Are Your Company Retirement Benefits In Jeopardy

In years gone by, when someone retired from a large company they didn’t have to worry about losing their retirement benefits. That’s no longer the case. Being faced with ever increasing competition, many large companies are changing their benefit programs. If this hasn’t affected you yet, it soon will. Read on to find out how. Did you know that it costs General Motors over $1,000 per vehicle just to cover retiree benefits? A few years ago, a steel company only had 20,000 current employees but had over 70,000 former employees receiving retirement benefits. To survive, companies have to cut costs everywhere they can, including cutting or eliminating some retiree benefits. Retirees are understandably nervous. But not all of your company benefits are at risk. For those retired, you shouldn’t be too concerned about losing your pension. A pension is the retirement benefit that is designed to pay the retiree a set amount of money each month for the rest of their life. Should your old employer go belly up there is little chance your pension will be affected. In these cases, the Pension Benefit Guaranty Corp. takes over the pension payments. You also aren’t in danger of losing your 401(k). Even if the company declares bankruptcy the money in your 401(k) is safe—unless you had it all invested in company stock! For those still working, you need to know that many companies are now terminating their pension programs for current employees, or requiring their employees work much longer to qualify. That means that more often, it is up to the employee to fund their own retirement out of their paycheck. Few are ready for this. To put this in perspective, let’s say you are 40-years old and have finally gotten serious about saving for retirement. You want enough so you can live off the interest--$50,000 per year. In order to retire at age 65, you will have to save over $20,000 per year! The benefits most likely to be affected for retirees and current workers alike are medical benefits. Companies across the board, including large ones like General Motors, are reducing or eliminating the medical benefits that are available to retirees. Current workers are being expected to shoulder more and more of the health care burden. Retired or not, you will be faced with higher co-pays, larger premiums and reduced coverage. As a result, you must be prepared to pay several hundred dollars more each month for this coverage. For instance, I have clients who retired from a major chemical company. A few years ago they only had to pay $60-$70 a month for that coverage. Now it is costing them several hundred dollars a month. Fortunately, they have the money to pay it. Many don’t. So what should you do? Retirees relying on company medical benefits need to be prepared for the real possibility that they will be reduced or disappear. This may change your financial situation so you need to keep it in mind when choosing investments. Avoid those with long time commitments and penalties to access your money. Non-retirees need to realize that now, more than ever, it is their responsibility to provide for their retirement. Live below your means and set aside all you can. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Oversight Needed On Equity-Indexed Annuities

The sale of Equity-Indexed Annuities has increased 45% the first 6 months of this year. I’m concerned that the vast majority of those sales are unsuitable for the investors buying them. Oversight by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) is desperately needed to protect retirees from being taken to the cleaners by agents hungry for the large commission. Read on to find out how this oversight will benefit you. For almost 2 years now, I’ve been warning people against buying Equity-Indexed Annuities. Hopefully, my articles have caused agents all across the country to lose sales. That’s why I am regularly attacked and berated by agents. When I started, I was a ‘lone voice in the wilderness’. Now, the SEC and the NASD are interested in the situation. The national media are covering the story more regularly. The chorus of voices calling for change is growing. For example, The Wall Street Journal had an article on October 15th that echoed my complaints. Greater regulation and oversight of these products is needed because, even though they are technically an insurance product, they are being sold as an investment. Anyone looking at their sales literature can plainly see that. With promises of market gains and the ‘guarantee’ that you won’t suffer any losses, this investment is promoted as the answer to all your concerns. Investors are buying it as an investment, not insurance. Therefore, they should be regulated as investments and not as insurance. Investors will benefit if Equity-Indexed Annuities are classified as an investment. It will reduce, but not eliminate, the potential for abuse. Here’s why. First, being classified as an investment will result in better disclosure of the risks involved with this product. Equity-Indexed Annuities are complex products. Many of the agents selling them don’t even understand their intricacies. Consumers are not adequately warned of the dangers they face in these products. Most think they can’t lose money in this investment and that’s simply not true. For instance, many of those purchasing one of the most popular Equity-Indexed Annuities fail to realize that if they pull their money out of the contract when the contract matures that they won’t receive the index-related returns they thought they would. In fact, those wanting a lump sum from this specific product after 10 years would be GUARANTEED of making a total return of about 1.5% for the entire 10 year period. Few would ever buy this investment if they clearly understood that. Second, those selling investments are required to make sure that the investment they sell is suitable for the person they’re selling it to. When a commission-based investment is sold, it is reviewed by compliance officers to verify suitability. Compliance officers closely scrutinize investment sales because it’s their job to protect their firm from lawsuits and regulatory fines. And they know that their firms may be audited by the SEC. No compliance officer would approve the sale of an Equity-Indexed Annuity for 100% of a person’s investable assets—but I see those recommendations all the time. No compliance officer would approve of a transaction where the investor pays a large penalty on one annuity contract to transfer the money into an Equity-Indexed Annuity. This has become such a problem, though, that the NASD has issued warnings about it. Third, the high commissions equity-indexed annuities offer create a huge conflict of interest for the advisor. If you were an advisor and had the choice of making 2% or 15% on an account, which would you choose? Is it any wonder equity-indexed annuities have become so popular? The Wall Street Journal article arrives at the same conclusion that I have--older investors should avoid equity-indexed annuities. And yet, who are these agents going after the most? Older investors, of course, because they’re the ones with the most assets. Don’t be surprised if in the not-too-distant future, new regulations emerge to reign in the wild-west world of equity-indexed annuities. Until that day arrives, don’t fall for the equity-indexed annuity sales-pitch. There are much better ways to earn a decent market return with low risk, and you don’t have to give up control of your money to do it. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Readers Expose Mortgage Schemes

Getting a new mortgage? Watch Out! Mortgage brokers (even at banks) get paid on commission. As interest rates rise, they must become more creative to make a living. Many are honest, but there’s plenty that won’t blink an eye at taking advantage of uninformed consumers. Don’t be one of them! In my previous two articles, I’ve shared how and when Interest-Only, Option-ARM and Reverse Mortgages should and shouldn’t be used. (Read them at www.guardingyourwealth.com.) I’ve warned readers to be very careful when refinancing or purchasing a mortgage because the person you are dealing with may not have your best interest at heart. Here are some true stories that clearly illustrate that. David shares, “A licensed securities dealer has proposed that I take $300,000 in equity out of my house before home values plummet and invest the entire amount in an "investment grade" life insurance policy, specifically an Equity-Indexed Universal Life (EIUL) policy.” He described in detail how this would allow any future growth, loans and death-benefits to be tax-free. He also listed some of the negatives, such as the high cost of the insurance policy and other expenses. The advisor had shown him that he could pay off his house after 10 years with the investment, with money left over. He closed by saying, “It sounds almost too good to be true. Is this program too risky, or too expensive, to warrant investing my home equity?” Of course it’s too good to be true! It doesn’t make sense to tap your home’s equity for any investment. His home had probably been the best investment he had ever had. He was earning a guaranteed 6% or so (the interest rate on your mortgage) while increasing his equity at the same time. Don’t put that at risk. This is just one of the new schemes developed by agents to keep the commission dollars flowing. People like David, who are not retired, don't have a lot of investable assets for 'advisors' to go after. The bulk of most people’s investable assets are in a 401(k) or other company retirement program. The 'pot of gold' that pre-retirees do have is the equity in their home. Because homes have appreciated, many have significant equity. This scheme allows agents/advisors to tap that money when they otherwise couldn't. In this specific case, the agent could be making $85,000 off of this transaction! No wonder it sounded like such a good idea! To be frank, this borders on a scam and is not consistent with any good financial planning principles. This 'advisor' should lose his/her license. ’Av’ wrote about a horror story involving her parents’ purchase of an Option-ARM mortgage from an unscrupulous mortgage broker. To be safe, her parents included other family members in the talks with the mortgage broker. He laid out all the details, including the most intriguing part: an interest rate of only 1.65%. He assured them the payments would only be $300 per month. They couldn’t believe it and asked him several times to verify that information. Based on his assurances they took the mortgage. Then the first payment coupon came. She says, “Imagine my shock when (the real interest rate) was 5.6%. I called…and got the run around. I was told the payment hadn’t gone up.” The true amount due just to cover the interest was considerably more then the $300 they expected. By paying just the $300 their amount borrowed would continue to increase. Before the sale, the mortgage broker had been so trustworthy and always quickly returned their calls. Now he gave them the cold shoulder. When they finally reached him, he said “You’ve signed the papers and that’s that.” Clearly frustrated, she says, “So I am paying about 6% interest on a loan that 4 adults heard was only going to be 1.65%…we were played the fool big time and I want to warn other people.” Don’t accept any mortgage broker or other financial advisors’ word on something. It must be in writing. If you don’t understand the contract, take it to a lawyer or a Certified Financial Planner who doesn’t have an interest in the transaction for an objective point of view. Be careful so you don’t become the next horror story. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.