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. 

Market Update, 1Q-2011 and Beyond

Market Update and Strategy

  An unusual report was issued last week; the credit-worthiness of the United States was put on ‘alert’ by Standard and Poor’s, a highly regarded rating agency. They issued a negative outlook, a downgrade from the ‘stable’ outlook then prevailing. The AAA rating was affirmed, but the longer term outlook change could result in losing that rank unless we get our fiscal house in order. Simple remedy here; spend less than you take in Uncle Sam.

  Besides the immediate reaction down last Monday, the market shrugged it off and gained about 300 points on the Dow the last 3 days leading up to Good Friday, showing the resilience of the stock market in the face of even this type of bad news.

  The stock market put another quarter of positive gains in the history column in March, rising about 6-7% or so in the popular averages in the three months; Dow, SP500 and Nasdaq.  It was the third consecutive quarterly gain dating back to the September period last year, and the 7th rise in 8 quarters dating back to June 2009. As April will close later this week, equity prices are up another 1.5 to two percent or so. But the first quarter wasn’t all roses and a steady plodding up; the stock market sank 7% into mid-March before recovering that much. Wall Street is ignoring the pain we see on Main Street - for now.

  During the quarter, we continued on the theme of resources and sector investing; Agricultural (grains-timber), metals (gold and silver), Internet, health care, and energy themes led our selections. The markets behind these investments did not all continue uninterrupted all three months. Oil and the precious metals sold off on one occasion, and we traded them once or more. Energy (oil, gasoline, and natural gas), Industrials (Cotton), and Coffee are offering up nice returns more so than the average stock index referenced above. Ditto silver which is ahead about 50% this year! Our premise is that the commodities will hold up better or offset the stock market averages in the next down market, so that should offer us some protection relative to the blue chip equities.

 You’ve no doubt noticed grocery and gas prices rising, but you have to eat n drive. One idea: you can hedge some of that energy and commodity inflation you’re experiencing by owning exchange-traded funds that invest in gasoline, food, and even cotton, which has doubled since last August. They trade just like stocks on the exchanges from 9:30 am to 4:00 pm daily. Call me for details on how to get started.
 
 We use a fairly simple approach to spread our money around in specific amounts to invest in what’s working, shunning individual stocks which are more volatile and subject to earnings and specific news risk day to day. Beating the USA market indexes mentioned above, the following had and continue to warrant our capital: Country funds such as Brazil, Canada and Australia, natural gas, and computer software. What worked in late 2010 isn’t working now. Some country funds have hit some air pockets, particularly in Asia and the South American bourses.

 Often just one or two of your investments in 10 can really make a difference. I offer that observation from Pareto’s principle, stating that 80% of your outcomes will most likely be achieved by 20% of your selections. Vilfredo Pareto was a 19th century Italian economist who created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth. In the late 1940s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto's Principle. Pareto's Principle or Pareto's Law as it is sometimes called can be an effective tool to help you manage your life effectively.

  Interest rates are holding rather steady as the slower economic growth and the Federal Reserve are stubborn to raise them during this weak recovery. We do use the Income ETF’s when we hold sizable cash balances not invested in equity ETF’s. These funds  pay 3-5% in interest per year, and pay dividends monthly. When we don’t own the bond funds, and sit in cash, our return is almost zero percent. We feel it’s safer to avoid bonds when they are falling in price. This will crimp or lessen your income however.

My next post will focus on income, how to achieve it and various options to consider when you enter retirement.

Until then, be well.

Barry Unterbrink
Chartered Retirement Planning Counselor

Mid Quarter Update, Markets, Economy and Jobs

Mid-quarter Update ... Ruminations on markets, economy and jobs


It's mid-February, and that signals the half-way point through the first quarter. Most of the popular stock averages are ahead quite nicely, from +6% for the Dow Jones Industrials to 7% for the Standard & Poor's 500 Index, to 8% for the technology-laden Nasdaq 100 Index. That would be a very decent gain for even 6 months from a historical average of 10% yearly return for stocks the last 80 years. The market pundits and tea leaf readers tell us that a "correction" is overdue. Two data facts stand out: the rather uninterrupted 20% rise since Labor Day, 2010, and the doubling of stock prices since the bear market lows in March, 2009. There's an axiom "prices that double often head into trouble"; but I'm not predicting that here today. Our research director's in charge of timing and allocation of funds, and we're generally bullish and invested now. Call me for a free review of your financial situation and goals.

Here in the investment cockpit, we've evidenced a change this year in the market sector performance. The exchange traded funds we monitor and use for our clients now favor those sectors that would benefit from higher prices: energy, aggricultural commodities, technology  and mining namely. The foreign country funds that served us well in 2010 are mostly all negative in our screens now; Peru, Taiwan, Chile, Singapore, Japan: all seemed to catch a cold in mid-January. These markets can change fast, so they could reappear at some juncture. As an example of a narrow-based ETF we're using now; Internet Holders (HHH); a 13-stock basket covering Internet Commerce. When you own HHH, you own 20% in eBay, 42% Amazon.com, 7% Priceline.com and the balance spread among Time Warner, E*Trade, etc. It's an excellent way to participate in this space without buying the stocks. An aggricultural ETF we favor now contains contracts for soybeans, corn, wheat, cotton, soybean oil, coffee and sugar. China announced they may not harvest enough wheat this year for their internal consuption.

Prices higher?

Today's producer price index report shows us - and some would say confirmed - commodity prices are picking up steam, and that could lead to higher consumer prices for us. Consumer prices are released tomorrow morning. Raw material prices including food and energy, gained 0.8% for January, the highest since 2008. Can companies that produce and bring to market our food pass along costs (think Kellogg, Kraft, Archer Daniels) to us in the supermarket? $5 for a box of cereal is a bit much, so I often defer to a healthy alternative or off-brand to get the same nourishment for my dollar. Higher consumer prices will hurt demand and not enable our economy to grow as fast. And the Federal Reserve is not worried about inflation yet? It seems that their dual mandate of stable prices and full employment are not working out too well so far.

Inflation will hurt fixed income (bond) prices also. If you own any, check your statements or ask us for help.

Main Steet vs. Wall Street (it's lack of jobs, stu**d)

Unfortunately, the events in the finacial district in New York, and the prices on Wall Street do not often correlate with the health of the rest of America and the problems and challenges we face economically. Jobs (lack of them) is front and center for Obama & Company. What concerns me is more longer term oriented; how our country is falling behind in smarts to prepare for the new services, technologies and industries that will need skilled labor in the future. I have a rather vested interest in this, as my two teenagers will have choices to make during their working years that could well be determined by how and what they study today.
Consider these factiods taken from last month's Barron's magazine as they interviewed top money managers and economists in their roundtable discussions.

* the percentage of the US population that's earned 4-year degrees has remained stagnant for 10 years.

* if you don't have a degree, you will most likely stay unemployed longer.

* Unemployment for women is 2% less than men, mainly due to the heavy toll manufacturing and construction jobs took during this recent recession.

* the pool of US students studying STEM (science, technology, engineering and math) has fallen dramatically the past 10-15 years.

* Tech companies, whose growth has spurred many jobs in the past, cannot find enough qualified US workers who graduate with these skill-sets.

* 70% of the PhD program graduates are non-US citizens (think Asian, Chinese, Indian, etc.)

* In the 1970's the US has 20 million manufacturing jobs with a 200 million populace; today it's 12 million on a 320 million population. So while corporations are doing rather well with profits and earnings worldwide, many workers are suffering as their incomes are dropping relative to expenditures. Median family incomes have dropped 4-8% in the past decade; and that's measured before the 2008 financial crisis hit us.

So what's my solution - mainly aimed here Generation Y (born 1981-1999)? Continue to learn and acquire new skills after you leave school to be compettive. Ask for help when you don't understand. Raise your hand a lot. Get a mentor or coach. Learn a second language. On this score, my daughter learned French in high school, my niece, Mandarin Chinese, and my son is tackling Spanish and German in high school. His first job in 2018 may be in Munich or Buenas Aires. As for me, I've joined a Spanish meetup group and intend to be fairly fluent by year-end.

My blog today is quite pessimistic, but sometimes we need to worry, because that will prompt changes for the better. I hope so.

Until next time,

Adios amigos !
Barry Unterbrink, CRPC
(954) 719-1151