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Bernanke Says 2008 Worse Than Great Depression

FDRMy Comments: Ben Bernancke is no longer Chairman of the Federal Reserve. However, before he became chairman he was widely recognized as a world class economist and an expert of the Great Depression. It was that expertise that gave him so much credibility as he maneuvered the Fed through 2008-2009 until earlier this year.

There is no question that many of us are still hurting. The gap between the haves and the have nots is increasing. The ability of many of us to spend money like we used to is limited, which to some degree keeps recovery uncertain.

There is blame to go around, but not because anyone or sector of the economy was and is evil. That presumes a conspiracy involving thousands of people which is enough to debunk that idea. Bad things happen from time to time. There is little point in worrying about the past; we can only influence the future, but an understanding of the dynamics that led to the mess may be helpful.

Brian Gilmartin, CFA, Aug. 28, 2014

http://blogs.wsj.com/economics/2014/08/26/2008-meltdown-was-worse-than-great-depression-bernanke-says/

The above link was copied and pasted from a Real Time Economics Wall Street Journal tweet yesterday (8/26), after Gentle Ben testified in the AIG litigation recently.

I think former Fed Chair Bernanke was right in concluding that 2008′s recession, if left to run its course, would have been a far greater calamity for the US economy than the Great Depression, but for different reasons:

1.) The money markets and the commercial paper market was at real risk of failure, which means S&P 500 companies couldn’t have rolled short-term high quality CP;

2.) Far more Americans through 401(k)s and pensions, had exposure to the stock and bond markets than Americans had in the late 1920′s and early 1930′s;

3.) A 70 year bull market in home prices came to a crashing halt, the first national real estate depressions since the 1930′s. While the US economy was thought to be a primarily agrarian economy during the Great Depression, single-family homes as a percentage of household net worth, would have been far greater in 2007 – 2008 than in the 1930′s;

4.) The truly shocking action for me wasn’t the Lehman default or even the Bear Stearns default, but the drop in Northern Trust’s and State Street’s stock in late September, early October, 2008. Northern Trust traded up to $88 in September ’08 only to collapse to $33 within a two week time frame. NTRS and STT are “global custodian” banks and thus are huge custodians (recordkeepers) for corporate pension plans and such, with far bigger assets in custody and administration than assets under management. If The Reserve Fund had broken the buck, there would have been true calamity in the Street and although it is simply a guess, I would have thought that the US unemployment rate would have seen 50% easily, at least over the near term;

5.) The Reserve Fund was, at that time (I believe) in 2008, one of the world’s largest money market funds, and if the Reserve Fund had “broken the buck” which means that if the Reserve Fund’s NAV had moved below $1 per share, it could have resulted in a run on money markets that would have made the bank run and the Bailey Building & Loan run (“It’s A Wonderful Life”) look like a day in the park. (The aftermath of what happened with the Reserve Fund in 2008 is that today, the SEC is contemplating and is close to letting money market fund NAVs (net asset values) float. The thought is that the $1 money market price creates a “moral hazard” and what I told a client recently is that what retail investors will likely wind up with is whole array of “ultra-short” bond funds as money market funds, which do fluctuate minimally in price.)

6.) Although some of the fiscal policy has been horrid since 2008, I do think that one of the root issues in the economic recovery following 2008 has been the true “shock” of the drop in real estate and household wealth. Remember consumption is 2/3rd’s of GDP and with the capital markets and the real estate markets, being two of the greatest wealth-creation vehicles post WWII (not to mention the value of an education), it is taking years for the consumer to restore their savings and confidence.

7.) The fact that “disinflation” (a declining rate of inflation) and deflation continue to be an issue 5 years after the stock market low and the substantial economic recovery, is indicative of lingering overcapacity. Part of that is due to the life-cycle of technology which has dramatically accelerated productivity and shortened tech product cycles (not to mention kept a lid on inflation) and part could be demographics and the Aging of America (it is a bigger debate);

8.) The Great Mistake in the 1930′s by the Federal Reserve is that they actually withdrew liquidity sometime in 1935 – 1936, which resulted in another downturn in the US economy in the late 1930′s just prior to WWII. In other words, Fed policy errors actually exacerbated the Great Depression, rather than shorten it. Both Janet Yellen (I’m sure), just like Ben Bernanke are / were both aware of the Fed’s policy mistakes and are obviously loathe to make the same mistake. The fact that there isn’t a meaningful inflation today just makes the Fed’s ability to maintain ZIRP (zero interest rate policy) and low rates that much easier. However it will end at some point, and we will get some inflation, I would suspect.

Most intelligent investors blame leverage on the 2008 collapse, but I think it was far more involved than that. It just wasn’t that simple.

In client meetings the last few years, I’ve been telling clients that there is less than a 5% chance that they will see the 2008 confluence of events happen again in their lifetime (probably less).

Certainly I could be wrong, but I continue to think the US economy, and the US stock market, particularly the S&P 500 is in a perfect glide slope of healthy, albeit subdued growth, low inflation, and a healthy respect for stock volatility and negative sentiment on the part of retail investors.

One commentator from PIMCO called it the “Goldilocks economy” and the metaphor seems appropriate.
We will see S&P 500 corrections over time, but I will bet in 10 years that we will look back and see this period of time as similar to post WWII economic stability and growth. Perhaps that conclusion is somewhat of a stretch given the demographics of the US economy today, but we’ll see.

Thanks for reading today. We’ve been contemplating this commentary on 2008 for some time. Watching NTRS and STT trade in late September, early October, 2008 was one of the few times, I’ve felt true fear watching the stock market. The potential collapse of the money market as was being telegraphed by the global custodian banks, would have been a horrific scenario to conceive, let alone experience.

When all the books are written about the “near Great Collapse of 2008″ after 20 – 30 years of hindsight, I do think Ben Bernanke, then Treasury-Secretary Hank Paulson, and Tim Geithner will be due a huge debt of gratitude.
For a few days/weeks, educated American’s had a brief look into the abyss. It won’t be forgotten by those of us that sat through it.

For Retirement Portfolios, a Smarter Glidepath

retirement-exit-2My Comments: I’ve talked in earlier blog posts about the rate used to withdraw money from your retirement accounts. There is a prevailing sentiment that it should be 4% or less. I think that’s too low. On the other hand if I’m wrong, and 30 years later you discover you have run out of money, it’s unlikely I’ll be here to take your blame.

Having said that, I think a 6% extraction rate is more realistic. Only how much more money that actually gives you is hard to imagine. That’s because it’s a function of how fast the money left in your accounts actually grows.

My experience, though thick and thin, meaning good years and bad years, is that you should be able to grow your money at 7 to 8% per year. I’m now using programs that when backtested over the past dozen years, which includes the crash of 2008-09, have grown at 10%.

The argument against that is that as we all know, past performance is no guarantee of future performance. But it is a clue, and with advances in technology and tactical approaches to investing, a higher number is far more realistic, in my opinion.

by Michael Kitces / AUG 25, 2014

One of the core functions of financial planning is setting up clients’ portfolios in retirement so that resources are adequate to sustain the journey — no small feat, given the uncertainties involved and the need to balance stability and safety against the risk of inflation, as well as the need for growth over the potentially long time horizon.

Conventional wisdom suggests that retirees should manage this challenge by having a moderate exposure to stocks at the start of retirement — to help their portfolio grow and be able to keep up with inflation over the long run — and then reduce equity exposure slowly over time as they age and their time horizon shrinks.

But recent research has suggested that the optimal approach might actually be the opposite — start with less equity exposure early in retirement, when the portfolio is largest and most vulnerable to a significant market decline, and then slightly increase the equity exposure each year throughout retirement.

And as it turns out, an even better approach may be to accelerate the pace of equity increases a bit further in the earlier years (from an initially conservative base). After all, a slight equity increase in the last year of retirement isn’t really likely to matter.

For instance, a glidepath might aim to increase equities in just the first half of retirement, until the target threshold is reached, and then level off. Instead of gliding to 60% equities from 30% over 30 years, glide up to 60% over 15 years — then maintain that 60% equity exposure for the rest of retirement (assuming the 60% target is consistent with client risk tolerance in the first place).

Accelerating the glidepath reduces the time when the portfolio is bond heavy — a particular concern in today’s low interest-rate environment. And it may be even more effective to simply take interest-rate risk off the table altogether by owning short-term bonds instead. Such an approach leads to less wealth on average, but in low-return environments, rising-equity glidepaths that use stocks and Treasury bills can actually be superior to traditional portfolios using stocks and longer-duration bonds (say, 10-year Treasuries) — even though Treasury bills provide lower yields.

FASTER GLIDEPATH

In the original research that American College professor Wade Pfau and I collaborated on, showing the benefits of a rising-equity glidepath, we simply assumed that any retiree using a glidepath would make adjustments in a straight line throughout retirement. For instance, gliding equities to 45% from 30% during a 30-year retirement time horizon would require a shift of 0.5% per year.

Gliding to 60% from 30% in the same time horizon would involve shifting 1% per year.
Yet the reality in such situations is that, for someone who is spending down assets, the last 1% change in equity exposure (to 60% from 59%) in the 30th year is not going to impact the outcome. At that point, the retiree has either made it or not.

So we launched a follow-up study, testing the impact of an accelerated glidepath. In this case, instead of moving to 60% equities from 30% over 30 years, the retiree moves there in only 15 years (at 2% per year), and then plateaus.

To test the alternatives, we looked at how they would have performed historically compared with each other with a 4% initial withdrawal rate over rolling 30-year periods in the U.S., starting each year since 1871, assuming a combination of large-cap U.S. stocks and 10-year Treasury bonds that are annually rebalanced.

The results, shown in the “How Fast a Glidepath?” chart below, reveal that the accelerated glidepath over 15 years is superior to the 30-year glidepath. In most years, the difference is fairly small — an improvement of the safe withdrawal rate of 0.1 to 0.2 percentage points — but in the best years, the improvement was as much as roughly half a percentage point.

The accelerated glidepath is ultimately better in all historical scenarios and improves outcomes in both high-return and low-return eras. It’s only a question of how much.

INTEREST-RATE RISK

A commonly voiced concern about our original rising-equity glidepath research was the fact that being more conservative with equities in the early years also means owning more in bonds. That’s not necessarily appealing in light of today’s low interest rates and the fear that rates will rise at some point in the coming years.

Accordingly, in our follow-up research we also tested the impact of taking interest-rate risk off the table, by using portfolios of stocks and Treasury bills, instead of stocks and 10-year Treasury bonds. The benefit of using Treasury bills is that, because they mature in a year or less, they are reinvested annually, avoiding any risk that the retiree will need to liquidate bonds at a loss because of rising rates. The downside, of course, is that shorter-term Treasury bills generally have lower yields over time (at least in any normal, upward-sloping yield curve environment).

As shown in the “Bills vs. Bonds” chart below, there are times when Treasury bills help, and times when they hurt. The difference in outcomes between using Treasury bills and bonds is as much as a half-percentage point improvement in safe withdrawal rate, and as bad as a 2-point decrease. ( No chart here. Please continue reading by clicking HERE )

Social Security Survivor Benefits: What Advisors (and clients) Should Know

My Comments: By now you know that I provide financial advice about Social Security and about ways to maximize your SSA benefits. That all happens when you are alive. Inevitably, someone in a married relationship is going to leave the building, as Elvis did. Then what happens?

 

by Paul Norr / AUG 18, 2014

Social Security survivor benefits have some unique rules which can be especially hard to remember. Survivor benefits can seem similar to other parts of the Social Security system, but they actually have some significantly different features and regulations. Following is a summary of those unique features and and how survivor benefits differ from the more common Social Security benefits.

The formal title of the Social Security program, Old Age, Survivor and Disability Insurance (OASDI) provides an immediate clue that the Survivor program is distinct from the “old age” portion of the system to which most of us are usually referring when we say Social Security. The Disability portion of the program has its own trust fund and is totally separate program. The Old Age and Survivor programs, however, have a hybrid relationship, sharing the same trust fund while operating under some significantly different rules.

OLD AGE VS. SURVIVOR BENEFITS
The differences between the spousal benefits of the Old Age program and survivor benefits are the heart of the issue. Spousal benefits are benefits based on a living spouse’s (or ex-spouse’s) work history. Survivor benefits are benefits based on a deceased spouse’s (or ex-spouse’s) work history.

Here are the primary differences between Survivor and Spousal benefits:

1) Survivor Benefits are much higher, as much as twice as high. Maximum survivor benefits are 100% of the deceased worker’s last Social Security benefit. Maximum spousal benefits are only 50% of the worker’s SS benefit.

2) The worker’s benefit used to calculate benefits could be different in each case. Survivor benefits are based on the deceased’s Full Retirement Age (FRA) benefit plus any delayed retirement credits the worker may have accrued by waiting as late as 70 before filing for their benefits. Spousal benefits are based only on the worker’s FRA benefit and are not enhanced by any delayed retirement credits for the worker.

3) File before the Full Retirement Age (FRA) and either benefit will be reduced, although not in the same way. At the earliest allowable age for spousal benefits of 62 one will only get 35% of the worker’s benefit. A widow claiming survivor benefits at the earliest possible age of 60 (two years younger, another difference) will get 71.5% of the deceased worker’s benefit.

4) The window for a Full Retirement Age at 66 is slightly different. For spousal benefits FRA is formally 66 for people born between 1943 and 1954. For survivor benefits FRA is 66 for people born between 1945 and 1956. If you are born in 1944 or 1955 you will have a different FRA for each benefit.

5) The minimum length of marriage required in order to qualify for either benefit differs, 12 months for spousal benefits but only nine months for survivor benefits. There are different exceptions to each of these.

6) If one is divorced and collecting benefits on the work record of the ex-spouse, remarrying may affect benefits differently. Remarriage will completely nullify any spousal benefits based on the ex-spouse, no matter the age at which the person remarried.

If the ex-spouse has died however, and the survivor remarries after the age of 60, they can keep the survivor benefit even though they are now remarried. This sets up an interesting situation where the remarried person will ultimately have the option of choosing between three benefit options: a survivor benefit on the ex-spouse, a retirement benefit on their own work record or a spousal benefit based on their current spouse.

It may also present some important planning opportunities. For instance, if a woman collecting survivor benefits on her ex-husband is 59 and planning to remarry, she might want to delay the wedding bells until her 60th birthday in order to keep receiving the survivor benefit based on her decrease ex-husband.

Finally, the benefit calculations for the two benefits are independent of each other. For instance, filing for one benefit before FRA will not affect the filing for the other benefit. For instance, a person can apply for survivor benefits before FRA thereby reducing their survivor benefits. This early survivor filing will not affect their application for their own old age retirement benefits. They would still be eligible to collect their full benefit at 66 or even accrue Delayed Retirement Credits by waiting until age 70.

These are most of the important differences between survivor and spousal benefits. It gets confusing and hard to remember so you might want to keep this summary handy. I know that I will.

Paul Norr is a financial planner in Thousand Oaks, Calif. and writes about retirement and planning issues. His website is www.paulnorr.com.

Wealth Managers Enlist Savvy Spy Software to Map Portfolios

profit-loss-riskMy Comments: I’ve been playing this financial game now for almost 40 years. And like so much in today’s world, it’s very different today than it was then. Technology forces us to embrace new thoughts and ways to deal with so much in life.

When it comes to managing your money, my role as an investment advisor and financial planner causes me to try and stay at least near the front of the line, otherwise I’ll get left behind.

Much better returns on investment (ROI) can be had today, hypothetically, than we could have hoped for 30 years ago. Do you remember when interest rates less than 10% were thought to be ridiculous? Now we are living with interest rates near zero and have been for some time. So how is it possible to predict that a 10% ROI is reasonable today?

The following article talks about people of wealth that no one around here fully understands. And so for the rest of us, it’s kind of meaningless. Except when they talk about technology and how far its come so that mere mortals like us can benefit. Having access to these technologies can make a huge difference in your life.

Posted by Steven Maimes, Contributor – on August 5th, 2014
NYT article by Quentin Hardy

Some of the engineers who used to help the Central Intelligence Agency solve problems have moved on to another challenge: determining the value of every conceivable investment in the world.

Five years ago, they started a company called Addepar, with the aim of providing clear and reliable information about the increasingly complex assets inside pensions, investment funds and family fortunes. In much the way spies diagram a communications network, Addepar filters and weighs the relationships among billions of dollars of holdings to figure out whether a portfolio is about to crash.

Professional wealth managers are going to be seeing a lot more of big data. Last spring, Addepar raised a substantial sum to take this mainstream, and although it is not the only one bringing big data to a portfolio statement, its cast of characters sets it apart.

“One of the most foundational questions in finance is ‘What do I own, and what is all of this worth?’ ” said Eric Poirier, the chief executive of Addepar. “ ‘What is my risk?’ turns out to be an almost intractable problem.”

Although the list of wealth managers who use Addepar is confidential, Mr. Poirier says it has already grown from people like Joe Lonsdale, its tech-billionaire founder, and Iconiq Capital, which manages some of the Facebook co-founder Mark Zuckerberg’s money, to include family offices, banks and investment managers at pension funds.

“In this state, some people are just getting wealthier,” said Joseph J. Piazza, chairman and chief executive of Robertson Stephens L.L.C., a San Francisco investment adviser that manages about $500 million using software from Addepar. Ten years ago, he said, “it might be a young entrepreneur with $50 million. Now it could be 10 times that, and they are thoughtful, bigger risk-takers.”

Investing used to be a relatively simple world of stocks, bonds and cash, with perhaps some real estate. But deregulation, globalization and computers have meant more choices. For a wealthy person, this could mean derivatives, private equity, venture capital, overseas markets and a host of other choices, like collectibles and Bitcoin.

And for all the computers on Wall Street’s trading floors, a lot of money management is surprisingly old-fashioned. Venture capitalists may invest in cutting-edge technology, but they sometimes still send out quarterly reports on paper. Financial custodians, which hold securities for people, often have custom-built computer systems. That makes it hard to compare a trade at one with a trade at another.

“The market is much more complicated than it used to be,” said David G. Tittsworth, president and chief executive of the Investment Adviser Association, a trade group of 550 registered firms. “The rich have bigger appetites for futures, commodities, alternative investments. There’s a lot of demand for helping them keep track of what their holdings actually are.”

Mr. Poirier, 32, a New Hampshire native who started a coding business at 14 before heading to Columbia University, worked on analyzing fixed-income products at Lehman Brothers from 2003 to 2006, before that Wall Street firm collapsed from mismanagement of its own risk. “Trying to figure out a yield, I’d work with a dozen different computer systems, with different interactions that people didn’t understand well,” he said.

He then took a job with Palantir Technologies, a company founded to enable military and intelligence agencies to make sense of disparate and incomplete data. He went on to build out Palantir’s commercial business, managing risk for things like JPMorgan Chase’s portfolio of subprime mortgages.

There were plenty of parallels between the two worlds, but instead of agencies, spies and eavesdropping satellites, finance has markets, investment advisers and portfolios. Both worlds are full of custom software, making each analysis of a data set unique. It is hard to get a single picture of anything like the truth.

Even a simple question like “How many shares of Apple do I own?” can be complicated, if some shares are held outright, some are inside a venture fund where the wealthy person is an investor and some are locked up in a company that Apple acquired.

Finance “was the same curve I encountered in the intelligence community,” Mr. Poirier said. “How do you make sense of diverse information from diverse sources, when the answer depends on who is asking the question?”

The parallel was also evident to Mr. Lonsdale, a Palantir co-founder. From an earlier stint at PayPal, he had millions in cash and on paper is a billionaire from his Palantir holdings. He also knew lots of other young people in tech who could not make sense of what was happening to their money. “Wealth management is designed for the 1950s, not this century,” he said.

Mr. Lonsdale left Palantir in 2009, starting Addepar with Jason Mirra, another Palantir employee, in 2009. “It didn’t make sense for Palantir to hire 20 or 30 people to work in an area like this,” Mr. Lonsdale said. Mr. Mirra is Addepar’s chief technical officer. Mr. Poirier joined in early 2013 and became chief executive later that year.

Besides Mr. Lonsdale, early investors in Addepar included Peter Thiel, a founder of both PayPal and Palantir. More money came from Palantir’s connections to hedge fund investors. Addepar’s $50 million funding round last May was led by David O. Sacks — another PayPal veteran, who sold a company called Yammer to Microsoft for $1.2 billion in 2012 — and Valor Equity Partners, a Chicago firm that has also invested in PayPal, SpaceX and Tesla Motors, among other companies.

Despite the pedigree, Mr. Lonsdale says Addepar, which has 109 employees, is not meant just as a tool for rich tech executives or family money. They are, he said, “just the early adopters.”
Karen White, Addepar’s president and chief operating officer, says a typical customer has investments at five to 15 banks, stockbrokers or other investment custodians.

Addepar charges based on how much data it is reviewing. Ms. White said Addepar’s service typically started at $50,000, but can go well over $1 million, depending on the money and investment variables involved.

And in much the way Palantir seeks to find common espionage themes, like social connections and bomb-making techniques, among its data sources, Mr. Lonsdale has sought to reduce financial information to a dozen discrete parts, like price changes and what percentage of something a person holds.

As a computer system learns the behavior of a certain asset, it begins to build a database of probable relationships, like what a bond market crisis might mean for European equities. “A lot of computer science, machine learning, can be applied to that,” Mr. Lonsdale said. “There are lessons from Palantir about how to do this.”

A number of other firms are also trying to map what everything in a diverse portfolio is worth. One of the largest, Advent Software, in 2011 paid $73 million for Black Diamond, a company that, like Addepar, uses cloud technology to increase its computing power and more easily draw from several databases at once.

“We’ve been chipping at the problem for 30 years,” said Peter Hess, Advent’s president and chief executive. “There is a lot more complexity now, and the modernization of expectations about how things should work is led by the new tech money. But because of Apple and Google, even my parents have expectations about how easy tech ought to be.”

Sensible Expectations for Inflation

retirement_roadMy Comments: When I talk with prospective clients and those already clients, I talk about existential risk. These are risks that may or may not happen, depending on any number of variables. One of them is inflation since it reduces the purchasing power of your dollars over time.

Another existential risk is the financial burden imposed on a family whenever someone needs long term care. The odds are high it will happen for 60% to 75% of us. However, if you simply die before the need for long term care happens, then the risk disappears.

Inflation risk is far less existential, if you expect to live a long and happy life, chances are good it will be there, with the only question being how much inflation. Having solutions in place that mitigate the risk makes sense.

Managing expectations is also an important part of financial planning. Growing your money over time at a rate that exceeds the rate of inflation goes a long way to helping you maintain your standard of living going forward.

posted by Jeffrey Dow Jones July 24,2014 in Cognitive Concord

One of the things I’ve been watching closely over the last few months is inflation. Not for the reasons you might be thinking — I’m not one of these inflation truthers banging that tired old drum that inflation is higher than being reported. I don’t think there’s a big conspiracy out there about the CPI. All things considered, and as complicated as it is to calculate, it’s actually a really good data point.

One of the early themes of this newsletter, way back in 2009, was that inflation wasn’t something to worry about. Longtime readers may remember The Inflation Chupacabra with fondness. The basic premise was: I’ll believe it when somebody brings me solid evidence. Five years later, I’m still waiting.

It’s possible – possible — that may be changing.

What I’m really watching right now is wage inflation. Because without a significant and sustained pickup in wages, you can’t get a significant and sustained pickup in prices. The one supports the other. For some reason, there’s this myth out there in certain circles where, in this decade of stagnant income, systemic inflation can run at 5 or 10% per year. It can’t. Some goods can increase in price at a dramatic rate. But not systemic prices, not unless the wages supporting those prices also rise.

Wage inflation is unquestionably picking up a little bit, but it’s not significant enough to set the sirens blaring. We still have a long way to go before reaching levels of concern. I posted this chart from Deutsche Bank’s Torsten Slok a few weeks ago:
CONTINUE-READING

5 QLAC Questions and Answers

My Comments: QLAC? What the heck is a QLAC?

By Jeffrey Levine / July 18, 2014

On July 1, 2014 the Treasury Department released the long-awaited final regulations for Qualifying Longevity Annuity Contracts (QLACs). These new annuities will offer advisors a unique tool to help clients avoid outliving their money.

The QLAC rules, however, are a complicated mash-up of IRA and annuity rules, and clients may need substantial help in understanding their key provisions. To help advisors break down the most important aspects of QLACs, below are 5 critical QLAC questions and their answers.

1) Question: What are QLACs?
Answer: QLACs, or qualifying longevity annuity contracts, are a new type of fixed longevity annuity that is held in a retirement account and has special tax attributes. Although the value of a QLAC is excluded from a client’s RMD calculation, distributions from QLAC don’t have to begin until a client reaches age 85, well beyond the age at which RMDs normally begin.

2) Question: Why did the Treasury Department create QLACs?

Answer: Prior to the establishment of QLACs, there were significant challenges to purchasing longevity annuities with IRA money. The rules required that unless an annuity held within an IRA had been annuitized, its fair market value needed to be included in the prior year’s year-end balance when calculating a client’s IRA RMD. This left clients with non-annuitized IRA annuities with an inconvenient choice to make after reaching the age at which RMDs begin. At that time, they needed to either:
1) Begin taking distributions from their non-annuitized IRA annuities, reducing their potential future benefit, or
2) Annuitize their annuities, which would obviously produce a lower income stream than if they were annuitized at a more advanced age, or
3) “Make-up” the non-annuitized annuity’s RMD from other IRA assets, drawing down those assets at an accelerated rate.

None of these options was particularly attractive and now, thanks to QLACs, clients will no longer be forced to make such decisions.

3) Question: How much money can a client invest in a QLAC?

Answer: The final regulations limit the amount of money a client can invest in a QLAC in two ways: a percentage limit; and an overall limit. First, a client may not invest more than 25 percent of retirement account funds in a QLAC.

For IRAs, the 25 percent limit is based on the total fair market of all non-Roth IRAs, including SEP and SIMPLE IRAs, as of December 31st of the year prior to the year the QLAC is purchased. The fair market value of a QLAC held in an IRA will also be included in that total, even though it won’t be for RMD purposes.

The 25 percent limit is applied in a slightly different manner to 401(k)s and similar plans. For starters, the 25 percent limit is applied separately to each plan balance. In addition, instead of applying the 25 percent limit to the prior year-end balance of the plan, the 25 percent limit is applied to the balance on the last valuation date.

In addition, that balance is further adjusted by adding in contributions made between the last valuation and the time the QLAC premium is made, and by subtracting from that balance distributions made during the same time frame.

In addition to the 25 percent limits described above, there is also a $125,000 limit on total QLAC purchases by a client. When looked at in concert with the 25 percent limit, the $125,000 limit becomes a “lesser of” rule. In other words, a client can invest no more than the lesser of 25 percent of retirement funds or $125,000 in QLACs.

4) Question: What death benefit options can a QLAC offer?
Answer: A QLAC may offer a return of premium death benefit option, whether or not a client has begun to receive distributions. Any QLAC offering a return of premium death benefit must pay that amount in a single, lump-sum, to the QLAC beneficiary by December 31st of the year following the year of death.

Such a feature is available for both spouse and non-spouse beneficiaries. In addition, the final regulations allow this feature to be added regardless of whether the QLAC is payable over the life of the QLAC owner only, or whether the QLAC will be payable over the joint lives of the QLAC owner and their spouse.

QLACs may also offer life annuity death benefit options. In general, a spousal QLAC beneficiary can receive a life annuity with payments equal to or less than what a deceased spouse was receiving or would have received if the latter died prior to receiving benefits under the contract. An exception to this rule is available, however, to satisfy ERISA preretirement survivor annuity rules.

If the QLAC beneficiary is a non-spouse, the rules are more complicated. First, clients must choose between two options, one in which there is no guarantee a non-spouse beneficiary will receive anything; but if payments are received, they will generally be higher than the second option.

The second option is a choice that will guarantee payments to a non-spouse beneficiary, but those payments will be comparatively smaller than if payments were received by a non-spouse beneficiary under the first option. Put in simplest terms, a non-spouse beneficiary receiving a life annuity death benefit will generally fare better with the first option if the QLAC owner dies after beginning to receive benefits whereas, if the QLAC owner dies before beginning to receive benefits, they will generally fare better with the second method.

5) Question: Are QLACs available now
Answer: Yes…and no. Quite simply, the QLAC regulations are in effect already, but that doesn’t mean that insurance carriers already have products that conform to the new IRS specifications.

To the best of my knowledge, and as of this writing, QLACs exist in theory only.
It’s likely, however, that in the not too distant future, QLACs will go from tax code theory to client reality. Exactly which carriers will offer them and exactly which features those carriers will choose to incorporate into their products remains to be seen.

But make no mistake: QLACs are coming (or here, depending on your point of view). If such products may make sense for clients, it probably makes sense to reach out to them now and begin the discussion.

Increased Consumer Spending Driving Strong Economic Growth In USA

USA EconomyMy Comments: On Thursday, July 30 the market dropped 300 points. The blogosphere and media were all a chatter about “was this the start of the correction?”. Who knows ?!?

It illustrates why those of us who profess to be financial advisors are more in the dark than you are. Here we are talking about a looming market correction, one that will happen, and the longer it takes to start the more violent it is likely to be. And here I am this morning, coming to you with good news about the economy. Seems totally weird, doesn’t it?

What has to be remembered is that the markets are always forward looking. I want to invest my money before it goes up, if at all possible. If I think it’s going to crater, I’m taking my money out. At least that’s the plan, unless you use some of the approaches favored by us at Florida Wealth Advisors, LLC.

What this headline tells me is that when the correction happens, it will be relatively short term and though perhaps dramatic, it will not be systemic.

Jul. 31, 2014 / APAC Investment News

Summary
• The Bureau of Economic Analysis is reporting 4 percent growth in the second quarter, a strong rebound from the first quarter.
• Consumer spending in both durable and non-durable goods is up. Both exports and imports also rose, along with most other indicators.
• This economic growth should provide some upward pressure for markets, at least in the short term.

The United States has struggled to fully recover from the 2008 Financial Crisis. While stock markets have rebounded, unemployment has remained high and economic growth has been tepid. New data points to the U.S. economy growing a solid 4 percent in the second quarter, however, propelled by an increase in consumer spending. This should help stabilize markets and perhaps even push them higher.

With consumer spending accounting for roughly 2/3rds of America’s economy, any increase in consumer spending should come as a relief for those concerned of yet another slowdown. Still, stock markets hovered in place following the release of the data on Wednesday, likely over concerns about the Fed’s next move with interest rates and the continued wind down of its asset buying program.

Consumer Spending On The Rise
According to the Bureau of Economic Analysis consumer spending increased a solid 2.5 percent in the second quarter, up from 1.2 percent in the first quarter. Durable goods, which includes automobiles, appliances, and other similar goods, increased by an astounding 14 percent, compared with an increase of just 3.2 percent in the first quarter. Non-durable goods, which includes food and clothing, increased by 2.5 percent. The BEA presents its numbers in seasonally adjusted annual rates.

Automobiles have been performing particularly well as of late, even while General Motors is still feeling the fallout from a major scandal and many automakers are suffering a rash of recalls. There were some fears of a major slowdown following the economic contraction in the first quarter, but for now it appears that the feared slow down hasn’t materialized.

Ford did suffer a decline in sales in June, falling some 5.8 percent YOY. While this may not seem like good news, the drop was not as bad as expected. Meanwhile, General Motors sales rose 1 percent even in spite of the bad publicity from the ignition scandal, and Chrysler posted a solid 9.2 gain.

Growth Being Driven By Other Factors
Besides consumer spending, other areas of the economy have also performed well. Exports rose by 9.5 percent, following a sharp decline of 9.2 percent in the first quarter. This suggests that the global economy may also be growing. Imports also rose 11.7 percent, compared with an increase of only 2.2 percent in the first quarter.

Investment in equipment rose 7 percent, while investments in non-residential structures rose by 5.3 percent.

Interestingly, federal government consumption actually decreased by .8 percent, suggesting that the rise in spending is being driven by private businesses and consumers. This should come as a welcome sign given the government’s high debt burden. Simply put, the American government likely couldn’t afford to drive up consumption even if it wanted to.

Strong Economic Growth Should Re-enforce Markets
For now, strong economic growth should keep markets buoyant even with many factors exerting downward pressures. Sanctions on Russia, tensions in the South China Seas, political infighting in Congress, the possible fallout of the Fed curtailment of its asset buying program, and numerous other factors have created jitters. Strong economic growth can counteract these downward pressures, at the very least.

Meanwhile, as stock indexes have surged to all time highs, there have been some concerns that a bubble may be building. While stock markets have been performing well, the economy in general seemed to be suffering from sluggish growth, suggesting that something besides actual economic performance has been driving stock prices upwards. Now, however, economic growth finally appears to be in line with the rising stock market indexes.

So long as the economy continues to grow, markets should remain stable. Of course, the economy itself could quickly swing back into contraction. Government debt levels remain high, profits can evaporate over night, and consumer sentiments can change quickly.

Further, as the economy continues to grow, the Fed will almost certainly continue to cut back its stimulus measures, and eventually even raise interest rates. This, in turn, could slow economic growth. Meanwhile, stagnant wages, continued high unemployment, high debt levels, and other factors could eventually pose a threat.