Fortune Watch » Financial Planning

US Financial Products: Annuities

Robin Bal — Wed, 01 Feb 2012 16:26:47 +0000

In the United States an annuity contract is created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time. Annuity contracts traditionally provide a guaranteed distribution of income over time, until the death of the person or persons named in the contract or until a final date, whichever comes first. However, the majority of modern annuity customers use annuities only to accumulate funds free of income and capital gains taxes and to later take lump-sum withdrawals without using the guaranteed-income-for-life feature.

Annuity contracts in the United States are defined by the Internal Revenue Code and regulated by the individual states. Variable annuities have features of both life insurance and investment products. In the U.S., annuity insurance may be issued only by life insurance companies, although private annuity contracts may be arranged between donors to non-profits to reduce taxes. Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others. Their federal tax treatment, however, is governed by the Internal Revenue Code. Variable annuities are regulated by the Securities and Exchange Commission and the sale of variable annuities is overseen by the Financial Industry Regulatory Authority (FINRA) (the largest non-governmental regulator for all securities firms doing business in the United States).
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There are two possible phases for an annuity, one phase in which the customer deposits and accumulates money into an account (the deferral phase), and another phase in which customers receive payments for some period of time (the annuity or income phase). During this latter phase, the insurance company makes income payments that may be set for a stated period of time, such as five years, or continue until the death of the customer(s) (the “annuitant(s)”) named in the contract. Annuitization over a lifetime can have a death benefit guarantee over a certain period of time, such as ten years. Annuity contracts with a deferral phase always have an annuity phase and are called deferred annuities. An annuity contract may also be structured so that it has only the annuity phase; such a contract is called an immediate annuity. Note this is not always the case.

Immediate annuity

The term “annuity,” as used in financial theory, is most closely related to what is today called an immediate annuity. This is an insurance policy which, in exchange for a sum of money, guarantees that the issuer will make a series of payments. These payments may be either level or increasing periodic payments for a fixed term of years or until the ending of a life or two lives, or even whichever is longer. It is also possible to structure the payments under an immediate annuity so that they vary with the performance of a specified set of investments, usually bond and equity mutual funds. Such a contract is called a variable immediate annuity. See also life annuity, below.

The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings with a tax-deferred growth factor. A common use for an immediate annuity might be to provide a pension income. In the U.S., the tax treatment of a non-qualified immediate annuity is that every payment is a combination of a return of principal (which part is not taxed) and income (which is taxed at ordinary income rates, not capital gain rates). Immediate annuities funded as an IRA do not have any tax advantages, but typically the distribution satisfies the IRS RMD requirement and may satisfy the RMD requirement for other IRA accounts of the owner (see IRS Sec 1.401(a)(9)-6.)

When a deferred annuity is annuitized, it works like an immediate annuity from that point on, but with a lower cost basis and thus more of the payment is taxed.

Annuity with period certain

This type of immediate annuity pays the annuitant for a designated number of years (i.e., a period certain) and is used to fund a need that will end when the period is up (for example, it might be used to fund the premiums for a term life insurance policy). Thus this option is not necessarily suitable for an individual’s retirement income, as the person may outlive the number of years the annuity will pay.

Life annuity

A life or lifetime immediate annuity is used to provide an income for the life of the annuitant similar to a defined benefit or pension plan.

A life annuity works somewhat like a loan that is made by the purchaser (contract owner) to the issuing (insurance) company, which pays back the original capital or principal (which isn’t taxed) with interest and/or gains (which is taxed as ordinary income) to the annuitant on whose life the annuity is based. The assumed period of the loan is based on the life expectancy of the annuitant. In order to guarantee that the income continues for life, the insurance company relies on a concept called cross-subsidy or the “law of large numbers”. Because an annuity population can be expected to have a distribution of lifespans around the population’s mean (average) age, those dying earlier will give up income to support those living longer whose money would otherwise run out. Thus it is a form of longevity insurance.

A life annuity, ideally, can reduce the “problem” faced by a person that he/she doesn’t know how long he/she will live, and so he/she doesn’t know the optimal speed at which to spend his/her savings. Life annuities with payments indexed to the Consumer Price Index might be an acceptable solution to this problem, but there is only a thin market for them in North America.

Life annuity variants

For an additional expense (either by way of an increase in payments (premium) or a decrease in benefits), an annuity or benefit rider can be purchased on another life such as a spouse, family member or friend for the duration of whose life the annuity is wholly or partly guaranteed. For example, it is common to buy an annuity which will continue to pay out to the spouse of the annuitant after death, for so long as the spouse survives. The annuity paid to the spouse is called a reversionary annuity or survivorship annuity. However, if the annuitant is in good health, it may be more advantageous to select the higher payout option on his or her life only and purchase a life insurance policy that would pay income to the survivor.

The pure life annuity can have harsh consequences for the annuitant who dies before recovering his or her investment in the contract. Such a situation, called a forfeiture, can be mitigated by the addition of a period-certain feature under which the annuity issuer is required to make annuity payments for at least a certain number of years; if the annuitant outlives the specified period certain, annuity payments continue until the annuitant’s death, and if the annuitant dies before the expiration of the period certain, the annuitant’s estate or beneficiary is entitled to the remaining payments certain. The tradeoff between the pure life annuity and the life-with-period-certain annuity is that the annuity payment for the latter is smaller. A viable alternative to the life-with-period-certain annuity is to purchase a single-premium life policy that would cover the lost premium in the annuity.

Impaired-life annuities for smokers or those with a particular illness are also available from some insurance companies. Since the life expectancy is reduced, the annual payment to the purchaser is raised.

Life annuities are priced based on the probability of the annuitant surviving to receive the payments. Longevity insurance is a form of annuity that defers commencement of the payments until very late in life. A common longevity contract would be purchased at or before retirement but would not commence payments until 20 years after retirement. If the nominee dies before payments commence there is no payable benefit. This drastically reduces the cost of the annuity while still providing protection against outliving one’s resources.

Deferred annuity

The second usage for the term annuity came into being during the 1970s. Such a contract is more properly referred to as a deferred annuity and is chiefly a vehicle for accumulating savings with a view to eventually distributing them either in the manner of an immediate annuity or as a lump-sum payment.

All varieties of deferred annuities owned by individuals have one thing in common: any increase in account values is not taxed until those gains are withdrawn. This is also known as tax-deferred growth.

A deferred annuity which grows by interest rate earnings alone is called a fixed deferred annuity (FA). A deferred annuity that permits allocations to stock or bond funds and for which the account value is not guaranteed to stay above the initial amount invested is called a variable annuity (VA).

A new category of deferred annuity, called the fixed indexed annuity (FIA) emerged in 1995 (originally called an Equity-Indexed Annuity). Fixed indexed annuities may have features of both fixed and variable deferred annuities. The insurance company typically guarantees a minimum return for EIA. An investor can still lose money if he or she cancels (or surrenders) the policy early, before a “break even” period. An oversimplified expression of a typical EIA’s rate of return might be that it is equal to a stated “participation rate” multiplied by a target stock market index’s performance excluding dividends. Interest rate caps or an administrative fee may be applicable.

Deferred annuities in the United States have the advantage that taxation of all capital gains and ordinary income is deferred until withdrawn. In theory, such tax-deferred compounding allows more money to be put to work while the savings are accumulating, leading to higher returns. A disadvantage, however, is that when amounts held under a deferred annuity are withdrawn or inherited, the interest/gains are immediately taxed as ordinary income.

Features

A variety of features and guarantees have been developed by insurance companies in order to make annuity products more attractive. These include death and living benefit options, extra credit options, account guarantees, spousal continuation benefits, reduced contingent deferred sales charges (or surrender charges), and various combinations thereof. Each feature or benefit added to a contract will typically be accompanied by an additional expense either directly (billed to client) or indirectly (inside product).

Deferred annuities are usually divided into two different kinds:

Fixed annuities offer some sort of guaranteed rate of return over the life of the contract. In general such contracts are often positioned to be somewhat like bank CDs and offer a rate of return competitive with those of CDs of similar time frames. Many fixed annuities, however, do not have a fixed rate of return over the life of the contract, offering instead a guaranteed minimum rate and a first year introductory rate. The rate after the first year is often an amount that may be set at the insurance company’s discretion subject, however, to the minimum amount (typically 3%). There are usually some provisions in the contract to allow a percentage of the interest and/or principal to be withdrawn early and without penalty (usually the interest earned in a 12-month period or 10%), unlike most CDs. Fixed annuities normally become fully liquid depending on the surrender schedule or upon the owner’s death. Most equity index annuities are properly categorized as fixed annuities and their performance is typically tied to a stock market index (usually the S&P 500 or the Dow Jones Industrial Average). These products are guaranteed but are not as easy to understand as standard fixed annuities as there are usually caps, spreads, margins, and crediting methods that can reduce returns. These products also don’t pay any of the participating market indices’ dividends; the trade-off is that contract holder can never earn less than 0% in a negative year.

Variable annuities allow money to be invested in insurance company “separate accounts” (which are sometimes referred to as “subaccounts” and in any case are functionally similar to mutual funds) in a tax-deferred manner. Their primary use is to allow an investor to engage in tax-deferred investing for retirement in amounts greater than permitted by individual retirement or 401(k) plans. In addition, many variable annuity contracts offer a guaranteed minimum rate of return (either for a future withdrawal and/or in the case of the owner’s death), even if the underlying separate account investments perform poorly. This can be attractive to people uncomfortable investing in the equity markets without the guarantees. Of course, an investor will pay for each benefit provided by a variable annuity, since insurance companies must charge a premium to cover the insurance guarantees of such benefits. Variable annuities are regulated both by the individual states (as insurance products) and by the Securities and Exchange Commission (as securities under the federal securities laws). The SEC requires that all of the charges under variable annuities be described in great detail in the prospectus that is offered to each variable annuity customer. Of course, potential customers should review these charges carefully, just as one would in purchasing mutual fund shares. People who sell variable annuities are usually regulated by FINRA, whose rules of conduct require a careful analysis of the suitability of variable annuities (and other securities products) to those to whom they recommend such products. These products are often criticized as being sold to the wrong persons, who could have done better investing in a more suitable alternative, since the commissions paid under this product are often high relative to other investment products.

There are several types of performance guarantees, and one may often choose them à la carte, with higher risk charges for guarantees that are riskier for the insurance companies. The first type is a guaranteed minimum death benefit (GMDB), which can be received only if the owner of the annuity contract, or the covered annuitant, dies.

GMDBs come in various flavors, in order of increasing risk to the insurance company:

Return of premium (a guarantee that you will not have a negative return)
Roll-up of premium at a particular rate (a guarantee that you will achieve a minimum rate of return, greater than 0)
Maximum anniversary value (looks back at account value on the anniversaries, and guarantees you will get at least as much as the highest values upon death)
Greater of maximum anniversary value or particular roll-up

Insurance companies provide even greater insurance coverage on guaranteed living benefits, which tend to be elective. Unlike death benefits, which the contractholder generally can’t time, living benefits pose significant risk for insurance companies as contractholders will likely exercise these benefits when they are worth the most. Annuities with guaranteed living benefits (GLBs) tend to have high fees commensurate with the additional risks underwritten by the issuing insurer.

Some GLB examples, in no particular order:

Guaranteed minimum income benefit (GMIB, a guarantee that one will get a minimum income stream upon annuitization at a particular point in the future)
Guaranteed minimum accumulation benefit (GMAB, a guarantee that the account value will be at a certain amount at a certain point in the future)
Guaranteed minimum withdrawal benefit (GMWB, a guarantee similar to the income benefit, but one that doesn’t require annuitizing)
Guaranteed-for-life income benefit (a guarantee similar to a withdrawal benefit, where withdrawals begin and continue until cash value becomes zero, withdrawals stop when cash value is zero and then annuitization occurs on the guaranteed benefit amount for a payment amount that is not determined until annuitization date.)

Recently, insurance companies developed asset-transfer programs that operate at the contract level or the fund level. In the former, a percentage of client’s account value will be transferred to a designated low-risk fund when the contract has poor investment performance. On the fund level, certain investment options have a target volatility built within the fund (usually about 10%) and will re-balance to maintain that target. In both cases, they are stated to help buffer poor investment performance until markets perform better (where they will transition back to normal allocations to catch an upswing). However, there are criticisms of these programs including, but not limited to, often mandating these programs on clients, restricting flexibility of investing, and not catching the upswing of markets fast enough due to the underlying design of such programs.

Be careful in regard to using GLB riders in non-qualified contracts as most of the products in the annuity marketplace today create a 100% taxable income benefit whereas income generated from an immediate annuity in a non-qualified contract would partially be a return of principal and therefore non-taxable.

Criticisms of deferred annuities

Deferred annuities are generally sold by financial professionals, some of whom may work directly for an insurance company. Most financial professionals, however, are independent agents of the insurance company, not employees. The financial professional who sells an annuity collects a commission from the insurance company. This commission will be a percentage of the total premium paid by the investor. This percentage can be as little as 1% and as high as 12%; the average is 6%. Since these commissions appear high and there are deferred sales charges on annuities, many financial gurus have criticized annuity products.

The investor will, generally, not pay any of this commission directly to the financial professional; the commission is paid by the insurance company to the financial professional up front. The insurance company will recapture the commission paid to the financial professional through the fees charged to the customer (in a variable or fixed indexed annuity) or the spread in the interest rate market (for a fixed annuity). There are also deferred back-end charges that will be applied if the investor closes out his or her contract before the agreed-upon time frame, usually 8 years. These charges can last for as little as 1 year or as many as 20 years, depending on the type of annuity and issuing company. These back-end charges concern many financial professionals and financial gurus.

Some annuities do not have any deferred surrender charges and do not pay the financial professional a commission, although the financial professional may charge a fee for his or her advice. These contracts are called “no-load” variable annuity products and are usually available from a fee-based financial planner or directly from a no-load mutual fund company. Of course various charges are still imposed on these contracts, but they are less than those sold by commissioned brokers. It is important that potential purchasers—of annuities, mutual funds, tax-exempt municipal bonds, commodities futures, interest rate swaps, in short, any financial instrument—understand the fees on the product and the fees a financial planner may charge.

Variable annuities are controversial because many believe the extra fees (i.e., the fees above and beyond those charged for similar retail mutual funds that offer no principal protection or guarantees of any kind) may reduce the rate of return compared to what the investor could make by investing directly in similar investments outside of the variable annuity. A big selling point for variable annuities is the guarantees many have, such as the guarantee that the customer will not lose his or her principal. Critics say that these guarantees are not necessary because over the long term the market has always been positive, while others say that with the uncertainty of the financial markets many investors simply will not invest without guarantees. Past returns are no guarantee of future performance, of course, and different investors have different risk tolerances, different investment horizons, different family situations, and so on. The sale of any security product should involve a careful analysis of the suitability of the product for a given individual.

A controversial practice of insurance sales is the selling of insurance contracts within an IRA or 401(k) plan. Since these investment vehicles are already tax deferred, investors do not receive additional tax shelters from the annuities. The benefit of the annuity contract is the guaranteed lifetime income that all annuity contracts must have by state law. Approximately 90% of annuitants, however, have not taken the life annuity upon retirement. If an investor does not intend to take the life income option from an annuity contract at retirement he or she may want to consider a low-cost deferred annuity.

If an investor needs to take lifetime income at retirement, on the other hand, he or she may want to try to buy an annuity upon retirement or might consider selecting a 401(k) plan account with an option to buy the annuity just before retirement.

Taxation

In the U.S. Internal Revenue Code, the growth of the annuity value during the accumulation phase is tax-deferred, that is, not subject to current income tax, for annuities owned by individuals. The tax deferred status of deferred annuities has led to their common usage in the United States. Under the U.S. tax code, the benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of annuity contracts are bought primarily for the tax benefits rather than to receive a fixed stream of income. If an annuity is used in a qualified pension plan or an IRA funding vehicle, then 100% of the annuity payment is taxable as current income upon distribution (because the taxpayer has no tax basis in any of the money in the annuity). If the annuity contract is purchased with after-tax dollars, then the contract holder upon annuitization recovers his basis pro-rata in the ratio of basis divided by the expected value, according to the tax regulation Section 1.72-5. (This is commonly referred to as the exclusion ratio.) After the taxpayer has recovered all of his basis, then 100% of the payments thereafter are subject to ordinary income tax.

Since the Jobs and Growth Tax Relief Reconciliation Act of 2003, the use of variable annuities as a tax shelter has greatly diminished, because the growth of mutual funds and now most of the dividends of the fund are taxed at long term capital gains rates. This taxation, contrasted with the taxation of all the growth of variable annuities at income rates, means that in most cases, variable annuities shouldn’t be used for tax shelters unless very long holding periods apply (for example, more than 20 years).

Also, any withdrawals before an investor reaches the age of 59 are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income.

In the October 2003 edition of Wealth Manager, an article titled “Photo Finish” by W. McAfee, Jr. examined the effects of taxation on annuities relative to other investment vehicles. The author found that annuities are generally not effective as a tax deferral vehicle and that there are significant flaws in the use of annuities for financial planning during the accumulation phase.
[edit] Insurance company default risk and state guaranty associations.

An investor should consider the financial strength of the insurance company that writes annuity contracts. Major insolvencies have occurred at least 62 times since the conspicuous collapse of the Executive Life Insurance Company in 1991.

Insurance company defaults are governed by state law. The laws are, however, broadly similar in most states. Annuity contracts are protected against insurance company insolvency up to a specific dollar limit, often $100,000, but as high as $500,000 in New York, New Jersey, and the state of Washington. This protection is not insurance and is not provided by a government agency. It is provided by an entity called the state Guaranty Association. When an insolvency occurs, the Guaranty Association steps in to protect annuity holders, and decides what to do on a case-by-case basis. Sometimes the contracts will be taken over and fulfilled by a solvent insurance company.

The state Guaranty Association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The Guaranty Associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance(e.g.). Presumably this is a response to concerns by stronger insurance companies about moral hazard.

10 Top Money Tips Women Should Not Ignore

Robin Bal — Mon, 07 Dec 2009 02:09:05 +0000

Here are a few money management pointers for women. Are there any aha moments for you when you read this list? Post your comment!

Tip 1: Balancing your cheque book is not rocket science
Contrary to what women believe or in many cases are lead to believe by the male influences in their lives, it is not difficult to work out personal finances. The basic principle is not unbelievably complex. What is paid into your account should cover what you pay out.

Spend what you have. In fact preferably not all you have, put some away. But start with balancing the incoming and outgoing as your first baby step towards financial intelligence.

And if that means cutting up the credit cards, then do so right now. If you cannot afford to pay the full amount due on your credit card at the end of the month, then you have a problem. You are trying to eat more than you have.

2) Take care of your own money
In line with balancing your own cheque book, let’s also understand then that you do not need to abdicate the money management function to anybody else. Regardless of what your father, uncle, partner et al says, guess what – you can do it yourself.

Just because you are a woman does not mean you are incapacitated, even handicapped, when it comes to working with your money. This you might have heard your father say often. Mother doesn’t know how to manage money; I can’t leave it to her.

Do not believe this. You can do the money sums. Trust yourself on this score. And in case you might not be able to add up to ten, go and do a course and learn.

3) Treat your money with respect
Where does it say in the handbook on life that you should throw your money at rubbish? You don’t need that expensive hair cut, the designer jeans, the brand spanking new car.
Because guess what. Nobody cares.
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Do not be careless with your money. It is there to first and foremost look after your well-being. It does not need to be used to give you some fake status in society or pay the extravagant college fees for your youngsters who promptly disappear to become beach bums.

In fact you don’t need to sponsor your partner through a wonderfully easy business life just to be ditched when you reach your fifties for that young floozy of a secretary. This is not a rare occurrence so don’t think it couldn’t happen to you.

4) Save for yourself first
This might seem a non-women thing to do. After all are women not the nurturers, care givers or supporters of dreamers just to mention a few attributes normally attributed to them? Is this possibly against women’s nature then if they look after themselves?

How often have you heard of women who have been abandoned, cheated of their money, neglected by those who they cared for? There are endless stories. It needs to stop. Women have to start caring for themselves first.

This includes saving for your retirement rather than sponsoring your partner’s important for business golfing club membership or the children’s college studies. Of course the family unit is important, but so are you. Never forget that.

5) Do not undervalue yourself
You might consider this the same as the previous number. But it deals more with the overall value you place on yourself. This includes such things as your career prospects, status in the community or family in other words what is your value?

If you have decided to be a stay at home mom then work out a salary and pay structure for this.

Understand that you have value as a person and worker. How much would it cost the family to hire an equivalent help? What is it costing you in terms of your own career development to put these years aside for the family’s well-being?

If you work for yourself how do you value your services you are providing your clients? How do you perceive the value of the products you make if you have a handicraft business for instance? Make sure you place a realistic value to your time and expertise.

6) There is no shame if you don’t know about finances
Do not allow yourself to feel embarrassed that you do not have any skills in investments, money management or in establishing a retirement fund. Nobody is born knowing this.

There are no inherent brilliant talents required to work out what investment will give you the best returns. In fact if the sales person trying to sell you something that sounds complicated, it’s probably a lie. Move on. Only deal with people who will explain in plain language what is going on.

Do not allow investment brokers or personal finance expert’s talk down to you. Force them to explain in easy English. If they can’t do that, then move on. Find somebody who can. Your life depends on it. Don’t allow yourself to be bullied by so called experts..

7) Protect your assets
Don’t allow the great romance of the century to cloud your judgement. Keep your assets in your name. Protect them where necessary by contracts. In the same way don’t be careless with your assets when starting a business and especially if you have a partner.

The idea that you can always earn that money again might not work every time, especially if you are older. The same applies if you are terminating a relationship where assets are involved.

Never stand surety
Never use your assets to guarantee somebody else’s dream. This includes such honourable ideas as your children’s college qualification, your partner’s business venture or the purchase of your communal home.

If you can’t afford your new home without putting up your assets for security then you probably shouldn’t be buying this home. It’s a fairly easy concept to understand.

It seems a serious treadmill folk are constantly moving along. As soon as the new car is in the garage an even newer one is already planned. Each purchase will mean bigger instalments, more insurance and higher servicing costs and the list carries on. Why do this? Rather buy what you can afford. Do not put your assets at risk for fulfilling a dream of a four bedroom home when that three bedroom one is totally adequate.

9) Be brutally honest
If you have found yourself in the middle of a personal credit crisis because you have maxed out your cards, overdrawn your account or find the instalments to your car, house, and boat killing you then put a huge mirror in front of you and take a long look at yourself.

And then admit to your foolish money ways. Once you have admitted that you are in trouble, get advice to find your way out of it and work on it. Cut up the credit cards; sell the bogus assets which are really liabilities as they are draining your money without you getting any benefits.

Once you have the courage to view your financial situation with clarity and without lying about it, you will find it easier to work your way out of trouble and into a healthy situation. Many people do not admit to themselves that they are in trouble

10) Final one: following your instincts
If an investment seems too good to be true, then don’t go with it. Investing in Madoff’s huge return bogus funds must have triggered off some warning bells in some minds. But folk didn’t listen. They readily parted with their money never to see it again.

You will be surprised how often your instinct is telling you the right way forward. But somehow you allow a friend, a so-called expert sales person or a TV personality to influence your thinking.

Would you follow Oprah’s investment advice? Probably. But what does she know about investing? She’s made her money with her TV show and other media spin-offs and not through knowing investments. She might have clever advisors, but she is not somebody one should listen to for money advice.

Yet if she told her millions of viewers to buy a share, people would! Even if their instinct told them otherwise.

Follow your gut feeling. You will be amazed how often it is right.

These are just ten pointers you should follow as a woman. And if you are a guy reading this, no harm in taking some of this advice on board as well!

Do You Have Plan B Ready?

Robin Bal — Mon, 22 Jun 2009 09:14:01 +0000

The mantra of the times is cost cutting. The axe of cost cutting invariably falls on the employees. It is either through wage reduction, reduced bonuses, reduction of other benefits, reduced work hours or in a worst case scenario in the form job losses.

In most countries unemployment rates are hitting close to double digits, the worst case scenario might soon become a reality for anybody including you. In such a situation, it is imperative that you should have a plan B ready.

Instead of waiting for a surprise and acting re actively, it is important for you do a realistic assessment of your current situation.

Each and every one of you must have an understanding of your employer’s financial situation and strategy, your own function/department current state and whether there is any danger of retrenchment at your level. Once you access the macro and micro level picture, you need to play your next steps accordingly.

You may not have a choice but to look out for alternate employment if you feel that you may be in the firing line. It may not be easy in the current situation. However the current economic situation gives you an excellent opportunity to do what you always wanted to do.

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A job loss or a potential job loss might be an excellent excuse for you to change your field and move into the field of your liking. An engineer may want to get into arts and a banker may want to get into farming. This might prove to be a once in a life time opportunity and catalyst for such a shift.

If you don’t foresee an immediate threat to your job, however at the same time don’t feel confident about your situation in the medium term, you need to adopt a different strategy. As long as the company you work with doesn’t look like winding up/closing down, the first option to be explored should be within your employer.

Being fair to yourself, you need to treat your employer as your customer and demonstrate value for the salary you are earning. If you feel the same is not the case in your current role, you should position yourself for an alternate role that is a better fit for your potential and will help bring more visible benefits to your employer.

Such an alternate role may be in the same or different function. Such a positioning and the subsequent change to your role may not happen overnight. However this paradigm shift in your outlook towards your employer will definitely help you in the medium to long run.

One important alternate option you need to consider is honing your professional skills. It is an excellent time to consider education in your field of liking, be it a management degree or a certification in any technical subject.

It should be something which will give you satisfaction and the edge required to move ahead. The thing you should keep in mind is to be careful on how much money you spend as fees. The last thing you want is getting stuck in a ROI loop.

Last and not the least, your best option for plan B depends on how much you have saved in your coffers for the bad times. If you have enough bank balance, what about an extended vacation for globe trotting?

12 Personal Finance Lessons To Be Learned From This Recession

BillShrink Guy — Mon, 11 May 2009 09:42:42 +0000

Everyone I know is sick of this recession, and sick of hearing about this recession. For one, the media’s attention to the global financial situation is depressing. But as many have pointed out, we are in this situation because of our own devices. On the individual level, poor financial and debt management, have exacerbated outside factors such as the housing market collapse and high rates of unemployment. For others, indiscriminate consumer debt has led to a number of individual crises. But in such a climate, there is a lot that can be learned. While it would have benefited everyone to know this several years ago, here are twelve personal financial lessons that can and should be learned during this recession.

Learn How to Plan Ahead

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It’s no secret that poor planning contributed to why so many people are currently in untenable financial situations. Don’t Panic. Figure out where you are at, where you want to be and put in place a realistic plan for getting there. The majority of businesses without plans in place before they start operations do not succeed. So if you are serious about creating a way to get ahead, or even just caught up, this step could not be more necessary. Unique circumstances will come up and cause you to stray from your plans temporarily, but structure is necessary in order to monitor your progress, and stay focused.

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Learn From Past Mistakes – Then Put it Into Practice

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Americans have an average of $10k in credit card debt. In order to identify how you came to be where you are at specifically, take a look at your spending for the last year (or even several years). Then locate what percentage of spending went to each type of expense. Chances are, the figures will be surprising and maybe upsetting at first when, for instance, you realize how much you spent going out to dinner or on entertainment. Figure out a realistic percentage that you would like to reduce your less-than-necessary expenses by, and then work this into your plan. The sense of urgency caused by the current recession can be an impetus to your learning about, and consequently fixing, poor money management practices.

Learn to Understand, Hate and Attack Debt

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Prioritize debt. Snowball. Pay off your highest interest rate first. Basic advice, right? The problem is that people have been regurgitating this theory for years, but most do not put it into practice. Paying off debt can be an arduous task, but it can also be quite rewarding. This step requires individuals to plan out their debt and then follow through with attacking it. A plan may seem difficult to stick to at first, but after several accounts are paid off, you’ll be surprised to see how quickly the remaining debt is repaid with more money being allocated to principal in subsequent months. One byproduct of this exercise should be a new understanding of debt – and you will probably learn to avoid credit cards like the plague.

Learning to Distinguish Want vs. Need

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After figuring out much money you’ve unnecessarily spent in the past, this should come naturally. I’m not suggesting that you should never go out to eat or splurge on anything ever, just that you implement a higher level of self control. For instance, the term “special occasion,” should have a greater meaning once you decide to get serious about your finances. When you condition yourself to realize that spending $100 on cocktails and dinner when you go out for your third cousin’s coworker’s birthday will mean that you are able to spend $100 less the next month on your aggressive debt repayment, you’re on the right path. In short, consider the opportunity cost of your spending.

Learn to Save – Even if You Start Small

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The oldest piece of financial advice relates to saving: put an emergency plan aside (6 – 9 months worth of expenses) should you lose your job. But, does it make sense to service a savings account with a 2-3 % yield, when remaining credit card debt rates of up to 29%? Yes, because it is not wise to forgo saving entirely in order to repay debt. Instead of spending less on debt repayment, save in the form of cutting out extra expenses. The problem for many people is that they live month to month and they don’t develop healthy saving habits until they are in their thirties or forties. Contributions to a savings plan should be recognized as the first of your necessary monthly expenses, so that money saved will never be thought of as money that can be spent. Even if your savings rate starts small, you can always increase in the future.

Learn to Monitor Your Expenses

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Scrutinize your current bills – cell phone, internet, credit cards, et cetera. I’d suggest to continually call your service providers to find out if there are better deals available, or if they can do something special for you. These days, customers have more power than ever; for instance, try suggesting that you will go elsewhere if vendors are not able to sweeten existing deals. Using leverage to get a better deal is a time-honored tenet of this more or less ‘free market’. Companies know that it is more cost-efficient to keep an existing client than it is to get new customers, and using this in your argument with customer service may be a way to get reduced pricing, or extra free services.

Learn to Stay on Course

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When I first started to cut debt aggressively about a year ago, I found myself able to dramatically reduce my monthly bills and pay down debt at a rate that I never could have imagined. The problem was once I paid about half of my debt down, I found myself at a plateau. It was only after realizing that I had replaced my old expenses with new ones did I start making ground again. My once super-frugal approach to eating out and playing golf only about twice a month became more lax, and this was putting a damper on my ability to repay debt at my preferred rate. It took an evaluation of my recent expenses to see how I had strayed from my plan and to figure out how to get back on it. This is extremely important to keep in mind: be careful not replace some unnecessary expenses with others.

Learn to Take Responsibility

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Personal finance is all about being responsible and taking initiative: no one will do these things for you, and learning to manage your finances is not something that you just wake up with one morning. It is every individual’s responsibility to monitor their bills and make sure they are not incurring any unnecessary fees with their banks or credit card companies, and also to monitor their credit score closely. And, if necessary, to repair their own credit. For those that own their own home, now is a great time to refinance and a good credit is imperative to improve your rates; for those looking to buy, knowing what your credit report says is only the first step in understanding what type of interest rate you will likely get. And, of course, the better your credit is, the better your interest rate will be.

Learn How to Get Organized

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To those who are not used to monitoring and managing their finances closely, this may sound like a lot of work. But once you get a system in place, it should only take about one hour per week to stay on top of everything. This will include: making sure that credit card due dates are not changing, that rates are not increasing, monitoring activity to your charge accounts, tracking the progress of your overall debt-to-income, and making sure you are always getting the best deals possible. These of course, are just a few of the examples.

Learn to Become Competitive and Creative

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One of the most important things to take from a recession is that nobody can just coast by anymore. For those seldom challenged in the workplace, it would make sense to improve your skill set, continue education, and network now. The medium- to long-term for many, still remains uncertain. For those that have fallen prey to our generation-high unemployment rates, it’s time to reevaluate your previous career and at least start considering other alternatives. In today’s changing and evolving marketplace, dynamic individuals are those which succeed.

Learn to Become a Deal Hunter

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While the housing market deflated, prices in most other industries have dropped in the last year as well. If you are serious about improving your personal financial wherewithal, try thinking about buying new as a way to replace old, not to satisfy want. Even better, think about buying slightly used as a way to replace the old. The ‘replacing’ aspect is key. If you need a newer vehicle, try finding a fleet rental and you will be blown away by the potential savings. Even in industries where consumers don’t traditionally haggle for prices, deals can be found with retailers looking to unload stock.

Learn to Diversify

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Where is your money going every month, and from where is it coming in? Cash? Currencies market? CDs? Commodities? Residual income? Profit-sharing? Trust fund? Is it possible for you to create a second income stream? In these uncertain times, individuals with contingencies and fall back plans usually fare the best. Think of the old saying, “don’t put all your eggs in one basket”. Always be on the lookout for producing additional income-generating opportunities. For some this might mean getting a part-time job, or taking on freelance work. My parting advice: be wary of get rich quick schemes on Late Night TV.

Contributed by BillShrink Guy

How To Teach Your Children Money Smart Secrets

Robin Bal — Sun, 28 Sep 2008 15:47:47 +0000

Our schools teach the fundamentals we all love; reading, writing, math, science and history. What concerns me is our school system lacks some of the ‘street smart’ skills that kids will need to be those successful leaders, healers and entrepreneurs.

As parents, we must take teach our children ‘money smarts’.

Can you imagine how empowered you would be if your parents taught you how to balance a checkbook, invest in the stock market, manage credit card debt, start a business, or the power of compounding interest?

If you were one of the lucky few whose parents did teach you money skills, consider yourself blessed. The present economic situation is a perfect time to teach our kids the importance of money management and the need to respect money for what it is, and isn’t.

So, where do we start? With the basics. Depending upon your child’s age, you can start with talking about money. Most of us don’t discuss the family’s financial situation at the dinner table. I propose you do. I think it’s important that children understand what is happening, good or bad, with the money being earned.

Don’t get me wrong here; I’m not suggesting you tell your kids your annual income or the balance of your investment portfolio. What I am suggesting is to bring the kids into conversations regarding ways to save, creative ways to earn additional money and what to spend that money on. Involve them with decisions on vacations, donating to a charity or cause, or how they plan to buy their first car.
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From middle schools to teens, open a savings account and teach them the importance of monthly deposits, regardless of the amount. Create in them the healthy habit of making that deposit every single month. Compounding interest and time are on their side and simple, small deposits made regularly add up to huge money later.

Did you know that $4 a day, 5 days a week invested at 10 percent (historically, the average in the stock market) turns into $1.3 Million in 50 years.

Introduce the concept of a budget, although I don’t care for that word. (Like a diet, it implies I have to give up something). It is about compromise and being aware of where the money goes, so rather, suggest this: what is priority, given the income?

Teach them to live within their means and the dangers of credit. If our kids can understand this now and realize the consequences if they don’t, it will make for a peaceful and prosperous future. As parents, we know there isn’t anything we want more in life than to see our children healthy, happy and at peace.

37 Killer Free eBooks to Improve Your Wealth

Jessica Merritt — Mon, 15 Sep 2008 04:51:31 +0000

The Internet is full of wonderful information, and much of this information can be found in ebooks. Whether you’re looking for guidance on feng shui, or just want to know how to save money, there’s an ebook out there for you. Here you’ll find a great collection of ebooks available online for free.

Learn about a wide variety of financial issues and advice in these ebooks.

66 Ways to Save Money: Learn about practical ways to cut costs in your daily life with this ebook.
Estate Planning: Find out why a will is so important and how you can prepare one, plus plenty of other helpful details for estate planning.
Ten Questions to Ask When Choosing a Financial Planner: Read this ebook to know what you should ask when looking for a professional to help you with your money.
7 Steps to Eliminate Debt: Take control of and eliminate your debt by following the steps outlined in this ebook.
Living Trust Offers: The FTC commision’s pamphlet explains the details of living trusts and how you can protect yourself from estate planning scams.
Get the Facts on Saving and Investing: This SEC document will help you learn how to save and invest properly.
Simple Strategies for Managing Your Money: This FDIC ebook’s checklists will help you get financially fit and avoid scams.
Building a Better Credit Report: In this ebook, you’ll learn about methods for legally improving your credit score, spotting scams, and dealing with debt.
What You Should Know About Buying Life Insurance: In this pamphlet, you’ll find out about all of the types of life insurance, plus tips for choosing the right policy.
How SIPC Protects You: Read this document to see how the Securities Investor Protection Corproration will help return your assets if your brokerage firm goes under.

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Building Wealth: A Beginner’s Guide to Securing Your Financial Future: The Federal Reserve Bank of Dallas offers this guide that will help you build personal wealth.
ID Theft: What It’s All About: This pamphlet from the FTC explains how your identity can be stolen and what you can do about it.
SHOP: The Credit Card You Pick Can Save You Money: In this consumer awareness brochure, you’ll learn how to pick the right credit card for you.
All About…The Foreign Exchange Market in the United States: This ebook explains how the forex market works in the US.
Identity Theft: Learn about the details of identity theft and how you can protect yourself from it in this pamphlet.
Debt Consolidation Sample Letters for Free: Find a collection of sample letters that you can use for debt consolidation in this ebook.
Privacy Choices for Your Personal Information: This booklet will tell you how to opt out of sharing private information.
Credit Score: The Quintessential Therapy for a Happy Pocket: Check out this ebook to learn everything you need to know about credit scores.
Identity Theft and Your Social Security Number: Find out how your social security number can be exploited by reading this ebook.
Tools of the Trade: A Basic Guide to Financial Derivatives: See how derivatives can be good for managing financial risks.
Healthy Credit: In this ebook, you’ll learn about managing your credit report and score.
Phishing and Pharming: Helping Consumers Avoid Internet Fraud: Protect yourself from internet fraud by educating yourself with this ebook.
Taking Control of Your Finances: Learn how to save and manage money, as well as avoid common mistakes by reading this ebook from the FDIC.
Know Before You Go…To Get a Mortgage: Read this guide to learn about mortgage information you need to know.
Take Creditors and Collection Agents to Small Claims Court: This ebook explains how you can sue creditors and collection agencies based on consumer rights.
What Women Need to Know About Retirement: In this ebook, you’ll learn about being prepared for retirement.
Pathways to Getting Ahead: Young adults should read this book about asset building and policy choices.
Interest-Only Mortgage Payments and Payment-Option ARMs: Are they for you?: This guide will help you determine whether or not you should get an interest-only or ARM loans.
Banking Basics: The Federal Reserve Bank of Boston offers this ebook that will explain everything young adults need to know about banking.
Consumer Action Handbook: A top-notch ebook, this handbook will help you with buying tips and resolving consumer problems.
Savings Fitness: A Guide to Your Money and Your Financial Future: Set up a personal savings plan using this guide.
Financial Intelligence Training: Become more financially intelligent by reading this ebook.
Money Matters: Your Guide for Financial Strength: This ebook will help you learn how to set financial goals, get organized, and more.
401(k) Plans: This document explains everything you need to know about 401(k) plans.
Credit Score: The Quintessential Therapy for a Happy Pocket: Learn about the importance of a good credit score and how you can make yours better with this ebook.
Consumer’s Almanac: The Consumer’s Almanac will help you manage your money, get organized, save, and more.
Variable Annuities: What You Should Know: Find out the details of variable annuities with this guide.

* This list has been compiled by Jessics Merritt who writes for Nursing School Search

Why Do I Need Disability Insurance?

Andy Puls — Mon, 14 Apr 2008 10:24:10 +0000

Your career is a direct result of hard work and a substantial investment of time and money. Doesn’t it make sense to fully protect it? A disability could render you helpless by taking away the one thing that you need to safeguard all of your assets: your income.

Home, auto, life, and health insurance are certainly valuable investments, but failure to couple them with disability insurance will jeopardize your full financial security. For example, health insurance might cover the potential fiscal pitfalls of the medical bills that result from a disability, but the rest of your financial obligations are not going to come to a halt. Vehicle payments, mortgages, insurance premiums, and even savings for the future are all important expenses that cannot be ignored just because you are disabled. Unfortunately, the chances of becoming disabled might be greater than you think.

According to the 1994 Statistical Abstract of the United States, in the course of a year, odds are that 1 in 10 people between the ages of 25 and 64 will suffer a disability. When comparing that ratio to the odds of being victim of a house fire (1 in 122); injured in an automobile accident (1 in 160); or even of death (1 in 117), the advantage of disability insurance is clear. A February 2000 article in the New York Times reported that 1 in 7 people between the ages of 35 and 60 will become disabled for five years or more.

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Despite these glaring statistics, many people still take a substantial risk by ignoring the benefits offered by a disability insurance policy. In 2000, a survey by The Consumer Federation of America and The American Council of Life Insurers found that 82 percent of people do not have long-term disability insurance or believe their coverage is inadequate.

The alternatives to disability insurance all carry a degree of risk or have some sort of drawback. Social Security benefits are difficult to qualify for and the disability must prevent you from working in any occupation. Worker’s compensation benefits are limited and only cover job-related sickness or injury. Other options—relying on savings, family, and/or friends—are not guaranteed and have considerable downside.

Guard your assets—don’t leave yourself vulnerable by neglecting to protect your income.

Retirement Savers: How Much Money Is Enough?

Robin Bal — Sun, 24 Feb 2008 20:29:08 +0000

When people discuss retiring or having a sea change or chasing their passion, the different reactions usually involve money: “I’d love to do it but I don’t have enough money.”

You reach retirement age and don’t have enough to retire on, you’ll be left with two options, either to delay your retirement or reduce your standard of living in retirement. Which one would you choose?

It always helps to know what you are aiming at and wealth creation is no different. I will assume that you want to build wealth in order to be able to retire and still live well. How much money will you really need?

I was attending a wealth building conference and one of the other speakers, a financial planner, made a statement that when you retire you only need about 50% of you pre-retirement income. I was amazed at this statement and I asked him back stage how he came to that conclusion. He told me that all retired people do is sit around and watch television all day.

My response to him was that this was a description of what broke people do (namely his clients). Retired people who have successfully built a decent wealth portfolio are living the time of their life! What are you aiming at? The lifestyle of the television watching clients of our financial planning friend or the time of your life lifestyle that comes with wealth?

How much will you need for a good lifestyle in retirement?

The short answer is that, if you want to maintain the lifestyle that you are accustomed to then you will need a monthly income equal to your monthly income one month before you retired. Anything less and there is something that you will have to give up.

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When I say this I often hear the following argument. If you were investing money prior to retirement and you no longer need to do this after retirement then you don’t need as large an income as you did before retirement.

I don’t know why so many people are so determined to aim at reducing their income but I will answer the question anyway, Firstly it depends on what age you are retiring at. If you are young or at least plan to live a long time after retirement then you may well need to keep investing.

Secondly, even if it is true that you don’t need to invest any longer then let me ask you what you plan to do in retirement. You see the biggest difference that retirement makes in your life is that you suddenly have a lot more free time to fill. How do you plan to fill it and what will that cost you?

If you plan to do some traveling then you will need to fund it. I don’t know too many retired people who would prefer roughing it in low quality accommodation of last resort. The retired people I know prefer high quality accommodation of a five star resort.

Realistically determining your financial needs in retirement is the first step to actually achieving the income that will provide for those needs. The only thing worse than aiming too high and missing it is aiming too low and getting it.

I would like to suggest that you put pen to paper and answer a few simple questions.

1. What age do you want to retire at?
2. How many years do you expect (considering today’s life expectancy) to live after retiring?
3. What lifestyle would you like to live in retirement?
4. What will that lifestyle cost per month?
5. Am I doing enough now to provide for that?

Please don’t make the mistake of aiming too low; there are too many people at that end of the retirement economy now!

Moving into 2008: Do You Have A Financial Plan Ready?

Robin Bal — Sun, 30 Dec 2007 04:12:34 +0000

The best thing about the future is that it only comes one day at a time. And that might well be the best way to tackle 2008. This year is almost over and while it’s a time of festivities, a look back may be a good idea if you’re thinking of some forward financial planning for 2008′s bills.

But you don’t need to resort to blaming yourself for what you could have saved if you had handled your expenditure more wisely. Crying over spilled milk isn’t only a negative way to start a new year, but also it gives you no recourse to whatever has been spent, lent or accumulated on your credit card bills.

A better way is to assess the damage or where you stand on your finances, and think of how to move forward. Even if you’re dragging a heavy load from 2007, just be clear about how much and to whom.

But keeping a positive attitude doesn’t mean that you should sit back and relax. Remember like everyone else, your bills are meant to increase in 2008 because of inflation, rent increases, your own growing needs, etc. So try to have a rough assessment of such increases and possible extra income as well. Then grab a notepad and a pencil to draft a budget for at least six months.

When you set your liabilities, income and estimated expenses side by side you should be able to see on paper where and how you’ll settle the 2007 debts, pay your new bills and be able to put aside some savings. If you cannot detect such a point in the coming six months, now you need to be alarmed. So what may have gone wrong?

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There are many factors: you may be setting unrealistic goals for savings or some big bills are knocking you out of balance. Another cause can be that your 2007 debts will continue to hinder your recovery. In such a case, you’ll need to find a way to get out of the vicious circle of debt and interest before things get out of control. See if a do-it-yourself approach can help by going back to your budget and trying to tighten it further. If this fails, consider some debt consolidation options.

Either way you need to take your debts seriously and make sure that your getting them down on schedule. Watch out for your points of weakness, be it spending on dining out, impulsive shopping or holidays, try to set the brakes on your whims to avoid adding on more debts.

Budgeting for occasional splurges may help limit your spending without leaving you feeling deprived.

Finally, have your budget displayed in a visible location: on the wall or the start-up screen of your computer. After all, we’re all familiar with the enthusiasm of new starts, which usually fades unless kept alive with persistence.

Picture in Post tetridia04

How To Protect Your Most Valuable Asset

Robin Bal — Wed, 05 Dec 2007 19:33:45 +0000

Disability Income Insurance protects your most valuable asset, your ability to earn an income. It’s easy to forget that your income is dependent on your ability to earn it.

When a disability leaves you unable to work for an extended length of time, you lose the ability to earn an income- the one thing you’ve always relied on to provide for yourself and your loved ones. Meanwhile, your living expenses continue-in fact, they’re likely to increase for a number of reasons.

You could need help around the house or have higher medical expenses, for example. That’s where disability insurance comes in. It’s designed to help you maintain your standard of living when you cannot work. If you don’t have much in the way of assets for a financial cushion, you need enough to cover costs and supplement your income until you can go back to work.

Individual disability insurance is truly a basic concept. It is an insurance product designed to replace anywhere from 60-70% of your gross income should a sickness or illness prevent you from earning an income in your occupation. All disability insurance quotes and coverage from every insurance company are very different; this is not a product to simply shop for the most competitive rate.

If you became sick or hurt and couldn’t work, how would you pay your bills? How would you maintain your living standard? If you’re like most people, your ability to get up each day and earn an income is one of your most valuable assets. Furthermore, your chances of becoming disabled at some time during your working career are probably higher than you would expect, so you also need more disability insurance information.

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To correctly determine the actual amount of coverage you would need if you became disabled, ask yourself how much monthly income would cover your living expenses. Would these expenses go up or down if you became disabled? These expenses must be carefully considered.

All disability income insurance policies have an “elimination period,” similar to the deductible for medical insurance. This is the length of time you must be disabled before you would become eligible for benefits, typically 30, 90 or 180 days. For this period you need to establish an emergency fund.

The policy has a “definition of disability” which defines disability relative to your ability to work and/or your ability to work in your current occupation. The definition of disability is one of the most critical features of a disability income policy, and is something you should review carefully before purchasing a policy.