COMMENTARY ON ECONOMIC AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST 0626414
REGISTERED INVESTMENT ADVISER
ABOUT TIME: Regulators from the states noted that 67% of issuers of index annuities, or annuities with crediting rates pegged to the performance of stock indexes and other market indices, are from Iowa and Minnesota.
In Iowa, one key regulatory change could affect the name of the product: Iowa wants to require that the products, which often are called “equity-indexed annuities,” be referred to as “fixed index annuities” in all advertising and marketing materials.
Here’s some proposed regulations:
- Promptly implementing the Senior Protection in Annuity Transactions model regulation and a model focusing on annuity disclosures.
- Setting a requirement that producers receive 4 hours of general index annuity training.
- Requiring that insurers provide company-specific training and updates on new products.
- Establishing a regulator training program.
- Updating the NAIC’s Buyers Guide to reflect changes in the index annuity market.
HEALTH CARE: As American employers continue to assess and reduce their retiree health care benefits, Fidelity estimates that a 65-year old couple retiring today will need $200,000(1) to cover medical costs in retirement.
The retiree health care cost estimate is calculated annually by Fidelity Investments. The 2006 estimate rose 5.3 percent from the 2005 estimate of $190,000. Since Fidelity's initial estimate of $160,000 in 2002, the number has increased an average 5.8 percent per year.
The 2006 estimate, which assumes that the individuals do not have employer-sponsored retiree health care, includes expenses associated with Medicare Part B and D premiums(5)(32%), Medicare cost-sharing provisions - co-payments, coinsurance, deductibles and excluded benefits (36%) -- and prescription drug out-of-pocket costs (32%). It does not include other health expenses, such as over-the-counter medications, most dental services and long-term care.
401(k): (Center for Retirement Research at Boston College) 401(k) plans have shifted the risk and responsibilities for retirement saving from the employer to the employee - a potential problem since “many employees make mistakes at every step along the way.” The problems? A significant percent of eligible employees fail to join the plan, few contribute the maximum, most do not diversify their investments or re-balance their accounts over time, many over-invest in company stock, and roughly half of participants cash out when they change jobs. But the real challenge, according to the report, will come as those dependent on 401(k) plans arrive at retirement and have to figure out how to allocate their 401(k) balances
LONG TERM CARE: Only half of U.S. nursing homes have separate care units for dementia patients, and only 61% of assisted living facilities provide care for people suffering from Alzheimer’s disease and other forms of dementia.
Nursing homes charge $10 to $25 extra per day for patients in the dementia units. About half of the assisted living facilities that provide dementia care charge extra fees for that service, with the costs ranging from $50 to $3,000 per month.
OBESITY: "Today the percentage of adolescents age 15-17 who are overweight is about 50% higher in poor as compared to non-poor families, a difference that has emerged recently,"
In the early 1970s, about 4% of poor youngsters ages 15 to 17 were severely overweight, compared with about 5% of teens who weren't poor. By the early 2000s, those rates jumped to 23% of the poor and 14% of other kids.
WANT TO KNOW WHY ARBITRATIONS DON'T WORK? Here are the comments from the NASD- "we must decline to use your services to provide additional training to the arbitrators on its roster. As a matter of policy, the NASD provides procedural rather than substantive training to its roster members. In arbitration, the parties present their arguments and evidence to the arbitration panels and the arbitrators are not expected to do their own research. While most arbitrations claims present questions of fact, some parties relay on a specific law, statute or industry standard. Generally, the party who has raised such an issue will offer the panel a brief setting forth how the law, stated or industry standard applies to the case.
Signed Linda Fienberg, President Dispute Resolution."
The point is this- there is NO training in the industry for attorneys, arbitrators OR expert witnesses in regards to suitability. Fienberg notes that the parties will offer the panel material on "industry standard" but the problem has always been that there aren't any standards. Brokers have never been taught the fundamentals of investing. Nothing on correlation, alpha and so on. They are not required to know how to use a financial calculator. Even look at the supposed experts. They generally come from the industry. They may have supervised others for years. They have a series 4, 8 24 and so on. Yet none of the licenses have the fundamentals developed either.
The procedures she is addressing cover pre hearing conferences, etc. but nothing about the procedures of suitability. I bet, absolutely bet, she does not know the definition for diversification. Nor does effectively anyone else at the NASD.
ONE DOLLAR IN FIVE TO GO TO HEALTH CARE That represents 16% of Gross Domestic Product, but the Medicare and Medicaid Services' National Health Statistics Group says it will be 20% by 2015. That will amount to more than $4 trillion in annual health-care spending.
RETIREMENT WORRY (Wachovia) most Americans fear they will not save enough money for retirement, and nearly half are not counting on the Social Security system to provide the money they need to retire comfortably. 90% say they worry how well prepared they are for retirement and 85% said they are no better than "somewhat confident" that they are saving enough. 48% fear that Social Security will not provide enough for them. AND
Employee Benefit Research Institute reports "retirees" over age 70 are getting more income from working and far less from earnings on assets than they did back in the 1980s. The share of total income coming from work increased to 37% in 2004 from 26% in 1987 in the 65-69 age group; to 14% from 7% in the 75-79 age group; and to 3.4% from 2.4% in the 85 and over age group.
INSURANCE: (Trusted Choice) -at least 32 million U.S. households own insurance policies that aren’t right for them, with approximately 32 percent of survey respondents admitting to having outdated policies.
THIS IS GOING TO BE INTERESTING: The Alternative Minimum Tax has become such a money maker that by 2008 its repeal would cost more than repealing the regular income tax
ALZHEIMERS: Genes account for 58% to 79% of a person's risk of developing late-onset Alzheimer's. Although genes might play a bigger role than lifestyle choices in the development of the disease, experts say late-onset Alzheimer's is a complex disease probably caused by an array of factors. That means even people with a strong history of the disease might be able to reduce their risk or delay the onset of the disease so they develop it at age 85 and not at 70.
GOING DOWN? The share of American households owning corporate equities declined for the first time in a decade in the three years between 2001 and 2004. Not only did fewer families own stocks in 2004, their average holdings fell abruptly, despite the fact that the major U.S. stock indexes had recovered to 2001 levels by the end of 2004
The report showed that median income and median net worth grew in the period at a slower pace than seen between 1995 and 2001. Debt levels increased, but so did real estate holdings.
In 2004, the percentage of households with direct ownership of stocks dropped to 20.7% from 21.3% in 2001. The share of families owning stock either directly or indirectly through a mutual fund or retirement account fell to about 49% in 2004 from a record 52% in 2001.
Among those who owned stock directly, the median value of their directly owned holdings dropped to $15,000 from $21,300 in 2001, the Fed said. The figures are adjusted for inflation.
The median is the halfway mark, with half the families holding more and half holding less.
Indirect holdings increased in value. The median holdings in mutual funds rose to $40,400 from $37,300. The median holdings in retirement accounts rose to $35,200 from $30,900.
Among those who own stock directly, most had ownership in just a few companies, with 59% owning three or fewer; 34% owned just one company. Slightly more than a third of stock owners held shares in the company they worked for.
Most stock is held by the rich, but more poor people are entering the market.
Among households earning more than $129,000 (the top 10% of income), 55% owned stocks directly, down from 60.9% in 2001. The median value of their direct holdings increased to $57,000 from $53,300.
Among those households earning less than $18,900 (the bottom 20%), direct ownership rose to 5.1% in 2004 from 3.8% in 2001. The median value of their holdings declined, however, to $6,000 from $8,000.
Incomes, wealth
Median incomes increased 1.6% to $43,200 on an inflation-adjusted basis in the three year period. Median wages, adjusted for inflation, fell 6.2%.
Median net worth increased 1.5% to $93,100 from 2001 to 2004, down from a 10.3% gain in 1998-2001 and 17.4% in 1995 through 1998.
Median net worth increased by about $1,400, with the gains concentrated in real estate. The median value of residential real estate rose to $160,000 from $131,000.
Among whites, median net worth increased about 9% to $140,700. For nonwhites and Hispanics, median net worth rose about 30% to $24,800.
Among those families in the bottom 20% of income making less than $18,900, net worth fell about 11% to $7,500. For the 10% of families making more than $129,000, median net worth increased about 4% to $924,100.
The percentage of households with debt rose to 76% from 75%, while the percentage of households that said they saved money fell to 56% from 59%.
The amount of debt held blossomed. The median amount owed rose by 34% to $41,300. The share of families with a home equity line of credit nearly doubled to 8.6%. Overall, 48% of families had debt backed by real estate, up from 45%
TV OR NOT TV, THAT IS THE QUESTION: Data from cities where preschoolers were exposed to the new technology, and data from cities where they were not, was correlated with test scores from about 300,000 students nationwide in 1965. The study also looked at test scores from pre- and post-TV age groups within cities.
The result showed "very little difference and if anything, a slight positive advantage" in test scores for children who grew up watching TV early on, compared to those who did not. In nonwhite households and those where English was a second language or the mother had less than a high school education, TV's positive effect was more marked.
Average TV viewing among 2- to 5-year-olds — the youngest viewers tracked by Nielsen Media Research — crept up to 3 hours and 40 minutes a day in the 2004-5 TV season. A host of cable channels have are dedicated to the tiniest viewers.
TRILLION – Now here is a cheery projection. According to the American Academy of Actuaries, a major terrorist attack on New York City using chemical, biological or radioactive weapons could cost $778 billion in insured losses...not to mention that it "could make rehabilitation difficult or impossible." Other cities? $171.2 billion for San Francisco and $42.3 billion for Des Moines.
TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2006
Temporary relief from the AMT in the form of an increase in the AMT exemption for one year was included in Title III of TIPRA. The exemption for couples for 2006 increased to $62,550 from $58,000 and for single taxpayers the exemption increased $2,250 to $42,500. Without the legislation, the exemptions would have dropped to $45,000 for couples and $33,750 for single persons, subjecting millions of additional taxpayers to the tax. However, any meaningful relief will have to wait until 2007 since the patch is for the current year only. The revenues derived by the federal government from the AMT are substantial and this is a strong disincentive to a permanent fix.
The fifteen percent tax rate applicable to long term capital gains and qualified dividends was also extended two years through 2010. The special five percent tax rate applicable to long term capital gains and qualified dividends for low and middle income taxpayers will drop to a zero percent tax rate for 2008. The extension of the low rates in section 102 of TIPRA means that the zero rate will continue for two additional years for this broad class of taxpayers - single taxpayers earning less than $30,650 and married taxpayers earning less than $61,300.
An interesting development for some taxpayers is the upcoming removal of the income limitation on Roth IRA conversions. Under current law, taxpayers with more than $100,000 in modified adjusted gross income are unable to convert existing traditional IRAs to Roth IRAs. After 2009, this limitation will be repealed, allowing higher earning taxpayers to take advantage of the popular Roth IRA through conversions of existing IRAs. Even better, section 512 of TIPRA will allow those taxpayers making a conversion in 2010 to defer the income tax on that conversion. Assuming the election is made, a taxpayer converting to a Roth IRA in 2010 may pay half the income tax in 2011 and the other half in 2012. This may prove to be a terrific planning opportunity for advisors since many clients will wish to take advantage of Roth IRA features including tax free distributions as well as the elimination of the minimum required distribution requirement.
An important development for taxpayers with children involves the expansion of the reach of the "kiddie tax" under section 510 of TIPRA. This tax refers to the application of parents' typically higher tax rates and brackets to certain investment income attributable to a child. Investment income over $1,700 is subject to this tax for children up to age eighteen, representing a four year increase from its application to children up to the age of fourteen under prior law. This change may have a chilling effect on those parents who anticipated lower tax rates on funds established in children's names for college and other expenses.
Developments affecting Qualified Retirement Plans
The proper designation of beneficiaries to qualified plan accounts permits clients to maximize the benefits of these accounts, including tax deferral and asset protection. A client's failure to designate primary and/or contingent beneficiaries may cause a loss of some of these benefits. The regulations spell out some of the ways in which a client may ensure these benefits are achieved. Recently, the IRS issued a private letter ruling which approved a method not included in the regulations, giving effect to a court-ordered reformation of a client's beneficiary designation form to add contingent beneficiaries. This reformation permitted distribution based on the life expectancies of the contingent beneficiaries. In this case, the client had opened a new IRA account and designated the spouse as primary beneficiary but failed to name any contingent beneficiaries. Shortly after the client's death, the spouse also died and the lack of a contingent beneficiary would have left the funds to the estate. The client's daughters sought court approval of reformation of the beneficiary designation to name them as the contingent beneficiaries. The court relied on the fact that the original account had also named the spouse as the primary beneficiary and named the client's daughters as the contingent beneficiaries and testimony that the client intended the same treatment for the new IRA but this was not accomplished due to an error on the part of the financial institution setting up the new IRA. The potential for a client to obtain relief through the courts is a welcome addition to the remedies available to our clients' experiencing problems with the beneficiary designation.
Ensuring the funds in qualified retirement plans serve the purposes intended by clients is key to effective implementation of financial strategies. One such purpose valued by many clients is the funding of special needs trusts or other approaches to making adequate provision for a beneficiary with special needs. Earlier this year, the IRS issued a private letter ruling approving the transfer of a beneficiary's share of an IRA established by a parent to a special needs trust created for the benefit of the beneficiary. This ruling permitted the transfer of the IRA without causing immediate income taxation and further permitted tax deferral and regular distributions over the life of the beneficiary. The ruling supports another useful strategy for clients with special needs children by allowing these clients to utilize qualified retirement plan account funds without adverse tax consequences. The strategy might be extended to other situations as well as it is not limited to the special needs trust per se.
The importance of taking qualified plan distributions when and as required is underscored by the statutory fifty percent penalty tax imposed on persons who fail to timely take a required minimum distribution from a qualified plan account. Any missed or reduced distribution must be reported by the taxpayer on form 5329. The IRS will, however, waive the penalty in cases where the taxpayer is able to demonstrate that the failure to take the full distribution was due to an error that the taxpayer makes a reasonable effort to correct. In prior years this form required the payment of the penalty tax as a precondition to a request for a waiver of the tax. Beginning this year, the requirement has been dropped, although the taxpayer will still be required to pay the penalty tax if the IRS does not grant a waiver.
UNBELIEVABLY FAT: (USA Today) A patient care director decided to check the numbers on overweight patients. She looked at a daily hospital census — about one-third of the 900 patients weighed 350 pounds+.
A union representing 70,000 nurses and other workers at hospitals in 18 states last week called for new laws forcing hospitals to buy equipment such as portable hoists to prevent worker injuries.
A union-commissioned survey of more than 900 nurses and X-ray technicians found the majority have chronic pain or have suffered injuries from lifting and moving patients.
At Barnes-Jewish, lift machines help some patients get in and out of bed. Chairs have been made stronger and wider. Lights have been added at floor level because the bodies of extremely obese people can cast a shadow that makes it hard to see the floor.
The hospital is replacing many of its beds — built to handle people weighing up to 350 pounds — with beds for 500-pound patients.
Some wings of Barnes-Jewish are replacing 36-inch-wide doorways with those that are 48 or 52 inches wide. The bathrooms are being fitted with floor-mounted commodes that can't be pulled out of the wall, and rooms reconfigured so patients can essentially get out of bed and step into the bathroom.
Gowns are bigger. Wheelchairs are wider. Even hospital-issued slippers come in extra-large sizes because the standard-issued footies were cutting off circulation for some patients.
Operating tables have been widened because the girth of some patients was lapping over the table, in some cases all the way to the floor, Becker said. CT scan machines weren't wide enough. Syringes with the longest available needles — 4 inches — couldn't penetrate the fat.
The law requires a leak-proof body bag. Some patients were so large they wouldn't fit in them. The hospital is working with a vendor to develop a wider bag.
NOTHING LIKE THE SEPARATION OF CHURCH AND STATE: IRS examinations found nearly three out of four churches, charities and other civic groups suspected of having violated restraints on political activity in the 2004 election actually did so,
The tax agency looked only at charities, churches and other tax-exempt organizations referred to the IRS for potentially violating laws that bar them from participating in or intervening in elections, including advocating for or against any candidate.
Those referred to the IRS represent a fraction of more than 1 million tax-exempt organizations organized under section 501(c)(3) of the tax law.
401(K)'S ARE NOT GOING TO WORK UNDER CURRENT CONDITIONS: From the bear market in of 2000 to the new "bull" market in 2004, more than 3 in 5 investors in 401(k)s failed to make a single change to their accounts.
SECOND HOMES: ( National Association of Realtors) Sales of second homes increased by 16% in 2005 to a record 39.9% of all U.S. existing home sales. Sales of vacation homes rose 16.9% to a record 1.02 million, while sales of homes owned for investment purposes increased by 15.7% to a record 2.32 million
FAT- There are over 9 million people in the U.S. who are 100# or more overweight. In 1995 there were only 20,000 weight loss operations- last year there were 170,000.
COLLEGE OR RETIREMENT: Many boomers waited to have children until relatively late in life, studies show, and experts point out this raises the likelihood of a conflict between two key financial goals for boomer parents: saving for retirement and putting the kids through college.
Advisors often tell boomers that saving for retirement comes first, trumping college education and most other savings goals. However, a study by Vanguard Group Inc. and Upromise Inc. suggests parents don’t agree. Where there is a conflict, the kids’ college education generally is holding its own in the battle for a share of the parents’ savings.
Overall, the study found, 95% of parents expected to send a child to college. Of those, about 64% currently were saving for it.
In addition, 37% said saving for their child’s higher education was a primary concern, compared to 34% who identified saving for retirement as primary.
Among those actually saving for retirement, 75% said they were very concerned about saving for college.
Among those actually saving for a child’s higher education, the same percentage, 75%, said they were very concerned about saving enough money for the purpose.
Of college savers, the average amount put aside was close to $4,700 per child, or about $7,000 per household. That would cover about a year in tuition, room and board, and other costs of attending a public college, notes Heywood.
Parents’ anticipated sources of funds for education consisted of grants, scholarships and financial aid (85% of those with children 12 and up, and 83% for those with younger children); savings and investments (86% and 90%, respectively); and loans and other outside financing (82% and 80%).
LIFE INSURANCE REVIEW: (Tony Steuer) The Uniform Prudent Investor Act is Holding Life Insurance Trustees To A Higher Standard
A trustee assumes a significant level of fiduciary responsibility when hired as a trustee managing a life insurance policy. The Code of Federal Regulations Title 12 Sec. 9.6 mandates requirements for national banks responsible for trust assets, including life insurance. This includes on-going annual reviews as well as pre-acceptance review and post-acceptance review. These reviews are designed to make sure that the asset “is appropriate, individually and collectively, for the account.”
A May 2003 Trusts and Estates Magazine article noted that over 80% of trustees had no ‘stated guidelines and procedures for handling life insurance’. If these duties are not performed and/or not performed correctly, the trustee may be open to significant life liability exposure and be made personally liable for any resulting damages. A beneficiary may recover in a lawsuit those values that he or she would have enjoyed had there been no breach of fiduciary duty or failure to act properly.
DUMB TV: New research suggests that elderly women who watch daytime soap operas and talk shows are more likely to suffer from cognitive impairment than women who abstain from such fare. Women who watched talk shows were 7.3 times more likely to have long-term memory problems while those who watched soap operas were 13.5 times more likely to have problems with attention.
I am happy to report however that men who watch fishing shows have not been found to have lost any mental capability at all. And the economy also improved due to increased beer sales.
BIRD FLU COST – Fitch predicts that a pandemic of avian influenza might cost the U.S. insurance industry up to $18 billion and as much as $53 billion internationally. I think it could be a lot more.
OUTSOURCING HEALTH CARE Here's an interesting twist. Two researchers propose that U.S. insurers save a bunch of money by encouraging policyholders to seek nonemergency medical care in other countries. For example, the average inpatient cost for a knee replacement in the U.S. is $10,335, while the average foreign cost, including airfare, is $1,321.
I'll pass thank you. I mean, where do you go? France? Greece? Russia? Albania?
WHY CAN'T I DO THIS??: One in 10 companies contracting with the General Services Administration from 10/2003 through 6/2005 owed back taxes. Their debts total $1.4 billion. Three hearings have shown government contractors owing $7.7 billion in taxes. The studies, conducted by the Government Accountability Office, showed Pentagon contractors owed $3 billion in taxes and non-defense contractors owed $3.3 billion.
The unpaid taxes include corporate income, personal income, payroll, excise and other taxes. Willfully failing to transfer payroll taxes withheld from employee paychecks to the federal government is a felony.
CAREGIVING (Aging Parents) If your loved one is in an assisted living facility when his or her money runs out, they (and your family) will have two options: (1) you can pay the monthly assisted living bills from your own funds; or (2) your loved one will have to move to a nursing home that accepts Medicaid patients. Medicare never pays, and Medicaid only rarely pays, for assisted living.
On the other hand, if your loved one already lives in a nursing home when he or she runs out of money, the nursing home cannot throw them out — in most cases.
In 1999, Congress passed Public Law 106-4, "Nursing Home Resident Protection Amendments of 1999." In summary, the federal law says:
1. If a private-pay or Medicare patient lives in a nursing home while the nursing home is a Medicaid provider (most are), he or she cannot be discharged for financial reasons, even if the nursing home later withdraws from the Medicaid program, but continues to provide nursing home care to other types of patients. HOWEVER, nothing prevents the nursing home from moving the patient, without his or her permission, into a lower-cost room, including a ward-type room for several patients, or a special Medicaid section of the facility. But, the nursing home cannot transfer the patient into another nursing home without his or her specific permission.
2. A Medicare or private-pay patient who enters a nursing home when the nursing home is not in the Medicaid program can be discharged [evicted] when he or she is no longer able to pay the charges of the facility, even if the patient then qualifies for Medicaid. But for this type of discharge to be allowed, the nursing home must have informed the patient of this discharge [eviction] policy in writing, and received the patient's written acknowledgment, when the patient began residence in the facility.
As you can see, there are several "ifs" involved, including whether or how soon your loved one should apply for Medicaid, the federal/state program that pays about half of all nursing home expenses. If your loved one is in this situation, or will be shortly, we recommend that you (or they) discuss all of this at your earliest opportunity with an attorney who specializes in elder law. Check the yellow pages in your local telephone directory, or go to the National Academy of Elder Law Attorneys' web site at www.naela.org. On their home page, you'll find a link in the upper left corner (just below their logo) that will help you locate an elder law attorney.
A final word of advice: While you and other members of your family may be able to help your loved one financially, be very careful about accidentally becoming a co-signer for any of your loved one's debts, or signing any other type of document where you agree to become financially responsible for him or her. If you were to become a co-signer or become financially responsible, you would be legally obligated to use your own money to pay your loved one's bills.
If you do have to sign something for your loved one as his or her Power of Attorney, make sure that you include POA after your name AND that you also sign your loved one's name after yours. That isn't forgery as long as you do have a valid Power of Attorney. And, acting as his or her Power of Attorney does not obligate you to use your personal funds to pay your loved one's expenses.
LIFE OR DEATH (Archives of Internal Medicine.) The most optimistic among a group of 545 Dutch men age 64 to 84 had a roughly 50 percent lower risk of cardiovascular death over 15 years of follow-up.
BAD STUFF: Investor-initiated life policies, in which investors lend wealthy individuals money to pay life insurance premiums for a designated period, are scheduled to be discussed by the NAIC. If the individuals die within a designated period, their beneficiaries get the death benefits less the premiums and interest. After the period expires, the individual has three options: repay the loan with interest and keep the policy, sell the policy and repay the loan with interest or transfer the policy to the investor, usually a hedge fund. If the policy is transferred, the investor receives the death benefits when the insured individual dies. The interest rates often are double digit and can be as high as 28%. New York has banned these arrangements as a "speculative investment for the ultimate benefit of a disinterested third party" lacking an insurable interest and several other states may do the same.
WHAT A BUNCH OF IDIOTS: FEMA has let nearly 11,000 unused manufactured homes deteriorate on old runways and open fields in Arkansas, and spent $416,000 per person to house a few hundred Hurricane Katrina evacuees for a short time in Alabama last fall
YOU ALREADY KNEW THIS: Median CEO pay soars 25%; typical worker's pay up 3%
ALITERACY: "An ability to read but an indifference and boredom with reading for academic and enrichment purposes."
According to the survey firm NDP Group -- which tracked the everyday habits of thousands of people through the 1990s -- this country is reading printed versions of books, magazines and newspapers less and less. In 1991, more than half of all Americans read a half-hour or more every day. By 1999, that had dropped to 45 percent." ...
"American historian Daniel Boorstin saw this coming. In 1984, while Boorstin was serving as librarian of Congress, the library issued a landmark report: "Books in Our Future." Citing recent statistics that only about half of all Americans read regularly every year, he referred to the "twin menaces" of illiteracy and aliteracy." .
""In the United States today," Boorstin wrote, "aliteracy is widespread.""
... "One of the few academics who have written about the phenomenon, [Kylene] Beers, a professor of reading at the University of Houston, says there are two types of reading: efferent and aesthetic."
"Efferent, which comes from the Latin word efferre (meaning to carry away), is purposeful reading, the kind students are taught day after day in schools. Efferent readers connect cognitively with the words and plan to take something useful from it -- such as answers for a test."
"Aesthetic is reading for the sheer bliss of it, as when you dive deep into Dostoevski or get lost in Louisa May Alcott. Aesthetic readers connect emotionally to the story. Beers believes that more students must be shown the marvels of reading for pleasure."
FINANCIAL LITERACY AND PLANNING: Implications for Retirement Wellbeing: Annamaria Lusardi ,Olivia S. Mitchell
Evidence suggests only a minority of American households feels “confident” about retirement saving adequacy. Little is known about why people fail to plan for retirement, and whether planning and information costs might affect retirement saving patterns. To better understand these issues, we devised and fielded a purpose-built module on planning and financial literacy for the 2004 Health and Retirement Study (HRS). This module measures how workers make their saving decisions, how they collect the information for making these decisions, and whether they possess the financial literacy needed to make these decisions. Our analysis shows that financial illiteracy is widespread among older Americans: only half of the age 50+ respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third understood these as well as stock market risk. Women, minorities, and those without a college degree were particularly at risk of displaying low financial knowledge. We also evaluate whether people tried to figure out how much they need to save for retirement, whether they devised a plan, and whether they succeeded at the plan. In fact, these calculations prove to be difficult: fewer than one-third of our age 50+ respondents ever tried to devise a retirement plan, and only two-thirds of those who tried, actually claim to have succeeded. Overall, fewer than one-fifth of the respondents believed that they engaged in successful retirement planning. We also find that financial knowledge and planning are clearly interrelated: those who displayed financial knowledge were more likely to plan and to succeed in their planning. Moreover, those who did plan were more likely to rely on formal planning methods such as retirement calculators, retirement seminars, and financial experts, and less likely to rely on family/relatives or co-workers.
THESE ARE THE NEW NASD CLASSES: Anti-Money Laundering, Auditing a Broker-Dealer, Books and Records, Capital Adequacy: Rule 15c3-1, Customer Protection: Rule 15c3-3, Drafting and Maintaining Written Supervisory Procedures, Ethics, Portfolio Management, Supervision in the Securities Industry. See anything on investment suitability? Nope.
ALZHEIMER'S MOSTLY CAUSED BY GENES: A landmark new study finding that Alzheimer's disease has a genetic cause in up to 80 percent of cases will affect prevention, treatment and further research for years to come.
Published in the February 2006 issue of Archives of General Psychiatry, the study examined 12,000 pairs of twins. The findings raise doubts about the widely held view that Alzheimer's has two forms, the "familial," with genetic roots, and the "sporadic," with environmental causes. Although past estimates of Alzheimer's risk varied widely, this study confirms the highest estimates of genetic predisposition, even among people previously thought to have the sporadic form of the disease.
SIMPLE TEST REVEALS INVESTMENT RISK TOLERANCE This is absolutely moronic. 6 questions from the Journal of Financial Planning and you can figure risk out.
1. Earning a high long-term total return that will allow my capital to grow faster than the inflation rate is one of my most Important investment objectives.
OK, what is a high return long term? If you use inflation at 3%- 4%, what is a high return for a specific client? Darned if I know since every person views risk differently. But that is assuming they had done any homework to begin with to understand past history and current economics. I think 99.99% would be just "guessing" at what was going on.
2. I would like an investment that provides me with an opportunity to defer taxation of capital gains to future years.
Tax deferral always sounds great. But are they talking an annuity? Index fund. No way I know. No way a client even asks the question or understands the implications.
3. I do not require a high level of current income from my investments.
I don't find this to be relevant. Lots of people that that you need income to live on. Perhaps. But why not take appreciation and sell the gains? It's still money. And many times appreciation is higher than income. That said, if you do not know what diversification is by the numbers, you are clueless to risk. If you cannot determine risk, you cannot determine suitability. Period.
4. I am willing to tolerate some sharp downswings in the return on my investments in order to seek a potentially higher return than would normally be expected from more stable investments.
Tell me what a sharp downswing is? 10%- 15% is a correction. Not really a problem. What about a 45% loss in two years. Sharp downswing or a complete failure in understanding risk?
5. I am willing to risk a short-term loss in return for a potentially higher long-run rate of return.
What is a short term loss? One standard deviation. Two? Three? Without a numerical statement, I do not know how to quantify the question.
6. I am financially able to accept a low level of liquidity in my investment portfolio.
How is a client going to determine this. Ouija board? HP12c. Literally the former than the latter. And it requires a formal budget to determine how much you need for retirement. Then you have to use Monte Carlo. Then you have to intersperse 1973/74.
DUMB MONEY: Mutual fund flows and the cross-section of stock returns. in 1999 investors sent $37 billion to Janus funds but only $16 billion to Fidelity funds, despite the fact that Fidelity had three times the assets under management at the beginning of the year. Thus in 1999 retail investors as a group made an active allocation decision to give greater weight to Janus funds, and in doing so they increased their portfolio weight in tech stocks held by Janus. By 2001, investors had changed their minds about their allocations, and pulled about $12 billion out of Janus while adding $31 billion to Fidelity.
Our main result is that on average, retail investors direct their money to funds which invest in stocks that have low future returns. To achieve high returns, it is best to do the opposite of these investors. We calculate that mutual fund investors experience total returns that are significantly lower due to their reallocations. Therefore, mutual fund investors are “dumb” in the sense that their reallocations reduce their wealth on average.
Our results contradict the “smart money” hypothesis of Gruber (1996) and Zheng (1999) that some fund managers have skill and some individual investors can detect that skill, and send their money to skilled managers. Gruber (1996) and Zheng (1999) show that the short term performance of funds that experience inflows is significantly better than those that experience outflows, suggesting that mutual fund investors have selection ability. We find that this smart money effect is confined to short horizons of about one quarter, but at longer horizons the dumb money effect dominates.
ANNUITIES: The NASD, the brokerage industry's regulatory arm, has filed 286 enforcement actions over annuity sales in the last six years
DYING: the annual number of deaths in the country dropped by about 50,000 in 2004 — the largest such decline in more than 60 years.
FORECLOSURES: Mortgages entering foreclosure jumped 72 percent during the first quarter from a year earlier, as higher interest rates increased monthly payments and strained the budgets of homeowners with adjustable-rate loans.
Lenders began foreclosing on 323,102 mortgages, a ratio of one in 358 U.S. households. Banks typically start foreclosing on mortgages after payments are 90 days late.
LET'S DO LUNCH" Producers that conduct hard-sell "free lunch" retirement-oriented seminars are coming under increased scrutiny by state and federal regulators. Right now, the Securities and Exchange Commission (SEC) 1 is collaborating with the North America Securities Administrators Association (NASAA) 2, the National Association of Securities Dealers (NASD) and the states of California3, Florida3, and Georgia4 by launching initiatives to curb fraud and suspicious sales practices aimed at seniors by unethical producers - the most popular of which is the luncheon seminar format. In fact, reliable industry sources have told us regulators from several other states plan similar actions as well.
The elderly eat these up (notice the pun). They will go anywhere for free food. Then some pretty boy stands up in front and gives them a good spiel. So they go for the bait and get hooked on an annuity or indexed product that will last longer than the rest of their lifetime.
You will never be able to do anything with these people. They are not necessarily unejdcated- they are simply stupid. They are unwilling to commit the time and effort to figure out what is really necessary. A free meal is all they need. As to those who do not have the capacity to think- laws and regulations are needed much faster. But if the fundamentals of investing are not required of almost all brokers and certainly not to regulators, it will require a better system to thwart some of these problems.
I am getting fed up with this.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
Life and Disability Insurance Analyst
2232 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127
Marina Office 510 357-1554
Cell 510 459-7797
ONE AND ONE ADDS UP TO ?????????? Sixty-one percent of workers say they expect to receive a traditional pension when they retire, despite the fact that just 40% of those surveyed say they or their spouses have such a plan.
LONG-TERM CARE COSTS - According to a Genworth Financial survey, the national average cost for a private room in nursing home is now $70,912 a year. For in-home assistance, the national average cost is $22.15 per hour, or $46,072 per year for 40 hours of help per week. At an assumed 5% inflation rate, a year in a nursing home, based on national averages, could cost over $110,008 in 2015 and over $179,191 in 2025 and the cost per year of in-home care, for 40 hours of help per week, would be more than $71,473 in 2015 and almost $116,422 in 2025
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LTC CLAIMANTS LIVING TOO LONG - Penn Treaty (and maybe other LTC carriers) have a problem...their LTC insureds are living about 3 years too long. In fact, Penn Treaty may have to add $30 million to its long term care insurance claim reserves as a contingency. In other LTC news, the Florida Senate is proposing legislation that would cap permitted increases in LTC premiums and require that current policyholders be given the option of keeping premiums stable by taking a reduced package of benefits.