Money Management & Retirement Planning Advice by Barry Unterbrink, Chartered Retirement Planning Counselor

Friday, June 03, 2011

Income Planning, CD's

Income Planning
Let's Get Creative using
Market-Linked CD's and Income Annuities


For those seeking income from their savings and investments, it may appear that there are a few sensible options left standing to increase income during this time of low interest rates. The Federal Reserve is keeping rates low; economic progress is muted at best, and stock prices hit an air pocket, falling about 2% in May and off to a shaky start here in June so far.
I am not an all or nothing advisor, in that if you are, you are making a bet by placing
much of your money to work at any one time. You may not think of it this way, but you are making a specific bet
on the markets and interest rates, especially important if you cannot access your money and are forced to wait upon a maturity date in the future.

Also, most income investments such as CD's, bonds and annuities are highly sensitive to current
interest rates, so the rate you are offered (and your income) will vary until you lock it in.

Outliving your retirement savings is the numero uno consideration in polls to seniors - it could also affect you financially and emotionally when your savings can't provide enough income to pay your living expenses, forcing you to either do without or make substitutions within your monthly budget. Worry and stress should not be part of this endeavor.

However, if you opt for no planning and just wait for the perfect time - interest rates are high and stable; inflation low; after-tax returns favorable; then no plan gets enacted, and current spendable income doesn't start and you are no better off than yesterday. You have to find a starting point and have a strategy. Also, the perfect time rarely presents itself in the checklist just presented. That's why I advise clients to make
some assumptions today, then stage your money into various income investments over time,
so as to likely hedge your money bet if your assumptions are inacurate or partially wrong.


This requires you to engage in some homework, tabulating your income needs vs. the marketplace offers, and what it can deliver to you today and into the near future. Also, you will need to "think outside the box". We learn by asking questions, so ask lots of them just like you're in a classroom. I come across new investments and products about every month or so that have some investment merit, and I'll share two of them with you below in brief snapshots. There is more to what meets the eye at first glance in the world of income planning. "This is not your grandfather's defined benefit retirement plan" so to speak.

Whether you are a do it yourself investor (DIY), or a seasoned pro with scads of money and advisors, we can all learn a new trick or two with our money. On the income front, what you have to ask yourself is..."Can my current income-based investments generate enough income to provide for my living expenses and comforable lifestyle?" "How long do I need my income to last?" "What is my threshold for losses?" "Can I sustain a 5-10% or more loss with my money if interest rates rise and my savings and investments fall in value?" 
The dialog might unfold as follows. "No I can't do this," , or the "Maybe I can, but it's too much work to accomplish it; I haven't the time to follow all this", or "Yes I can today, but when interest rates rise, I'm not sure how that will affect my bonds, CD's and mutual fund prices". "Could I end up losing some of my principal and still not achieve a decent income-based return on my investments?" "Do I have a doable and actionable strategy for selling when things start to turn ugly?"

For many savers who are risk-averse and don't wish to lose their "nest eggs", a popular option for consideration is to ''lay the risk" of  the unknown and uncertainty off on a third party, such as an insurance company. Then your job is essentially done, and they will provide you with a guaranteed monthly income for life or a set period of years. The income generated can often be higher than what you can achieve in the marketplace left on your own. Tax savings can also result from the way it is structured. And if less money is needed to generate income this way, then more funds can be left in other investments for longer term or emergencies, or funding other non-retirement needs. You will need some liquid funds because, as I stated above, you should move money into various income buckets over time, not all at once. This is called "laddering", like a step ladder whose steps represent different points in time. As you age, your income will normally rise also, as you are older and your income is based on your age at the time of investment. Interest rates could be higher also, adding to your monthly payout. The investment vehicle I've been descibing is an immediate income annuity. **see some popular income options with this vehicle at the end of this article.


A Certficate of Deposit on Steriods
Another safe-money income option gaining favor to 'beef up" your retirement money is a Market Linked CD (MLCD). This is an F.D.I.C. insured CD issued by a bank, which protects your principal if held to maturity. The different twist here is that your annual interest is not guaranteed, but is based on the performance of a 'basket' of stocks. A cap rate is set on the upside of roughly 7-9% per year for the CD term (that's the maximum per year you can earn). The bet here is that the stocks will perform positively up to that cap and that the final value will outperform the traditional CD's fixed interest. The floor is zero percent if the stock basket declines in value. You cannot lose principal with a MLCD. Five and 6 year CD's are offered each month, and the June offerings out this week include the stocks: Bristol Myers, General Mills, Campbell Soup, Newmont Mining, Sprint-Nextel, and Cablevision. With 5 year traditional CD's paying around 2.4% today, I would make the market-linked CD bet with a portion of my safe money. See me for details.


Bank CD ALERT: If you have rolled over or bought a CD in the past couple months, beware of the newer penalites that the banks are imposing and including in their disclosures. Apparantly, from recent reports I have read, major banks are now assessing a percentage fee if you redeem or "bust" your Certificate of Deposit before maturity. The former rules charged you a period of interest, such as 90 days, if you broke the CD early. One such fee charge would be two tiered; a $25 flat fee, and then a 1-3% charge against the amount withdrawn, depending on the maturity of the CD. What this means with today's low interest rates? You could lose PRINCIPAL as the fee may eat into your original deposit. Not good. Check with your bank to see if they charge these fees; if so, walk, er - run away. By the way, Market-Linked CD's can be sold prior to maturity without any penalties. Your principal is not guaranteed if sold prior to maturity, so you may lose or gain on the sale depending upon where current interest rates are, similar to how a bond is priced when you sell it.

** Immediate Income Annuity Options (from the footnoted text above)
LIFE INCOME: pays you every month until you die.
LIFE with period certain: pays the longer of your life, or a set number of years, say 10,15 or 20 years; if you die in year 7, let's day, your heirs will be paid income for 3 more years under the 10 year certain feature.
PERIOD CERTAIN: Pays a set number of years; not based on the life of the owner.

The above three annuities are termed IMMEDIATE annuities, in that they start to pay income right away, and you are making a single payment to the company and do not have access to your principal.

Brief Market Update
A good friend and blog reader asks me "How did your silver investments pan out; silver prices collapsed about 30% right after your last blog post in late April".  Glad you asked Bill. My reply: "We sold our entire silver investments in the first few days of May at prices equivalent to a $44 silver bullion price. We did not sell at the top of $49.50 or so, but did protect most of our gains that we accumlated since last August". Currently, silver has a lot of work to do on the charts, and at $36 today, is neither a buy nor sell. Commodities overall had a terrible May, and we see no need to "catch a falling knife" in re-entering most of these markets. That will change, and when money flows back into this area, we'll consider our stance. 

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