Boston College’s Center for Retirement Research suggests using Social Security for Retirement
The Center for Retirement Research at Boston College released a study stating that the best way for people to utilize their retirement income more effectively is to “buy” an annuity from Social Security. This statement, of course, is completely misleading and the whole concept should be investigated further[vi]
According to Pat Foley, president of U.S. life insurance distribution and marketing at Genworth Financial, approximately 10,000 people turn 65 every day and this will continue over the next 20 years.[i] As these individuals approach retirement age armed with only their 401k plans and Social Security as their only means of support once they stop working, there is a huge need to minimize risk while preserving wealth. Fluctuation interest rates as well as longevity are all issues to consider. Obviously, no one wants to outlive their savings or pay huge fees to protect their nest eggs but recommending Social Security as an option seems a little optimistic.
No one can “BUY” an annuity from Social Security. You delay claiming your Social Security benefit in order to get a higher pay out later. Instead you’re using your savings to support yourself. Here’s the one major problem with that. What if you spend your cash supporting yourself to hold off for the higher Social Security payout only to discover there is nothing left when it comes time for you to retire?
In their 2011 report, the Social Security Board of Trustees stated that by “2023, total income and interest earned on assets are projected to no longer cover expenditures for Social Security, as demographic shifts burden the system. By 2035, the ratio of potential retirees to working age persons will be 37 percent — there will be less than three potential income earners for every retiree in the population. The trust fund would then be exhausted by 2036 without legislative action.”[ii]
Therefore if you didn’t invest your money, decide to live off your cash and use Social Security as your annuity you could be in for a rude awakening come 2036. While annuities do have their faults—they’re expensive, underperformers and restrictive—for the most part they do provide risk adverse individuals with a guaranteed income stream.
Some products, like Indexed annuities, take hybrid approach from variable and fixed annuities because they have stability of a fixed annuity with the growth potential of a variable annuity. Indexed annuities have a loss provision which protects the nest egg even if the stock market goes down. Unless you make a withdrawal, the value of your annuity will not decrease. The insurance company invests most of the principal in bonds ensuring the policy generates a small annual return. In addition, the insurer uses a small portion of the premium to buy options in a stock market index such as the S&P 500. Options that are exercised can result in additional interest credited to a policy. As the demand for more risk adverse products rise, insurers will create newer products with better growth potential. [iii]
Apparently other government entities believe that annuities would be a good investment vehicle for retirement. In July 2011, US Government Accountability office (GAO) put out a report stating purchasing an income annuity from an insurance company is “an alternative to self-managing periodic distributions from savings" because it protects retirees from underperforming investments, overspending as well as from the risk of outliving their savings. It also claimed that inflation adjusted annuities reduces the risk of diminished buying power. Also some experts dispute that claim.[iv]
Other things to consider
Some investments allow the investment to be passed on to heirs. Social Security survivor benefits are for spouses and dependent children as well as disabled children only. If your financial situation changes some investments like annuities are not easily converted into cash. Some can’t be cashed out without suffering penalties and some cannot be cashed out at all once you start collecting. While some annuities can be sold on the secondary market for a discount, some cannot. Social Security, on the other hand, can not be liquidated or sold.
When it comes to retirement savings you’re never too young to start saving. It is also important to consider asset allocation and getting professional advice. Asset allocation is not putting all your eggs in one basket so if things go wrong in one investment class you don’t lose everything. [v] If you rely solely on one type of investment, especially one that is extremely inflexibl,e you’re leaving yourself open to possible financial hardship in the future.
[i]http://rescuecapital.com/blogs/2012/01/genworth-re-enters-the-indexed-annuity-market/
Imperial’s legal woes hinder its ability to file an annual report
Imperial Holdings (NYSE: IFT) has announced it cannot file its annual report on time because it was unable value its assets, according to South Florida Business Journal. The Boca Raton based company has been under investigation by the FBI, who raided their offices in September. This investigation is hindering their ability to establish a fair value for the insurance premium loans.
Also the SEC is investigating Imperial for possible securities fraud violations for their alleged misrepresentation to life insurance carriers. Until the company is able to resolve their legal issues and determine a value of their assets, they stated that they will not be able to file its annual report.
Imperial has cancelled its annual shareholder meeting and has not scheduled a new date because of the annual report filing delay. As a result Opportunity Partners has filed a lawsuit against them demanding that they hold the meeting. Recently, NY based Bulldog Investors sent a letter demanding the resignation of two members from Imperial’s board. If the shareholder meeting happens, a vote on the appointment of new directors could take place.
Imperial denies the allegations and the structured settlement business is not under investigation.
In addition to the FBI and SEC investigations, Imperial is facing numerous shareholder class action suits and has seen two major investors bail on them.
CFO and Chief Credit Officer Richard O’Connell Jr. signed a severance agreement with the company on February 15, 2012. President and COO, Jonathan Neuman, a target of the FBI investigation, took a leave of absence from the company back in January.
Student loan interest rates to double—what are the options?
Last month we published an article about how student loan debt could be the next big financial crisis. Unfortunately for many recent grads, the predictions made by the National Association of Consumer Bankruptcy Attorneys (NACBA) may be coming true because of significant increase in the interest rate of the popular Stafford Loan.
The subsidized loan, used by many low to middle income students, is schedule to jump from 3.4% to 6.8% interest beginning in July. There are many benefits to this type of loan besides the low interest rate—the Federal government covers the interest payments on these loans until the borrower has been out of school for 6 months.
President Obama has proposed extending the 3.4% interest rate for another year. The extension could save 7.4 million borrowers an average of $1,000 in interest payments. According to US Public Interest Research, some students would have to pay an extra $5,000 over a ten-year period if the rates were to increase.[1]
As more individuals return to school with hopes of gaining marketable skills and a better paying position, student loan debt began to steadily increase. In the past, the students would pay off this debt once they graduated but this is no longer the case.
In a study done by public institutions it was discovered that only 60% of full time and 24% of part time students received a bachelor’s degree within 8 years. For-profit education’s figures are worse. The withdrawal rate of Ashford University was 84%, while Kaplan, University of Phoenix, The Art Institute, Argosy and Brown Mackie all had figures in the mid to high 60’s. Therefore students are finding themselves worse off than they were before they went to school since they’re now unemployed with huge debts.[2]
There are various solutions to this dilemma being proposed. The government would like to decrease the monthly student loan payments from 15% of discretionary income to 10%. They would also like to reduce forgiveness of the loan from 25 years to 20 years.[2]
THE NACBA would like to make changes to bankruptcy laws so that individuals with student debt can receive the same relief as others facing bankruptcy. Currently very few student loan debtors have any chance of discharging what they owe through bankruptcy because they are unable to prove “undue hardship”. [3]
Ideally many students would like to see a decrease in tuition since it continues to rise despite the fact that salaries are decreasing.
Since none of these changes have been made current and former students are going to need some form of economic relief. Some suggestions include:
- Deferment/Forbearance: Temporarily suspend payment of your student loans due to economic hardship, unemployment, being in school and unemployment. While interest doesn't accrue on subsidized loans, this is not the case for other loans. If you don't qualify for deferment you may be able to get forbearance; which is when a lender pauses the payments or reduce them for a period of time while interest continues to accrue. If you’re in default neither option is available to you.
- Repayment plans: Some repayment plans are still available that could reduce your monthly payments. See this website for more details. http://www.direct.ed.gov/inrepayment.html
- Discharges: Some teachers or public servants are eligible for cancelations. If you have become disabled after the loan was made or the student has died the loan may be discharged. See the website for more details http://www.direct.ed.gov/cancellation.html
- Consolidation: There are some ways that you can consolidate your student loans. See http://www.direct.ed.gov/cancellation.html for details.
- Selling future payments: If you have an illiquid asset such as a structured settlement annuity or single premium immediate annuity, you may be able to sell all or some of your future payments for a cash lump sum payment. This will allow you to pay off the loan without accruing interest thereby saving you money and reducing your debt.
If you have student loan debt and a illiquid asset you may want to consider selling, call Rescue Capital at 866.688.3532. We can help you created a tailored solution to fit your needs. Considering going back to school, instead of getting into debt, sell some of your future payments to pay for your education. We can show you how.
Sources:
1. http://www.cbsnews.com/8301-500395_162-57396672/rate-on-popular-student-loan-about-to-double/
2. http://www.fool.com/investing/general/2012/03/13/the-next-bursting-bubble.aspx
3. http://rescuecapital.com/blogs/2012/02/student-loan-debt-could-be-the-next-big-financial-crisis/
What can you do when you can’t afford your car payments?
Many Americans have been experiencing hard times thanks to our economy. Sometimes, things we once took for granted such as having a new car or a nice home, are considered luxuries that are out of reach. So what can you do if you can’t afford your car payments?
Refinance – Sometimes refinancing your car loan may lower you payments to where they’re affordable. Sometimes even with refinancing the payments are still too high. It helps if you can put a little money down.
Sell it – Look at online pricing guides to determine your cars value if you were to sell it privately. Make sure you clean it and wax it to maximize its worth.
Lease transfer – If your car is leased it will be expensive as well as difficult to get out of the contract. However there is one way that won’t affect your credit score and is significantly cheaper than early termination. You can transfer the lease to another person through the use of a third party agency.
Sell used items – Many times there are items in your home that you’re not using that you can sell on websites like eBay, Craigslist or Amazon for cash you can use to make your payments or pay down your loan.
Sell illiquid assets – If you have a single premium annuity, structured settlement annuity or other periodic payments you can sell some of your future payments for a cash lump sum. Use the money to pay off your car as well as other high interest debt. There are no credit checks and since it isn’t a loan you won’t have to pay the money back.
Paying off your car loan not only helps you with your creditors, it saves you money. For example, if you financed $18,000 for 60 months at 9.5% interest your payments are $378/month. At the end of the loan you would have paid $4,682 in interest so your $18,000 car actually costs $22,682. If you decided after a year to pay off your balance in full ($15, 047) you will save yourself $2,979 in interest.
If you're having trouble paying for your car and you also have credit card debt, it makes sense to pay that debt off immediately. For example, if you had $18,000 in credit card debt and the annual percentage rate was 19.8% interest; your minimum payment is $360. If you only paid the minimum, it would take you 8 years and 9 months to pay it off and you paid $20,342.04 in interest. By paying $1,800 a month you will have your balance paid off in 1 year and you will only pay $1,833.78 in interest thereby saving you $18,508.26 in interest. Obviously if you paid off your debt completely, you would save thousands in interest.
If you’re looking for a way to get rid of your debt, avoid repossession, avoid foreclosure or purchase a car without payments selling some of your future payments to Rescue Capital for a cash lump sum may be your best option. To learn more about our program and how we can help you, call 866.688.3532.
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