/08]

³ lidp.com/living-benefits-defined.html    [11/11/08]

⁴ finance.yahoo.com/how-to-guide/retirement/18308     [11/11/08]

⁵ investopedia.com/printable.asp?a=/articles/pf/08/variable-insurance.asp           [11

Monday Market Outlook 11/17/2008

Weekly market outlook from Brian Wesbury at First Trust Portfilios, LP

Download darkest_before_the_dawn.pdf

Market Watch 11/17/08

Last weeks market statistics by Bob Carey at First Trust Portfolios, LP.

Download week_of_november_17th.pdf

Best & Worse Indices for the week ending 11/14/08

The best performing indices for the week ending November 14, 2008 were:

• Dow Jones CBN China Construction & Materials Index (17.07%)
• Bank of New York Portugal ADR Index (15.67%)
• Bank of New York Philippines ADR Index (11.63%)

The worse performing indices were:

• Bank of New York Russia ADR Index (-32.75%)
• Dow Jones Wilshire Industrial Index (-29.20%)
• Dow Jones US Platinum & Precious Metals (-27.57%)

Indices in a buying position are:

• Dow Jones US Transportation Index
• FTSE/Xinhua 25 Index
• Dow Jones Western Europe Telecommunications

Why Should You Keep Contributing to your 401K

A down market is no time to pull your money out or cut contributions.

 

With the way the market is behaving, you may be tempted to pull money out of your 401(k) right now or greatly reduce your contributions. If you’re considering such a move, please reconsider it.

Don’t stop saving for retirement. Even if you think you’re wealthy enough to forego putting money in your 401(k), you could end up seriously shortchanging your retirement savings potential by reducing your retirement plan balance or elective salary deferrals.

A 401(k) plan is a great retirement savings vehicle – and the fact is that most Americans have not saved enough for their retirement years. Additionally, if you withdraw money from a 401(k) plan before age 59½, you’ll face a 10% tax penalty (with few exceptions) and you may end up spending money today that could have enjoyed tax-deferred compounding in the future.¹

Don’t expose more of your money to taxes. Usually, contributions to a 401(k) are tax-deductible.² If you decide not to make those contributions, here’s a consequence: the IRS and your state government will claim more of your income. So you’ll wind up with less money in your wallet today and less money in your retirement account.

Don’t lose out on a match. Will your employer match your contributions – say, a dollar-for-dollar match on the first 3% of salary? If you make $60,000 per year, 3% is $1,800. Would you throw away $1,800 worth of free money each year? You shouldn’t, especially given that this money will grow tax-deferred.¹

Do keep contributing steadily. It’s a good idea to keep up the dollar cost averaging and continue to make steady month-to-month or paycheck-to-paycheck salary deferrals. In all probability, this is central to your financial plan - and how will you amass the retirement savings you need if you stop contributing? Sure, there are other ways to build retirement savings, but dollar-cost-averaged contributions to a 401(k) represent a consistent, recurring way to get that job done.

If you contribute to your 401(k) plan through a dollar cost averaging approach, your investment dollar is buying shares at a lower price in this down market – and it is also buying more shares for your money. That could put you in a really good position when the market rebounds.

It’s a good idea to keep contributing even if you are falling behind financially. Should you pay down debts with your 401(k) assets? Only as a last resort. In fact, if you are looking at a bankruptcy or similar financial pressures, a 401(k) account is a really good place to put some of your money (the 2008 contribution limit is $15,500, with a $5,000 ceiling on additional “catch-up” contributions for workers 50 and older).³ Pension plan, IRA and 401(k) assets are protected in bankruptcy proceedings in most states.⁴

Do review your goals with your financial advisor. Look at your time horizon. Look at your overall financial plan. Whether you are nearing retirement or far away from it, you will see that your 401(k) is a vital tool for pursuing your financial objectives. So don’t be discouraged by the short-term headlines; abide by the long-term plan created personally for you.

 

Citations.

¹ irs.gov/taxtopics/tc424.html x  [11/7/08]

² fool.com/personal-finance/retirement/2008/10/15/your-retirement-is-now-a-lot-more-complicated.aspx           [10/15/08]

³ buffalonews.com/businesstoday/businessfinance/story/481670.html                  [11/2/08]

⁴ nolo.com/article.cfm/pg/2/objectId/1E5D82D5-6576-491F-B763445E2CB1BE60/catId/462A9501-9B21-4E09-A08C5A7B8AF51A79/213/161/CHK/           [11/7/08]

 

 

 

Presidential Elections and Stocks

How has the market reacted to elections and new administrations?

Some interesting statistics from election years past and present.

Is an election year good for stocks? Well, let’s look at some data. Keep in mind, it’s only data – and as the old saying goes, past performance is no indication of future results. But the statistics concerning the Dow Jones Industrial Average sure are interesting. It is time to compare and contrast.

The Dow through Election Day.

America has  now seen 28 presidential elections since the first publication of the DJIA on May 26, 1896. In 20 of those 28 election years, the Dow posted a Y-T-D gain through Election Day.¹ Would that it was true this year. When the market opened on November 4, 2008, the Dow was down 29.71% from its close on the final day of 2007.^2,3

The Dow in “election season”. Between Labor Day and Election Day, the Dow rose an average of 1.92% in the 27 election years between 1896 and 2004. When the incumbent President was a Republican, the Dow’s average gain between Labor Day and Election Day in those election years was approximately +0.6%.¹ This year certainly did not live up to statistical expectation: the Dow closed at 11,543.96 on August 29 (the last market day before Labor Day) and opened at 9,323.89 on the morning of November 4 for a loss of 19.23% over that period.⁴

The Dow immediately after a Presidential election. The short-term statistic is positive: on average, the DJIA has gained 1.90% between Election Day and New Year’s Day in the 27 election years past. Here are two statistics seemingly at odds with each other: when a Republican President is in office during an election year, the DJIA gain has averaged approximately 4.6% between Election Day and New Year’s Day. But when a Democrat is elected (regardless of what party holds the White House), the Dow has averaged roughly a -0.9% loss between the first Tuesday in November and New Year’s Day.¹

 

On Election Day 2008, the Dow gained 305.45 or 3.28%. However, a day later, all the gain had been lost in the wake of troubling indicators.⁵

 

The Dow after a new President takes office. The DJIA has gained an average of 4.85% during the first year of a presidency. But when a Democrat is elected, that average gain has been approximately 6.0%. Historically, when a Democrat replaces a Republican in the White House, the average gain has been approximately +13.7% - but that statistic is skewed, because the Dow gained 64% in the year after Roosevelt replaced Hoover.  Put 1933 aside, and the average such gain is approximately 1.2%.¹

As for the S&P 500 … TheStreet.com columnist Scott Rothbort tracked S&P 500 data going back to 1950 and found that the price-only return of that index in a post-presidential election year has averaged +3.06%.⁶ On the other hand, a research report released November 5 by the Zero Alpha Group (an international network of financial advisory firms) indicates that the S&P 500 has gained approximately 15.8% during Democratic administrations (as compared to about 11.2% during Republican administrations).⁷

And what about your financial strategy? While the above data is fascinating to consider, the fact is that we can’t foretell the effect a new administration will have on our money. Long-term discipline is the most important factor in an investment strategy, and your financial advisor can help you to practice it.

Citations.

¹ cnbc.com/id/23590832           [8/26/08]

Monday Market Outlook 11/10/2008

Brian Wesbury of First Trust Portfolios, LP posits the the question of what we are doing to "help" the economy may be slowing a recovery.

Download unintended_consequences.pdf

Best and Worse Indices for the week Ending November 7, 2008

The best performing indices for the week ending November 7, 2008 were:

• Dow Jones US Full Line Insurance Index (23.99%)
• Dow Jones US Mortgage Finance (18.47%)
• Bank Of New York Turkey ADR Index (17.53%)

The worse perfroming Indices were:

• Dow Jones US Platinum & Precious Metals (-23.03%)
• Dow Jones US Coal Index (-16.83%)
• Dow Jones Gambling Index (-16.43%)

Indices in a buying position are:

• Dow Jones Media Index
• Dow Jones Stoxx Global 1800 ex American Industrial Goods Index
• Dow Jones US Transportation Services Index

Capital Adviser's November 2008 Outlook

This month our trusty money manager reminds us that no one has a crystal ball.

Download november_2008.pdf

Market Watch 11/03/08

Market statistics for the week ending October 31, 2008 from Bob Carey of First Trust Portfolios LP.

Download week_of_november_3rd.pdf

Monday Market Outlook 11/03/08

This week Brian Wesbury of First Trust Portfolios, LP makes an argument against another stimulus check.

Download fiscal_stimulus_just_say_no.pdf

Roth IRA Conversions in a Down Market

 

Here’s a year-end move you might want to consider.

 

 

Is it time for a break – that is, a tax break? With the stock market down 25-40% from its fall 2007 highs, it’s certainly a time to consider converting your traditional IRA to a Roth IRA, especially if you’re not planning on retiring soon. You will pay a one-time tax on the conversion … but with the market down, that tax will be less than you would have paid last year. As a result of the conversion, you will have more flexibility with your money when you are ready to use it.

The pros of a Roth conversion. A Roth IRA gives you two huge benefits: tax-free growth and tax-free income distributions in retirement (providing you are age 59½ or older and have held your Roth IRA account for 5 or more years).¹ Additionally, you can still contribute to a Roth IRA after age 70½ - and you don’t have to take mandatory withdrawals from it.² These facts alone might motivate you, especially if you are in your thirties or forties.

A Roth IRA conversion can also be useful for older investors who don’t need their IRA assets. If you don’t think you’ll need to tap your IRA, you might consider doing a Roth conversion and leaving the Roth IRA to your heirs. Untouched, the Roth IRA assets can keep compounding tax-free across the rest of your life (and subsequently, the rest of your surviving spouse’s life). Another advantage: converting that untapped traditional IRA to a Roth will reduce your taxable estate.³

All 2008 Roth IRA conversions, by the way, will have a 1/1/08 start date, so you get the full year credit toward the 5+ years you need to own the account before taking income distributions.⁴

The cons of a Roth conversion. On the downside, the conversion does trigger a tax, and you’ll need the money to pay it. You will pay tax on any earnings and pretax contributions in lieu of paying taxes upon subsequent withdrawals from the Roth IRA.

Don’t think about using your current IRA assets to pay the conversion tax – if you’re younger than 59½, you’re looking at a 10% penalty on the amount you withdraw, and you’ll throw away the chance for tax-free Roth IRA compounding of those assets. (If the amount you want to convert might send you into a higher tax bracket, you could simply do a partial Roth IRA conversion.)

You also don’t want to do this if you think you’ll drop into a much lower tax bracket when you retire. For example, if you’re in the 25% federal tax bracket now and the numbers seem to indicate you’ll be moving into the 15% bracket after you retire, you’ll be paying income tax on the conversion at your current 25% rate. If you’re moving down only a handful of percentage points (from, say, the 28% bracket to the 25% bracket), then it’s a different story.

For the record, contributions to a Roth IRA aren’t tax-deductible.²

Do you qualify for a Roth conversion? You can make the conversion if your modified adjusted gross income (MAGI) is less than $100,000 in the year you convert the IRA. By the way, that includes income that would result from the conversion.¹

The income limits determining eligibility for Roth IRA contributions are higher than $100,000 – for 2008, eligibility is phased out between MAGI of $159,000 and $169,000 for joint filers and between $101,000 and $116,000 for singles.⁵

How about a recharacterization? Okay, if you’re a glass-half-empty type who thinks the market will go lower in coming quarters, you could opt to convert your traditional IRA to a Roth sometime in the remainder of 2008 and then reverse (or "re-characterize") the decision prior to Oct. 15, 2009. If you recharacterize, you will get the taxes back that you paid on the Roth conversion.⁶

The deadline & timeline. You need to withdraw funds from your IRA before 2009 to make sure a conversion counts as a 2008 Roth conversion. After that, you have 60 days to make the rollover.⁴

Talk to your CPA or tax advisor before you make a move. Keep in mind that the tax code isn’t exactly set in stone right now, and who knows what will happen with parts of the tax code after 2010. So consult your CPA or tax advisor before arranging any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets.

Citations.

¹ smartmoney.com/personal-finance/retirement/roth-iras-you-wanted-to-know-7967/               [1/9/08]

² irs.gov/publications/p590/ch02.html#d0e9214                [10/31/08]

³ smartmoney.com/personal-finance/retirement/roth-iras-to-convert-or-not-7965/   [1/10/08]

⁴ marketwatch.com/news/story/ira-savers-dont-have-wait/story.aspx?guid={A300B5D3-200C-4312-93CA-3B81B4170A9C}&dist=msr_1                [10/30/08]

⁵ irs.gov/publications/p590/ch02.html#d0e9252                [10/31/08]

⁶ marketwatch.com/news/story/ira-savers-dont-have-wait/story.aspx?guid={A300B5D3-200C-4312-93CA-3B81B4170A9C}&dist=msr_1                [10/30/08]