How to Make a (Measly) $1 Million Retirement Nest Egg Last

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Occupy Wall Street has its 1 percent answer, of course. A consulting firm that studies the wealthy has a broader definition, based on millionaire status. Many financial planners have a cautionary third answer — that appearances, and account balances, can be deceiving, and you may not be as rich as you think you are.

The Occupy Wall Street forces focus more on income than on wealth. But if its 1 percent label were applied to assets, the dividing line between the 1 percent and everyone else would be $8.4 million.

Based on its research, the consulting firm, Spectrem Group, said about 8.6 million American households had a net worth of at least $1 million last year, not including their equity in a home — just over 7 percent of the 117 million American households.

George H. Walper Jr., the president of Spectrem, in Lake Forest, Ill., estimated that most of those in the low end of the millionaire class did not have most of their assets in formal retirement funds. “A lot of it is in other places,” he said, even if it is intended for retirement. Many people in that group are already retired, and their average age is 62.

People planning decades of retirement based on $1 million need to recognize that that amount is not anywhere near what it was a century ago, and that they will never live like millionaires, said Larry Luxenberg, a fee-only financial planner at Lexington Avenue Capital Management in New City, N.Y.

So how do you make $1 million last?

Take, for example, a hypothetical couple about to retire who have assets of just over $1 million. To help them, assume they have no children who are financially dependent on them. Also assume that they will be entitled to maximum Social Security benefits, which are just over $30,000 a year each (this year) for people who start collecting at age 66. (Delaying the start of benefits for up to four years increases the amount to be received but might, for some, require earlier withdrawals of retirement funds that would be subject to income tax.)

On the minus side, assume that this couple has no other pension plans that will provide retirement income — although many people who entered the workplace 40 years ago have significant defined-benefit pension plans from corporate or government employers. Mr. Luxenberg said there was a one-in-four chance that one member of a couple who had reached 65 would live into his or her 90s. So that person will have to plan for 30 years of income, he said. A rule of thumb, he said, was to draw 4 to 6 percent of retirement assets, adjusted for inflation, each year. For a hypothetical millionaire, that would be $40,000 to $60,000 a year, plus Social Security benefits.

“Folks with $1 million in a well-balanced portfolio can be comfortable,” he said, but “it’s not a lavish lifestyle.” He added: “The idea of a millionaire being someone who is really rich, that goes back to the Roaring ’20s and the Great Depression.”

Inflation has eroded the value of $1 million considerably, and as Mr. Luxenberg noted, “Three percent inflation over 30 years means you need 2.4 dollars for every dollar that you’d need now.” Withdrawing 4 percent of a nest egg each year used to be a standard formula but is no longer considered a hard-and-fast rule, said Greg Daugherty, executive editor of Consumer Reports and a retirement columnist for the Consumer Reports Money Adviser newsletter.

Four percent might be too much for someone who retired early, or whose money was largely in fixed-income assets.

One strategy to prevent running out of money in old age is to buy an annuity, which gives the annuity seller a specified amount in return for a predetermined monthly payment for life.

Matthew Grove, a vice president of the New York Life Insurance Company and head of its annuity department, said of the 4 percent rule, “there’s no guarantee that it will work,” even if it feels safe.

An annuity “guarantees that you can’t outlive your money, but guarantees that you can spend more over the life of your retirement,” he said.

A $1 million New York Life annuity bought by a 66-year-old man, with payments starting immediately, known as a single-premium immediate annuity, would pay $65,666 a year — far more than a 4 percent withdrawal from a $1 million pot.

The downside is that someone who died at a relatively young age might have had unspent money to leave to heirs if it had not been put into an annuity. There are also annuities that provide death benefits and payments for spouses, although the monthly payments are lower.

Mr. Grove said someone with $1 million might consider using only some of it to buy an annuity. The goal, he said, is to have an annuity and Social Security benefits cover retirees’ most important expenses.

Mr. Luxenberg said annuity buyers were paying for guarantees in the annuities’ cost. But he explained that “after the period we’ve come through, people are craving certainty and guarantees, and they’re willing to pay for guarantees.” For those people, he said, an annuity “could work.”

For those who will keep their assets and figure out how much to withdraw annually, Mr. Daugherty said, “Try to figure out what your expenses are going to be in retirement” before retiring. “Make a budget, even if you never have before,” he added. “One advantage of doing that is that it might show the need to work a few more years, if that is feasible, to allow the desired annual withdrawals in retirement.”

“The value of the 4 percent rule these days, for one thing, is it keeps people from doing anything too crazy, like 8 or 10 percent,” Mr. Daugherty said.

For some people who have been diligent savers, the 4 percent benchmark might encourage them to dip into assets, rather than trying to live only on the income their assets yield. “Some people are terrified of any spending,” Mr. Daugherty said, but they should not deny themselves “the legitimate pleasures of retirement, enjoying things like travel.”

But for those millionaires on paper, while such legitimate pleasures will be theirs, the bottom line, as Mr. Walper of Spectrem put it, “They’re not buying a Duesenberg.”

Alain Delaquérière contributed research.

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The beloved annuity Gets a hug from Obama

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Annuities: The official retirement vehicle of the Obama administration.

As slogans go, it’s hardly “Keep Hope Alive,” or even “Change We Can Believe In.”

But there were annuities, in a report from the administration’s Middle Class Task Force that came out this week. They are among the tools the administration is promoting as it tries to give Americans a better shot at a more secure retirement.

At its simplest, which is how the White House seems to want to keep it, an annuity is something you buy with a large pile of cash in exchange for a monthly check for the rest of your life.

If the biggest risk in retirement is running out of money, an annuity can help guarantee that you won’t. In effect, it allows you to buy the pension that your employer has probably stopped offering, and it can help pick up where Social Security leaves off.

President Obama did not discuss annuities in his State of the Union address on Wednesday night, probably figuring that viewers had enough problems staying awake. But the mere mention of them by the task force was enough to send executives at the insurance companies that sell the products into paroxysms of glee.

“I never thought I’d have the president as a wholesaler for us,” said Christopher O. Blunt, executive vice president of retirement income security at the New York Life Insurance Company. “This is awesome. I’m trying to see if I can get him to do a big broker meeting for us.”

He’s unlikely to turn up for such an event just yet. After all, the announcement from the White House did make it clear that the administration was looking to promote “annuities and other forms of guaranteed lifetime income.” That suggests the administration is open to other solutions, though there are not many others that are as simple as the basic fixed immediate annuity (also known as a single premium immediate annuity) that delivers a regular check for life.

Still, all of this attention from the president is a stunning turn of events for a rather unloved product. Many consumers reflexively run in fear when salesmen turn up pitching high-cost and complex variable annuities, which evolved from their simpler siblings decades ago. Today, the Securities and Exchange Commission maintains an extensive warning document on its Web site for investors considering the variable variety.

Meanwhile, almost all employees on the precipice of retirement who have access to annuities as a payout option steer clear when their companies offer them. While various surveys show that roughly 15 to 25 percent of corporations offer annuities to workers who are retiring, including big employers like I.B.M., a 2009 Hewitt Associates study reported that just 1 percent of workers actually bought one.

“I joke sometimes that we’re the best ice hockey players in Ecuador,” said Mr. Blunt of New York Life, which sells more fixed annuities than any other company, according to Limra, a research firm that tracks the industry.

So what are these soon-to-be retirees so afraid of? And what makes the White House so sure it can change their minds?

Let’s start with the fears. Early on, the knock on annuities was that once you died, the money was gone. So let’s say a 65-year-old man in Illinois turned over $100,000 in exchange for $632 a month for life, a recent quote from immediateannuities.com. If he died at 67, his heirs would get nothing while he would have collected only about $15,000. (On the other hand, it would take him until age 78 to get $100,000 back, but that doesn’t take inflation into account.)

The industry solved this by coming up with variations on the policy, allowing people to include a spouse in the annuity or guarantee that payouts to beneficiaries would last at least 10 or 20 years. This costs extra, of course, meaning your monthly payment is lower.

Others worried about inflation, so now there are annuities whose payments rise a few percentage points each year or are pegged to the Consumer Price Index. These cost extra, too (often a lot extra).

You see the pattern here. Every time someone had an objection — the need for a bunch of payments at once, a lump sum in an emergency or concern about rising interest rates — the industry created a rider to add to policies to make the concern go away (and make the monthly payment smaller).

Besides, people need to have saved enough to purchase a decent monthly annuity payout in the first place. But plenty of retirees haven’t been saving in a 401(k) or individual retirement account long enough to have a good-size lump sum.

There are also stockbrokers and financial planners standing in the way. Once money goes into an annuity, they can’t earn commissions from trading it anymore and may not be able to charge fees for managing it. Financial advisers have a charming term for this phenomenon — annuicide. You insure, and their revenue dies. So, many of them will try to talk you out of it.

One reasonable point they might make is that insurance companies can die, leaving your annuity worthless. State guaranty agencies exist, but they may cover only $100,000 to $500,000. I’ve linked to a list of the agencies in the Web version of this column so you can see what they insure.

Even if you get over all these mental hurdles, however, the hardest one may be the difficulty of seeing a big number suddenly turn small.

“It’s the wealth illusion, the sense that my 401(k) account balance is the largest wad of dollars I’ll ever see in my lifetime, and I feel pretty good about having that,” said J. Mark Iwry, senior adviser to the secretary and deputy assistant secretary for retirement and health policy for the Treasury Department. “Meanwhile, I feel pretty bad about the seemingly small amount of annuity income that large balance would purchase and about the prospect of handing it over to an entity that will keep it all if I’m hit by the proverbial bus after walking out of their office.” So how might the Obama administration solve this? It could get behind a Senate bill that would require retirement plan administrators to give account holders an annual estimate of what sort of annuity check their savings would buy. That way, people would get used to thinking about their lump sum as a monthly stream.

Tax incentives could help, too. A recent House bill called for waiving 50 percent of the taxes on the first $10,000 in annuity payouts each year. “If this is behavior that the administration is trying to inspire, then it’s not that long of a leap to think that maybe they’ll start to promote some version of these bills,” said Craig Hemke, president of BuyaPension.com, which sells basic annuities (and offers some good educational material for people who are trying to learn about the products).

Mr. Iwry, who is one of the intellectual architects of the administration’s examination of annuities, wouldn’t say much about what might happen next. But one paper he co-wrote two years ago suggests a clue.

As the treatise suggests, the administration could nudge employers into automatically depositing, say, half of new retirees’ lump sums into a basic annuity or other lifetime income product, unless they opt out. Then, they could test the thing out for two years and see how that monthly paycheck felt. If they liked it, they could keep the annuity. If not, they could cancel it without penalty and get the rest of their money back.

Annuities won’t be right for everyone (people in poor health should probably steer clear). And they’re not right for everything because it rarely makes sense to put all of your money in a single product or investment.

You could, for instance, use an annuity to cover the basic expenses that your Social Security check doesn’t cover. You might also use the money to buy long-term care insurance, which would keep nursing home bills from becoming a budget-destroyer.

But the president has one thing right: The basic annuity is almost certainly underused. Sure, you may be able to arrange a better income stream on your own, but not without a lot of help from a financial planner or a lot of time managing it yourself. Then there’s the possibility, however small, that you’ll spend too much in spite of yourself or run into a once-in-a-generation market event that will cause you to run out of money sooner than you expected.

All of that makes basic annuities the ultimate test of risk aversion. If you buy some, you and your heirs may have less money than if you’d kept your retirement savings in investments. Then again, if you guarantee enough of your retirement income, you — and those same heirs — won’t have to worry about how you’re going to meet your basic needs.

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Some 401 Plans are added an Option of annuity

Their idea is that these products can promise employees a traditional pension security, while freeing up the task to pay for her employers. However, they are still difficulty breaking A barrier.

Only 2% of the plans 401 include a kind of pension or an option of insurance as an investment alongside standard stock choice and the guarantee fund, according to Hewitt Associates, a benefits consulting firm in Lincolnshire, Ill. An additional 3 percent are "very likely" and 17% are "unlikely" to add the category this year, Hewitt said.

Proponents hope that the hearings this week, sponsored by the Treasury and the ministries of labour, will lead to federal regulations that clarify some of the administrative concerns.

"Most people would like to, as they approach the age 50, to have a certain logic of what income level, they would have retired," said Thomas j. Fontaine, global head of the assessments defined in the investment management firm AllianceBernstein, one of the most half-dozen insurance companies and fund managers design these products. "And they will want to know that they will have the income to life."

The products work in two ways. The most common varieties are related to the date funds target - pre-mixed funds which based their strategy of investment on the date, the employee wishes to take his retirement by automatically changing the mixture as the date approaches draws.

In the model of AllianceBernstein, a growing part of the assets of the deadline are transferred to a fund special guarantee begins at the age of 50, 100% in this Fund by five years prior to the date of retirement. Although the product is not complete, Mr. Fontaine said he only expected to ensure a 5% rate of return for life, for an amount of approximately 1% of the assets.

Prudential retirement has a product that combines a variable annuity with a date Fund group target, essentially ensuring against the slowdown of the market, for an amount of 1 per cent. It ensures that each year for the first 20 years of retirement, the investor may withdraw an amount equal to 5% of the assets which were in the Fund of the deadline in its largest year, even if the market has collapsed the year before retirement. After 20 years, Prudential began to pay 5%.

MetLife Personal Pension Builder takes a totally different approach, akin to a deferred fixed annuity. Whenever someone makes a contribution of 401, all or part of money essentially buy a mini-annuity (also known as the phased rent), obtain the interest rate prevailing at the time. Thus, a person who contributed at least every two weeks may be purchase 26 mini-rentes this year.

All these products have in common, is that employees use their assets from 401 to buy guaranteed, constant payment for the rest of their lives after retirement. The cost is usually about 1% of the assets secured, expenses regular 401.

For many people, the added security is worth the price.

"We assure all - disability, our car, our home - but we do not ensure the risk that we might survive our assets,"says Pamela Hess, Director of retirement research Hewitt."." It recommended that people use this kind of security for about half of their 401 property.

There are other concerns, however. Because so many parties are mobile, including the interest rate, the date of retirement and the amount of the contribution - companies worry about the administrative difficulties. It is not simple to have a force work together small-company stock fund.

As a standard annuity, some of the new products depend on a single insurance company remaining in business long enough to continue to pay on guarantees, perhaps for decades.

"How fix you this if it is not the right provider? (A) asked Ms. Hess.

Jody Strakosch, Director of MetLife retirement at the United States products, has a ready answer for this kind of criticism: "MetLife will meet our financial obligations for 140 years."

And John Kalamarides, senior vice president of strategies and retirement solutions at Prudential, said new rules "safe harbor" Washington could relieve the fiduciary concerns of some employers in the choice of insurance companies.

Side, the date of target products are more flexible than annuities. Investors can withdraw their money at any time, even if it means that they paid the additional fee for nothing.

Tongue companies these products say demand is growing. In a survey of 1,300 companies last fall, MetLife found that 44% of employees "want my employer to offer an annuity option" in their open or similar retirement. A spokesman for MetLife recognized that the Declaration may designate rolling on the 401 to an annuity at retirement, as well as to have an investment option.

Stephen P. Utkus, who heads the Center for research of the retirement of the vanguard group - which does not sell any of these new products - said that trying to buy security 401 investment was a mistake. The best approach, he said, is simply to build a bigger nest egg.

"Our customers see having a portfolio itself as a form of security," he said.

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Longevity insurance: purchase on the risks of life too long

Most people buy life insurance to protect against the risks of dying too soon. Now, there are new products that offer the same protection if you live too long.

He is known as an assurance of longevity, and there is clearly a huge market for it: life expectancy is on the rise fluffy are on the decline and most people do not have enough savings for transport over two decades or more of retirement. This is not lost on the insurance companies, who would like to that you think produces a pension of sorts - although you have bought with your own money.

I wrote on the advantages and disadvantages of the longevity of insurance - which, at its core, is really just an annuity - late last year. But now, New York Life will implement its own version, which he calls an "annuity guaranteed future income", on 11 July.

So how exactly does it work? With immediate basis, also known as pension income, give you a lot of money to an insurance company in exchange for a life income stream that generally begins immediately.

What is different on the products of the life of New York, is that the income stream is deferred - pay you the premium, but accept the flow of income at some point in the future. But there are two distinct ways to use the product.

With the first way, you can think about it as a way to prepay for an annuity (or pension) well before that you plan to use it. Which makes cheaper than a pension with immediate enjoyment, because, well, there's a chance that you will die before you begin to collect. In addition, the insurance company has the advantage of investing your money over a long period of time. You may purchase the annuity at the age of 55, but decide to begin to gather at the age of 67, for example.

But it can also be used as a pure insurance policy - hence the name, longevity insurance. You agree can begin collection of insurance at a date much later in the future, as your 85th anniversary. So if you live past your life expectancy, you are covered. And as most of the people don't know when they will die, this allows you to spend down your retirement savings more liberal because you know that your payments will be kick later. The great risk, of course, is that you will not see a penny because you die until you can collect.

"Mathematically, it's meaningless," said Christopher Blunt, an executive vice president at New York life, referring to the lower cost of the annuity purely as an insurance policy. "It is probably the more efficient and effective way of pure risk off the coast of the table".

So let's examine more closely some of the numbers. It would cost a 55 year old man $100,000 for the purchase of $1,000 per month of income guaranteed for life starting at the age of 65 years, compared to $103 500 for a woman. (It's more expensive for women because their life expectancy is usually longer).

It would cost $ 122 000 to cover the life of the two partners, which is much lower than the $203 000 it would cost to purchase an immediate annuity (at the age of 65).

But if a man chooses to payments over 10 years, invests $10,000 per year, its income stream could be a little less, perhaps more about $880 per month. This is because the insurance company is investing your money for a short period of time (and there is a higher probability you can collect the stream of income with every year passing). Don't forget that your payments will be influenced by the environment of interest rates: if rates rise, you can lock in a higher recovery rate and vice versa.

If you want to use the annuity purely as an insurance policy, it is much cheaper. It would cost a 55 year old man $12 100 to the purchase of $1,000 of guaranteed monthly income that begins at the age of 85 years, compared to $13,750 for a woman. It would cost a 65 year old man, $17 740, while it would cost a woman $ 21 600. To cover both, it would cost $20 340 if they are all two 55 and $31 240 if they have two 65.

Which appears as a decent deal, until you remember that little bug called inflation--your dollars are likely to be worth much less in the future. One option is to know how many you need in inflation-adjusted dollars and buy this amount.

Now for some of the rules of the game: the payment of the initial premium must be at least $10,000, but the subsequent payments may be as little as $100. You can make payments at any time 2 years before starting the collection of payments.

You also have the possibility to change your departure date. So if you were to take early retirement, you could start collecting early, even though your payments would be less. You are also given one shot to the postponement of the date of your departure, if you cannot postpone the beginning of your payments for more than 40 years of your initial payment.

With regard to cost, a single commission as 5% of the amount of the premium is the amount that you are paid in the end.

There are of course risks associated with an annuity. The most obvious is that you give control of a big pile of money, and you may not live long enough to collect. You have the opportunity to purchase survivor benefits, but which will reduce your monthly payments. For example, you can arrange you for a beneficiary to receive money if you have not started to receive payments, or to continue to receive payments for a certain period of time.

And then there is the question of inflation. You can also buy an option that will allow your payments to a certain percentage each year, but yet again, it will cost. (There is also a feature in which said that if rates rise more than two percentage points within five years of the purchase of the contract, the company will reset your contract to the highest current rate).

And then there is always the question of the financial stability of the insurance company several years in the future. Mr. Blunt noted ratings to triple-A New York of the life of each major rating agencies and said the company 30 billion dollars in reserves of life insurance on people more than 65 years and 5 billion dollars in reserves on individual annuities. And, since the company is a mutual (as opposed to a publicly traded company), he said that he could store as much capital as it necessary since he was not beholden to Wall Street and shareholders.

But what happens if Merck invents the magic pill and we all live up to 105? "Continuous improvement in medicine that allow people to live longer could create losses on our individual Annuity business," he said, "but it would be more than offset by the gains on life insurance higher.". But, he added, if something like that happen, "at a given time, the capacity could be limited."

What is the big reason you would or would not purchase this annuity guaranteed future income?

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Income insurance for the some 80

A relatively new product, called longevity insurance, makes money on these ratings, and you can beat them your position to collect more money. But the point is not to make a macabre bet. Insurance is a way to protect you from running out of money must live you to a ripe old age, but it is in your retirement years in something of a competition with the insurance company.

In its centre, longevity insurance is simply a deferred annuity: give you a pile of money to an insurance company, usually at the time you retire. But guaranteed payments start much later, usually 80 or 85 and for the rest of your life. As with the policies of the owner and other types of insurance, the idea is to waive a smaller amount of money now, for a potentially plu payment later.

While many retirees are reluctant to part with thousands of dollars for a profit, that they can never receive, some baby boomers may decide that is the gamble. Consider this: for a couple of 65 years in good health, there are 50% probability that at least one of them will live up to 92, according to the Society of Actuaries.

Even if you live that long, insurance removes some of the uncertainty of how much you can afford to retire. If you know that you have a guaranteed income stream which will start at the age of 85 years, for example, you may be able to spend a little more aggressive in your portfolio before that date. The idea is to buy enough insurance so that you can maintain your style of life, after payments begin.

"I think that it will be one of the most important investment vehicles for the next decade," said Harold r. Evensky, an independent financial planner in Coral Gables, Florida, who has been critical of annuities in the past. "There is no doubt that a large percentage of the public will face a problem of continuation of their way of life to retirement as daily expenses and inflation erodes their nest egg".

Also that attractive products sounds, at least in theory, there are several warnings. The biggest drawback is obviously that you can never recover your initial premium. Some companies allow your heirs receive all or part of your money, but the addition of these features can double your costs. It may be more cost effective to display the annuity as a pure insurance policy.

"Unlike other annuity products, it has more in common with insurance against fire, said Christopher o. Blunt, an executive vice president at New York life." To operate correctly, you don't want to think of it as an investment. You want to think about the risk of running out of money and how would be devastating, and how much money you will need to put up to take risk off the table. »

In view of the probability, it is less expensive longevity assurance that build, say, a bond portfolio that will produce the same amount of revenue, said experts. It is also much cheaper than buying an immediate annuity, payments begin immediately. It is difficult to generalize, but Jason s. Scott, Director-General of the financial Research Centre motor retired who analysed the longevity insurance, said that retirees might consider cutting about 15 percent of their retirement savings, to purchase insurance.

At the Hartford Financial Services Group, for example, it would cost a 65 year old man $18 425 to the purchase of $1,000 of guaranteed monthly income that begins at the age of 85 years, compared to $23 272 for a woman. It would cost $33 203 to cover the life of the two partners - which is far less than the $ 211,000 they should purchase an immediate annuity. The more you wait to collect revenue, less your premium.

There are risks to consider. Given that your payments do not start for many years, perhaps even decades, inflation can decrease purchasing power of your future payments. Social security, which increases with inflation, will provide partial coverage. But you can pay to purchase a large amount of income, especially if you think that most of your expenses will be vulnerable to inflation, said Mr. Scott financial engines. If you don't expect to receive income for 15 years, you can increase the amount you need from 2 to 3% a year over that period to arrive at a number of corrected for inflation, he added.

Another big issue is the financial stability of specific insurance companies for several years in the future. This is why financial planners suggest buy annuities on the State of several suppliers. A company fail, States have guarantee associations which provide coverage up to certain limits - typically 100 $ to $250 000 - based on the value of your expected pension benefits.

Here is an overview of what types of life insurance are available or coming soon:

This article has been revised to reflect the following correction:

Correction: November 15, 2010

An article in the special section of your money on November 5, on the longevity of insurance, a product that enables people to insure against their retirement capital, describes imprecisely survive the exhaustion that the benefits of a State guarantee association should a failure of the insurance company. The association would provide coverage based on the value of the benefits of pension under the insured; It would not be based on the amount paid for insurance and therefore not necessarily "would pay back the amount that you invested.".

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The Puzzle of retirement investing - economic viewpoint

Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive its benefits to a lump sum that it must manage itself. Ron a lot of choices, but all have consequences. For example, he could put the money in a conservative bond portfolio and by drawing on the principal and the interest of the expenses that he might spend $4,000 per month. If Ron is the case, however, it can if expected to run out of money by the age of 85, including the actuarial tables say there's a 30 per cent chance of achieving. Or he could take down only $3,000 per month. It would be as much to live each month, but his money should last until it reaches 100.

That is likely to be happier now? Dave or Ron?

If this question seems obvious, welcome to the club. Almost everyone seems to prefer the certainty of the pension of Dave Ron complex options.

"" But that's the problem: even if people like Dave that they tend to love them, old-fashioned pension "defined benefit" are a breed endangered. On the other hand, people like Ron - with defined contribution as 401 (k) plans-can transform uncertainty into a guaranteed monthly income stream that reflects the earnings of a traditional pension plan. They may do so by purchasing an annuity - but when offered the chance, almost everyone refuses.

Economists call it the "annuity puzzle." Using standard assumptions, economists have found that buyers of annuities are insured more annual revenue for the rest of their lives, compared to people manage their portfolios. One of the reasons is that those who buy annuities and die at the start end up subsidizing those who die later.

Then, why not more than people buy annuities with their 401 $?

Here is part of the answer: some people think that buying an annuity is a bad deal for their heirs. But that is not true. First of all, a retired may decide to cancel part of a retirement nest egg for bequest, either immediately or at a later date. Second, if a retired to manage his own money, the heirs may face the following possibilities: either they get financially "lucky" and the parent died young, leaving a legacy, or they are financially "unfortunate," which means that the parent lives a long life, and the heirs take the load support. If you have aging parents, you may ask you how much you would be willing to pay to ensure that you never have to find a way to explain to your spouse, or anyone you can be reached, that your mother is moving in.

There are other explanations of the unpopularity of the pension, but I think that the two are particularly important. The first is just buying one can be scary and complicated. Workers are accustomed to having their employers to restrict their series of choices to a few manageable, either in their 401 plans or in their choice of providers of health and life insurance. However, very few 401 (k) offers a specific annuity option that was blessed by the Department of human resources of the company. Shopping for an annuity, with hundreds of thousands of dollars at stake can be difficult, even for an economist.

The second problem is more psychological. Rather visualize an annuity as providing insurance where one lives above 85 or 90, most of the people seem to consider buying an annuity as a bet, which was to live a certain number of years of profitability. But, as the example of Dave and Ron shows, is the decision to self-manage your wealth of retirement is risky.

The more complex and unpredictable risk predicting how long you will live. Even if there is no progress of the medicine in the years to come, according to the Social Security Administration, a man with respect now 65 has almost 20% chance of living to 90, and a woman of that age has almost a third chance. This means that a husband who withdrew when his wife is 65 should include in its plans a chance of a third party that his wife will live for 25 years. (An annuity "joint and survivor" who pays until both members of a couple of die is the only way I know that for those who are not rich with confidence this problem.)

An annuity can also help people with another important decision: when to retire. It is difficult to get an idea of how much money is enough to finance a lifestyle in retirement. But if a lump is translated into a monthly income, it is much easier to determine if you have enough set aside to afford to stop working. If you decide, for example, that you can get about 70% of pre-retirement income, you can simply continue to work until you have accumulated as the level of benefits.

IN the absence of annuities, there is reason to be concerned that many workers is the difficulty with this decision. Over the past 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years of 66.9 to 61.6. Of course, there is nothing wrong with choosing to withdraw a little earlier, but during the same period, life expectancy increased by four years and will likely continue to climb, which means that pensioners have to finance at least another nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Rents some of these issues can make it easier to resolve, but few Americans actually choose to buy. If the cause is a perhaps rational fear of the viability of insurance companies, or false ideas about whether pensions increase rather that decrease the risk, the market has not understood how to sell these products successfully. Is there a role for Government? Listen next time for some thoughts on this issue.

Richard h. Thaler is a Professor of Economics and science of behaviour at the Booth School of Business, at the University of Chicago. He is also a school counsellor Allianz Global Investors Center for behavioural Finance, part of Allianz, which sells financial products, including annuities. The company has not consulted for this column.

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Beyond the Longevity Tables

AppId is over the quota

Lorsque les marchés financiers ont commencé à chuter il y a deux ans, de nombreux retraités face à la très réelle perspective de survivre à l'épuisement leur argent.

Comme solution, plusieurs chercheurs universitaires réclamaient depuis longtemps « rentes à vie fixe »: des véhicules d'investissement qui paient un ensemble montant chaque année jusqu'à ce que l'investisseur — ou, parfois, un conjoint — meurt.

Ces rentes sont à ne pas confondre avec une gamme d'autres produits avec « rente » dans leurs noms, y compris de nombreuses rentes vaguement comme « variables » connus. La plupart de ces autres produits ne traite directement les risques des retraités de survivre à l'épuisement leur argent. Ces véhicules a aussi généralement exactement des frais plus élevés. Seule une infime minorité des produits vendus comme des rentes aux États-Unis sont de la variété « fixe la vie », bénéficiant de ce label académique.

Imaginez une femme célibataire de 65 ans, qui a simplement pris sa retraite avec 100 000 $ dans son portefeuille de retraite. Selon les tables actuarielles de l'Administration de la sécurité sociale, elle peut s'attendre à vivre encore 20 ans. Si elle voulait verrouiller un retour pour cette période en investissant ses 100 000 $ dans des titres du Trésor des échéances appropriées, elle pourrait passer de 578 $ par mois (6 941 $ par an) pour les 20 prochaines années, selon les calculs effectués pour dimanche entreprise par Jeffrey r. Brown, professeur de finance à l'Université de l'Illinois à Urbana-Champaign.

Les chiffres sont fondées sur la vigueur Trésor donne au début d'octobre.

Après 20 ans, elle n'aurait aucun argent à gauche. Mais il y a une probabilité importante qu'elle vivra pendant plusieurs années supplémentaires. En fait, il y a une chance d'un à trois, qu'une femme âgée de 65 ans aujourd'hui vivront jusqu'à au moins 90 — ou cinq ou plus ans de plus que la moyenne de l'actuariat.

Rentes à vie fixe adresse ce qu'on appelle espérance. Si cette même femme achète une rente fixe de 100 000 $ aujourd'hui, elle pourrait bloquer non seulement un rendement plus élevé (619 $ par mois, ou 7 428 $ par année) mais aussi le fait garantie jusqu'à la mort — n'importe combien de temps elle a vécu, selon les calculs de AnnuityShopper.com.

Acheter des titres du Trésor de l'échéance requise est l'une des nombreuses solutions de rechange possibles pour une rente fixe. Mais dans les simulations réalisées par le professeur Brown, rentes à vie fixe régulièrement sont sorti avant d'approches alternatives. (Il a rapporté ces simulations en 2007 dans un document de travail du National Bureau of Economic Research.)

Pour parvenir à des gains plus élevés que ceux d'une rente viagère fixe, un investisseur pourrait essayez de mettre une partie d'un portefeuille de retraite dans les stocks ou d'autres actifs plus risqués, selon James Poterba, professeur d'économie au M.I.T. et président de la National Bureau of Economic Research. Mais la partie plus risquée n'aurait pas également la garantie que les fixe de vie offrent des rentes.

« Bien que le portefeuille des actifs plus risqués peuvent offre plus élevée devrait renvoie, que le marché ours illustre amplement qu'il apporte également le risque de pertes importantes et leurs conséquences malheureuses associés, » il a écrit dans un message électronique.

(Professeur Poterba sert au Conseil d'administration du fonds en actions retraite College et professeur Brown au Conseil d'administration de l'Association de la rente, qui vendent des rentes, parmi d'autres produits financiers et d'assurance enseignants).

Avantages des rentes à vie fixe sont reconnues depuis longtemps par un consensus des chercheurs universitaires. En fait, c'est un des rares cas dans lesquels ils prennent une vue plus sympathique d'un produit d'investissement que la plupart des investisseurs. La fin Franco Modigliani, le gagnant de prix Nobel en sciences économiques en 1985, de son discours d'acceptation consacre même à se demander pourquoi les rentes ne sont pas plus populaires.

Rentes à vie fixe sont adhérents à l'extérieur du milieu universitaire ainsi. Harold Evensky, président d'Evensky & Katz Wealth Management à Coral Gables, en Floride, une taxe uniquement financière planification entreprise, dit « Il n'y a aucune réelle alternative à la gestion du risque de longévité ».

Il est important de magasiner lorsqu'on envisage une rente, a déclaré le professeur Poterba, parce que le taux de recouvrement peuvent varier énormément. Tenir compte de la gamme des taux d'entreprises offrant actuellement l'hypothétique femme de 65 ans avec 100 000 $ à investir. Selon AnnuityShopper.com, ces varient de $594 à 619 $ par mois — équivalent à 7 128 $ pour 7 428 $ par année. M. Evensky a ajouté que, parce qu'un investisseur dépend de rente pendant de nombreuses années, il est important d'acheter des sociétés hautement cotées et, peut-être, à se diversifier en achetant plusieurs petites rentes sur l'état de différentes entreprises.

Investisseurs peuvent également trouver utile de consulter un planificateur de retraite, parce que les calculs nécessaires pour déterminer si un taux de recouvrement de pension est équitable peuvent être assez complexes.

Une caractéristique de rentes à vie fixe peut-être réduire leur attrait dès maintenant : places payées sont liées à des rendements obligataires, particulièrement ceux sur les obligations d'État — et les rendements sont très faibles. Gains faibles pourraient s'avérer une grande déception aux retraités en tenant compte des rentes après avoir subi de grandes pertes dans la crise financière.

Mais le professeur Brown dit investisseurs qui ont au moins plusieurs années loin de la retraite peuvent se prémunir contre les taux de versement de rente faible en augmentant progressivement les attributions de titres à revenu fixe dans leurs portefeuilles qu'ils obtiennent plus proches de la retraite. Et si les taux d'intérêt sont anormalement faibles lorsqu'ils sont prêts à acheter une rente, il fait remarquer, la partie de la liaison de leurs portefeuilles seront proportionnellement plus — leur permettant d'acheter une rente plus grande.

Cette couverture existe seulement pour ceux qui ont commencé, bien à l'avance de la retraite, de planifier comment ils convertiront éventuellement au moins une partie de leurs portefeuilles en un flux de revenu. En conséquence, le professeur Brown a conclu, « peut-être les meilleurs investisseurs leçon peuvent tirer le marché ours — tous deux concernant la retraite en général et des rentes en particulier — ne doit ne pas attendre jusqu'à ce qu'il est trop tard pour commencer cette planification. »

Mark Hulbert est rédacteur en chef de The Hulbert Financial Digest, un service de MarketWatch. Courriel : strategy@nytimes.com.

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With a gift annuity, which comes with a rate of return

Is this? Or is there a catch? The answer to these two questions is not. But the issues are simplistic.

Better ask yourself the question: "I want to support charity?" and "is a gift annuity choice for me." If you answer with a Yes, then you need to assess your finances and understand what are the charitable gift annuities, and how they work.

"Some people assume it is as a bank account," said Avery e. Neumark, a retirement expert and a partner in the accounting firm Rosen Seymour Shapss Martin & Company New York. "But it is not." It's just what the name — a gift. You give is the main, and you get a guaranteed lifetime income. You cannot compare with the rate of monetary market of today. The disadvantage is that you are locked in. »

Rates, which further annual inflation rates now exceed 1.1 per cent, may seem low years now if inflation heats up.

To be a wise choice, said Mr. Neumark, persons must generally approaching retirement and charitably inclined, have liquid assets, and other income and other needs is supported. "I had a client who did very well," he said. "He was 90 years, the rate was very high, and he has lived up to what he was 103".

The American Council on gift annuities defines the product as a contract under which a charitable organization, in exchange for a donation of money or property, undertakes to pay a fixed term one or two lives, usually donors '. Most reputable charitable organizations use the rates recommended by the Council, that vary according to the age of the annuitants and if there is one or two. Because of the charity, there are tax benefits.

For a simple life, the last rate table called for a 55 years old receive 5% a year, a 60 years 5.2 percent, a 5.5% 65, 70 years 5.8 per cent, an 80-year-old 7.2% and someone 90 or more 9.5 per cent.

Potential donors can calculate their own rates and tax benefits on the Web site: pcalc.ptec.com/hosts/989357365/CGA. For a donation of $100 000 covering a person 65 years and another aged 62 annuity calculator site showed an immediate tax deduction of $12,179.50 and an annual annuity of $5,000. Of the latter, $3,326.53 would be non-taxable because it represented a return of principal and $ 1,673.47 would be taxed as ordinary income.

After 26.4 years, common life expectancy, all payments would be taxed as ordinary income.

Conrad Teitell, a lawyer in Stamford, Connecticut, who represents the Council and a number of leading charities, said donors could donate appreciated assets and avoid the immediate payment of capital gains tax. The gain is calculated pro rata per year in the life expectancy of the donor, and the taxable portion of the pension payment is divided into ordinary income and capital gains.

Donors do not have to begin to take immediate, annuity payments he said; they can defer payments for a year or more. Which can be a good option for people who work and in a high tax bracket, but planning to retire in a year or so.

Some States require charities to meet the criteria, including the initial registration, notification and annual filing, sponsor of charitable gift annuities. Others are silent. Many are somewhere between the two. Mr. Teitell advises potential donors to check their own States to the American Council on the pension gift (www.acga-web.org/regs/regsoverview.html) Web site.

If the State of origin does not charities require to meet all the criteria, see if a charitable organization is authorized to offer annuities in a stricter State and ensure its financial soundness of the Better Business Bureau (www.bbb.org/us/charity) and Charity Navigator (www.)(CharityNavigator.org).

A healthy approach is not to engage with a charity that does not meet the standards of a more severe State, because pensions are a general obligation of the charity. Although the failure to meet the obligation is rare, some charitable organizations accept reinsurance, a useful to discuss with a potential beneficiary question.

Paul Horrocks, Vice President of the New York Life Insurance Company, which sells individual annuity policies and works also with organizations of charity on gift annuities, said donors could "accomplish the same thing in two ways," a charitable gift annuity that could pay 5% or by dividing the amount in a pure and simple gift of charity and a commercial annuity that would pay about 7%.

Don Greene, Executive national Bank of America Merrill Lynch philanthropic products, promotes charitable gift annuities. They are a means for "donors of bottom-end" to enter the world of "structured philanthropy", said, and "they offer tax benefits and a consistent level of support to a spouse."

The gift is irrevocable, he added, but a person who is committed to charity, by including a bequest in it, for example, might will want to examine a gift rather annuity and enjoy gift in life.

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Charity bankruptcy leaves many donors in distress

A story building for donors which came in two, long-term arrangements gives - annuities of charitable donation and donor funds - emerged from the bankruptcy court.

Skip to the next paragraph Andrew Councill for the New York Timescreditors takeKenneth M. Misken, who represented the Committee of creditors of the bankruptcy of the National Heritage Foundation.

The National Heritage Foundation, 9 000 - donor invested 25 million dollars in value have been erased under a restructuring plan approved on 16 October by the bankruptcy court Federal District is Virginia, in Alexandria. Money from the Fund was used in part to make lump sum payments of 107 people with pension charitable foundation, which filed for protection in bankruptcy in January.

People working in charities and Philanthropy experts say that the National Heritage Foundation is a flap, rather than a sign of a basic problem in the sector. But even this rare event raises the possibility that in the weakness of the economy, of similar cases could follow.

However, the outcome of the case highlights a legal reality that some donors prefer when they contribute to such funds: once given, the money belongs to the Organization of reception and it is not always clear what it can do with the funds.

"In approving the use of donor funds to pay creditors, the Court found that they were the property of the estate in bankruptcy," said Kenneth M. Misken, a lawyer with McGuireWoods in McLean, Virginia, representing the Committee of seven members of the creditors who negotiated the plan.

On the other hand, charitable gift annuities are a responsibility, because in exchange for a donation, non-profit promises to pay a fixed amount of money each year for the donor and perhaps the surviving spouse for the rest of his life.

Richard l. Fox, a lawyer with Dilworth Paxson in Philadelphia and author of "charitable giving: taxation, planning, and strategies" (Thomson Reuters, 2008), said the conclusion of the Court was unfair to donors, adding, "I don't think any ever proposed donor if charity does something screw up its finances that the donor funds will be invaded.

Of course, many other funds donor contributors suffered recently, then that account values collapsed. When this occurs, or a fund goes bust, the recipient charity organizations lose and the intention of the donor is upset.

Jane Wilton, General Counsel of the New York Community Trust, one of the largest community foundations in the country, the organization said discourage donors who regularly add money to the accounts and to make grants, rather than money to accumulate, take market risks. Many funds donor, contributors may recommend a variety of approaches to investment.

To configure an account to fund the donor, contributors donate irrevocably to the charity which offers the program - which may be affiliated with a University, the religious organization or financial institution - and can claim a deduction of the income tax. After the donation, contributors can make recommendations which charities should receive subsidies on the account, and charity sponsor typically honor their wishes. But it is not required to.

Maurice and Theresa Townsley of Monterey, California, donated money and assets totaling $ 1.2 million to an account with the foundation of the National Heritage. They later learned that the Foundation has committed most of their donations as security for a bank loan before the bankruptcy. With the approval of the Court, the Foundation has applied these funds to repay the loan in September.

The Townsleys, which has not responded to requests repeated comments and eight other donors have each filed another case, accusing the Foundation to mislead their donations to make. The Court has not yet ruled on this issue. When the filing of the Foundation for the protection of the bankruptcy, approximately 200 people with the donor funds in accounts filed claims; all were rejected except for the nine false assertion.

The Foundation describes itself as providing various support services for donors and on its website (www.nhf.org), said that it "has become the standard Fund donor." However, Kim Wright-Violich, President of the Charity Fund, Schwab said, the Foundation has a long history of clashes with the Internal Revenue Service and the practices which was subsequently banned by the 2006 Pension Protection Act.

Jan h. Ridgely, vice President of the Foundation and the daughter of its founder and Chief Executive, j. t. Houk II, said what happened to the donors was "tragic and inevitable," caused by a judgment of $ 6.2 million awarded to a Texas family who became then a creditor. The Board of directors includes his mother, Marian and her brother, John t. Houk III.

With shrunken endowments, charities seek to strengthen strongly giving marketing gift annuities, focusing on the flow of income they offer. Most of the charities of base their payments on the suggested maximum rate the American Council on gift (available at www.acga-web.org) pension. These are lower than those of the annuities of commercial insurance companies because the factor of annuity gift in the hypothesis that, when the donor dies charity receive about 50 per cent of the initial value of the amount transferred.

Many people holding these assets is retired. For example, the Federation of the UJA of New York has approximately 900 pensioners whose average age is 78, said William Samers, Vice President of the Organization to give and planned allocations. But it warned the donors in purchases of annuity gift that these investments are not a certainty. They are backed by the assets of the charity, and if the Endowment Fund dries, or the Organization stops, payments will stop. In a case of bankruptcy, the owner of the pension becomes an unsecured creditor.

"More Articles by giving" a version of this article appeared in print on November 12, 2009 page F2 of the New York Edition.

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A.I.G. units omit name and Excel

A few months after the eloquent "A.I.G." of its sales, the company brochures a ahead of its competitors and recovered a title he held for many years before its rescue plan - the top vendor of fixed annuities for clients of the Bank.

People who buy annuities in the branches of the Bank may be surprised to know that they are signing with A.I.G. Contracts are available under the names of two subsidiaries, Western national life and a first. Until last June, they carried the name of A.I.G. annuity.

Annuity booming sales are a bright spot of American International Group, which must raise funds to repay the Federal Government.

But some competitors and consumer advocates are questioning on return of A.I.G., saying that its ability to keep federal money drawing gives an unfair advantage of any just one year after its Government rescue.

Often sold as alternatives to the certificates of deposit, fixed annuities are insurance contracts guaranteeing a fixed rate of return, unlike variable annuities, which yields may follow the ups and downs of the markets.

People buy banks tend to be you are looking for something safe, but who pays more than a certificate of deposit. Contracts of fixed annuity usually run for many years, and even before the A.I.G. rescue plan last year, customers began to have qualms about stopping their money with a company whose future was uncertain.

After the rescue, they have accelerated their withdrawal of A.I.G., even if they had to pay a penalty to retrieve their money. Most of the new buyers were looking for other insurers, such as Transamerica and the life of New York, which had higher ratings and who has not received assistance through the Troubled Asset Relief Program.

But since June and the name change, the A.I.G. subsidiaries were upsetting in their own way to the top. In the third quarter, Western National more fixed annuities in the banks than any other insurer, according to Kehrer-Limra sold, research and consultancy following sales of insurance and investment products in banks.

The life of New York, who had claimed the head of the first half of this year, has now spin-off third and Transamerica is fourth. Other former contenders, such as Genworth and MetLife, are not in the top five more.

Although fixed annuities can provide their transmitter much money quickly, such as bank deposits, they can also erode capital an insurer more quickly than sales of other types of insurance. This is because they need the company to set aside large reserves at the outset.

This can pose risks are not only theoretical. Another A.I.G. - a subsidiary that the Federal Reserve Bank of New York has recently taken a 9 billion stake in - sold such a large volume of fixed annuities by Japanese banks that it wound up with insufficient capital to support its activities.

Mark Herr, a spokesman for A.I.G., said that the unit, the American Life Insurance Company, has restored its capital by the transfer of the risks "with the co-payment and co-insurance amended," among other techniques. He said that the problem had not reoffended since 2007.

Normally, only the insurers pools tend to strongly promote fixed annuities, in order to avoid their resources too thin elongation.

But it is not normally. National Western is one of a dozen of A.I.G. subsidiaries of insurance whose investment portfolios were dipped in by A.I.G. ready of securities - business affiliate which brought together more than 80 billion dollars of assets of insurers and loaned to the banks and Wall Street, to be used in trade.

The program titles imploded. Sharing of Western National loss was $ 7.9 billion, and the company has been modernised under the Federal rescue of A.I.G.

Joseph M. Belth, editor of the Forum insurance, a newsletter focused on consumers that tracks the financial strength of insurance companies, which said at least, buyers have the right to know the extent to which A.I.G., the parent, was standing behind the rents of its subsidiaries. Only subsidiaries are monitored to ensure stands enough money behind their promises.

Competitors stated that they believed that national Western was using Treasury money to finance some of the teaser rates higher in the industry.

"Some insurers sell annuities at rates that give to think they are either build more risk in the investment portfolio that it would be prudent, or using as a way to raise funds, perhaps to pay off other obligations," said Gary e. Wendlandt, Chief investment officer and vice President of New York life.

Judith Alexander, research of the tag, following the terms of annuity, confirmed that Western National offers among the most "bonus rate" on fixed annuities by the banks, allowing customers to capture more than 5% for a year, but she said that it also offered the lowest guaranteed contracts, in the neighbourhood of 2.6%, over a longer period.

The head of the Western national Executive, Bruce r. Abrams, said customers were opting for the longer terms.

"We are not selling many product bonus-rate", he said. "It is the multiannual guarantee rate." This is what clients are looking for, and that is what we are going to sell. »

He also cited relationships of long standing of the National Western with banks, it has enabled the company negotiate individual terms with banks each week, giving them a degree high flexibility. For example, he said, if a bank wants to attract the attention of customers by offering them higher than those proposed National Western interest, Western National may arrange for them to do so by compensating the cost with a smaller commission. The Bank would try to make a difference on the volume.

"It is unique," he said. "We have been so for more than 15 years."

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A proposal to pay aid for the elderly

Any retirement planning must answer an impossible question: how long will live? If you overestimate your longevity, you can try unnecessarily. If you underestimate, you survive your savings.

It is not really a new problem - and yet, not a single financial product offers a satisfactory solution to this risk.

We believe that a new product - an issued by the Federal Government, pension adjusted for inflation - would allow people to deal with this problem, with the bonus to contribute to public funds. In doing good for individuals, the Federal Government could do well for itself.

The insurance industry sells an annuity of corrected for inflation which is part of the way to help people cope with the possibility of survive outliving their savings. In your years of work or retirement, you pay a premium to an insurance company in exchange for the promise that the company pay you a fixed annual income, adjusted for inflation, until you will die.

But in a world in which A.I.G. had an excellent rating, only a few days before it becomes a ward of the State, how someone - especially a teenager - know certainly insurance companies will be solvent of a half-century from now? Annuities are not guaranteed by the Federal Government. The sole reinforcement is systems based on the State and current protection limits are sometimes small. If an insurance company goes as, retirees may end up with nothing close to what has been promised.

The Federal Government can provide a product that solves this problem. People would no risk of default than that associated with the bonds and other obligations, supported by the United States.

Here's how it would work. Initially, the people who wanted to buy this insurance would be register through retirement savings plans already available to the public, such as a 401 plan called and could choose the annuity option instead of, or in addition, investments in shares, bonds or mutual funds.

How many payments would be may be based on a variety of factors, including government bonds interest rates; tables of mortality which, among other things, take into account that healthier people are more likely to buy annuities; and administrative costs. This new product will cost the Government a penny. In fact, the Treasury would be advantageous. It's only an additional move beyond bonds adjusted for inflation, which has already been by the Treasury. By allowing the Government take advantage of a new class of investors, the cost of borrowing on the whole Government would probably fall.

In addition, expanding the Government the basis of domestic investors, the plan would allow improper address on foreign lenders, who have today nearly half of all federal debts - about 10 times the proportion in 1970. It is true that the Government would be on the hook a technological breakthrough has caused an unexpected increase in life expectancy. But it is a risk that the Government is on already implicitly: i.e., a fairly dramatic increase could threaten the solvency of issuers private annuities and many pensioners who do not have pensions, creating pressure for the rescue of the Government of the insurers or individuals. Taking explicitly on the risk and the fair cost of this risk of price in annuities are a far better way.

There is also the fear that annuities issued by the Government would displace private annuity sales. On the contrary: they might stimulate growth in private pensions. Because the monthly payments adjusted for inflation on these annuities without risk would be low, many retirees may choose to supplement with more risky annuities, highest.

In addition, insurance companies could be authorized to pack annuities issued by the Government with their own products, create attractive combinations that mix of security and the potential for higher yields.

Our proposal is a winner for everyone. The Treasury could reduce borrowing costs and diversify its investors base while acknowledging and budgeting for the risk that it is already. Individuals could eliminate the risk of living too long. Looking at the promised rates of return on the pension, people will have a better sense of how much they need to save. Eunice Sanborns in the world, and all taxpayers, would rest a little easier at night.

Henry t. c. Hu is Professor at the University of Texas School of Law. Terrance Odean is Professor of finance at the University of California at Berkeley.

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Podcast: The woes of Job, Pet Boom and annuity Puzzle

The economic recovery from the shock of the financial crisis was never that strong, but the monthly report of the Ministry of labour on the employment and unemployment painted a picture of an economy that may be hard even to maintain its growth.

Catherine Rampell, which covers the economy for the Times, says in the weekend podcast new business that the number of farm jobs created in the United States in may - only 54 000 - was much less than most economists had predicted. The unemployment rate moved in the wrong direction, too - upward, to 9.1% from 9%. And jobs has declined for the first time in seven months. There is little in this report to cheer on, although it is possible that some problems were temporary, from factors such as bad weather and the effects of the earthquake, tsunami and disaster Japan persistent global supply chain.

In a separate conversation on the podcast, David Gillen speaks of Andrew Martin on a sector of the economy which was almost recession-proof: the company pet. As written on the cover of the Sunday of Mr. Martin company, for human Palace pet food have been proliferating and animals "parents", as the industry calls, often brought treats on their cats and dogs even when they have cut back on spending for themselves.

I spoke to Richard Thaler, behavioral Economist at the University of Chicago, on what he calls "the Enigma of the pension" - the unpopularity of pension despite their economic benefits. Traditional pensions are a form of pension, but as most working people move to defined benefit plans such as 401 (k), they are confronted with a whole confusing options at retirement. He wrote in the column from an economic perspective in Sunday business that few of them have been purchasing annuities on the same State if it is in their interest to do so. The reasons appear to be more psychological in nature than a question of pure financial calculation.

In a conversation with Phyllis Korkki, I describe other behavioural dilemma, which is the subject of my column of strategies Sunday Business. It is from "the commercial paradox,"the propensity of many investors to fair trade, regretting some of these trades while feeling unable to do anything about it."" A new study by Barclays wealth highlights these internal conflicts. Because it is associated with the underperformance of frequent market trade, curb this behavior might be helpful. Much like too eat or game, however, for some people often Exchange is not easily corrected.

You can find specific segments of the podcast at these times: economic prospects (priesthood); news summaries (21: 33); the company pet (17: 39); annuities (12: 53); compulsive trading (6: 02); the week ahead (1: 56).

Articles discussed in the podcast are published over the weekend, links are added to this position.

You can download the program you use by the New York Times of the podcast page or iTunes directly.

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New Treasury Rules Ease Purchase of Annuity With 401(k)

AppId is over the quota
AppId is over the quota
It is one of the biggest conundrums of an aging society: Americans have salted away $11 trillion in retirement plans, yet millions still risk running out of money in old age.

On Thursday the government said it had some new tools to deal with the problem. The Treasury issued several new regulations intended to make it easier, and maybe cheaper, for middle-class people in retirement to transfer the money they accumulated in their 401(k)s into an annuity that would guarantee monthly payments until they die.

“Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security,” said Treasury Secretary Timothy F. Geithner.

The Labor Department also said it had completed rules to let workers learn about the fees various financial firms charge for helping to run 401(k) plans. Labor officials said they thought employers could negotiate better terms if the details were more easily available.

The risk of outliving one’s assets has moved front and center in recent years, as companies have frozen or ended their traditional, defined-benefit pension plans and replaced them with 401(k) plans. Traditional pension plans offer what is, in fact, an annuity, a stream of guaranteed payments from retirement to death. But fewer and fewer employers want to be running an annuity business on the side.

Insurance companies, on the other hand, are eager to wade into what they consider a big and attractive market of graying Americans with I.R.A. and 401(k) balances and little idea of what to do with them. But they have held back, in part, because of tax rules, which Treasury is easing.

One of the changes proposed Thursday would make it easier for employers to work with annuity providers, so that workers can learn about their annuity options at work, rather than having to go to a financial planner or broker.

“I’m trying not to jump up and down in my office, actually,” said Jody Strakosch, national director of annuities for MetLife, who was asked about the new rules while she was reading the 47-page tome from Treasury.

She said MetLife had had suitable annuity contracts available since 2004, but had been selling them mostly to the retail market and not to employers who offer retirement savings plans.

J. Mark Iwry, an official at the Treasury department, said the department hoped in particular to foster a workplace market for “longevity insurance,” something much discussed in policy circles but that employers rarely make available to workers when they retire.

Longevity insurance consists of an annuity whose stream of payments does not start until the retiree is well into retirement — say, 80 or 85 years old. That is the point where policy makers think many will need the money, because they will have exhausted their savings or developed costly health problems. The insurance would kick in and supplement Social Security. Like Social Security, the longevity insurance payments would keep coming every month until the retiree’s death. But because the policy would pay nothing in the first 15 to 20 years of a person’s retirement, it would cost much less than a conventional annuity.

A white paper by the Council of Economic Advisors estimated, for example, that a 65-year-old would have to pay $277,500 for a $20,000-a-year annuity that started immediately, but only $35,200 for one that started at age 85.

With a price so much lower than a conventional annuity, employees would be able to buy longevity insurance to cover their riskiest years with just a portion of their 401(k) account balance.

Most employers that offer annuities give retiring workers an either-or choice: the whole balance as a big check, or the whole thing to buy an annuity. Tax rules make it complicated to calculate the values if the amount is split, so those rules are being relaxed.

When the federal employees’ Thrift Savings Plan let people spend just part of their balance on longevity insurance, there was an increase in participation.

“They found a dramatic pickup in the number of people who were able to take a partial annuity,” said Ms. Strakosch. (MetLife provides the Thrift Savings Plan’s annuities.)

The Treasury also capped the maximum amount of retirement plan money that could be spent on longevity insurance at 25 percent of the account balance, up to $100,000. Mr. Iwry said that would keep high earners from improperly sheltering money, and minimize any effect of the changes on federal tax revenue.

Treasury is also changing the way of calculating required minimum distributions — the amounts that people over 70 are required to withdraw from their 401(k) plans every year. The new method would exclude any money that went to an insurance company to buy longevity insurance or an annuity.

Some of the rules take effect immediately; other changes are in the public comment period.

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Variable Annuities Offer Higher Income, at a Cost

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AppId is over the quota

Rates on annuities — periodic payments for life by insurance companies to investors who have made regular or lump-sum contributions — are close to the lowest on record, just as bond and bank deposit rates are, financial planners point out.

At first glance, annuity rates do not seem so miserly. A woman, 65 and living in New York, for instance, can receive 7.1 percent a year, according to the Web site ImmediateAnnuities.com. That may sound like a decent amount, but the money used to finance an annuity is forfeited to the insurer, so much of the 7.1 percent amounts to a return of capital.

Investors looking for higher income, or at least the possibility of it, often turn to variable annuities, which invest in mutual funds and provide returns tied to those in financial markets. With stocks showing performance for the last decade that is modest or worse, and often volatile, variable annuities might have lost some appeal, planners say, so insurers have sold versions with enhancements like guaranteed minimum income rates or payments for nursing home stays.

Variable annuities, with or without these so-called riders, could meet the needs of some people in or near retirement, planners contend. They warn, however, that the vehicles tend to be complicated and expensive and may be best avoided.

Variable annuities “offer lots of good funds,” said Christopher Cordaro, chief investment officer of RegentAtlantic Capital in Chatham, N.J., “but they tend to be overloaded with fees and very opaque, so it’s difficult to pull them apart and figure out what you’re paying for.”

Much of the complexity and added cost stem from the riders. A typical income rider might offer the return on a stock index or a fixed percentage, typically 4 or 5 percent these days, whichever is greater — but with an asterisk.

When it comes time to draw income on some of these annuities, Mr. Cordaro cautioned, the amount that the investment would be worth under the guarantee cannot be cashed out or used to buy a fixed annuity at a market rate. It can only be converted to income at rates that would provide a total return, over the life of the annuity, below what would have been available through conventional annuities.

“You can get a stream of income, but not the pot of money they said this grew to be,” he said. “If you really do the math on these, the guarantees aren’t worth what you’re paying for them. Insurance companies tend to make a lot of money off these things.”

Not just on the fancy ones, either. The average bare-bones variable annuity has fees totaling 2.5 percentage points a year, according to Morningstar. (Payment rates quoted by insurance companies and specialist Web sites are net of fees and represent amounts paid to investors.)

John McCarthy at Morningstar says that, on average, 1.5 points of the fees are accounted for by the death benefit that the typical variable annuity calls for if death occurs in the period that contributions are being made. The other point covers the cost of managing the investment funds in the annuity.

Other features mean additional charges. Todd Pack, president of Financial Advisers of America, a firm in Carlsbad, Calif., said that income riders cost 0.6 percentage points and up a year.

There are also annual charges for the bonuses that are often included to persuade investors to transfer from one annuity to another, Mr. Pack noted. He generally considers these bonuses a bad value, and he is no fan of nursing home riders, either.

“They tend to be very restrictive,” he observed. They kick in only after the annuity has been owned for several years, he said, or after the holder has been in a nursing home for many months.

Roman Ciosek, a managing director of HighTower, a Chicago financial advice firm, treats variable annuities with great circumspection, as his peers do, but he considers the rates available in some income riders attractive.

“Because rates are so low” on fixed-rate alternatives, “these annuities are more attractive,” Mr. Ciosek said. He added that he expected insurers to begin lowering rates in income riders, so he advised anyone interested in such an annuity to think about buying it sooner rather than later.

He suggested, however, that investors who would not need their money for at least several years might park it in a retirement account and buy term life insurance. That is a way to obtain the main features of a variable annuity at lower cost and with little added risk, in his view.

Mr. Cordaro recommended keeping a balanced portfolio of stocks and bonds and selling enough stocks each year to buy a no-frills, fixed-rate annuity with 5 percent of total assets. Each one should be with a different insurer because annuities are not federally insured and state authorities provide only limited protection for policyholders, he explained.

This gradual approach will also help avoid investment of a disproportionate amount during periods of very low rates. Because this is one such period, Mr. Cordaro would not be in a hurry to carry out his strategy. “If I knew that interest rates were going up in two or three years, which is probably a good bet,” he said, “I might want to hold off doing it.”

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When the Wait for Social Security Checks Is Worth It

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AppId is over the quota

This description oversimplifies things, of course. Social Security, as it’s currently constituted, is refreshingly straightforward but you do have to make one important choice, and many people could make their lives after retirement better if they chose differently.

As I discussed in a previous column, most economists and financial advisers say that in retirement, Americans would do well to increase the proportion of their wealth that pays a guaranteed income for life, much as Social Security does. The technical word for the financial instrument that accomplishes this feat is an annuity.

Traditional pensions are a form of annuity, and people who have them usually seem to love them. What’s odd is that people with retirement plans like 401(k)’s generally do not buy annuities, even though annuities would simplify and stabilize their financial lives. Economists call this state of affairs the annuity puzzle.

Several readers wrote to explain why they did not own (or recommend) annuities. Three major worries stood out:

¶Most annuities are not inflation protected, so what happens if high inflation returns?

¶How can a buyer be sure that the company selling the annuity will be able to make the payments 20 or 30 years from now?

¶Annuities can be complicated and are sometimes sold with large fees. How can buyers know whether they are getting a good deal?

All of these concerns are legitimate. I wish I had found a simple recipe to solve all of these problems, but they are tough ones. Still, the federal government could help matters. For example, it might create rules to encourage more employers to offer safe and fairly priced annuities within their 401(k) plans. There is interest in Washington in doing this, but the details are tricky. Employers would like a clear-cut rule absolving them from the responsibility of choosing an annuity provider, say, by granting a safe harbor if the insurance company has a satisfactory credit rating, but given the recent track record of rating agencies, this particular rule is unlikely to be adopted.

In light of these difficulties, let’s focus on the one source of annuities that is fully inflation protected, is fairly priced, and, because it is run by the government, is reasonably safe: Social Security benefits. Claiming that Social Security benefits are safe may sound naïve, but my view is actually quite cynical. I believe that as long as the elderly continue to vote in large numbers, no Congress will renege on promised payouts for those already eligible to receive benefits.

Of course, the system has to be tweaked to keep it self-sufficient, but economists of every stripe agree that this is a relatively easy fix, unlike, say, trimming the rising cost of Medicare. The fix might trim benefits in some way, perhaps through a less generous indexing formula, but I believe that anyone already eligible to claim benefits can safely count on getting them.

If you think this premise is preposterous, stop reading here, and complain to your representatives in Congress. (While you’re at it, you might also tell them to get the debt ceiling raised, or better yet, simply eliminate it, so we do not frighten people into thinking we would actually default on our debts, even to ourselves.)

So here is a bit of good news. There is a simple, easy way to convert a portion of your wealth into a fairly priced, inflation-adjusted annuity. Simply delay when you start receiving Social Security benefits.

Participants are first eligible to start claiming benefits at age 62. For those who wait, the monthly payments increase in an actuarially fair manner until age 70. The claiming formula is designed to make the economic value of the stream of benefits the same, regardless of when you start. The longer you wait, the greater your monthly benefits when you start getting checks, because you will not receive them for as long a period. If you wait from 62 to 66 to start, your payments go up by at least a third, and if you wait all the way until 70 to start claiming, your benefits go up by at least 75 percent. (I say “at least” because if you delay claiming and keep working it is possible that you can qualify for an even higher benefit level.)

With these rules, waiting is the cheapest way to buy more annuity coverage. However, few take advantage of this opportunity. Currently, about 46 percent of participants begin claiming at 62, the first year in which they are eligible, the government says. Less than 5 percent of participants delay past age 66. This is unfortunate. If you are in good health and you can afford to wait, my advice is that you should wait as long as possible. The greater is your guaranteed lifetime income, the easier it will be to organize your retirement budget, and the less you will worry about living “too long.”

The Social Security Administration could take some steps to encourage people to delay. First, change some confusing terminology. For historical reasons, Social Security labels an intermediate age between 62 and 70 as the “Full (normal) Retirement Age.” Yes, the parenthetical “normal” is part of the official language. The age had traditionally been 65, but it is slowly being raised to age 67. For anyone born between 1943 and 1954, for example, the age is set at 66.

Let’s get rid of this awkward and misleading term. Benefits at that age are not “full” and retiring at that age is not “normal.” Research shows that the designation of a full retirement age can serve as an anchor that influences people’s choices, and may help explain why so few people delay claiming past age 66.

THERE is a bolder step that could make additional Social Security benefits available for many people. Pamela Perun of the Aspen Institute suggests that participants be able to “top up” their Social Security benefits. Participants could buy up to $100,000 in additional annuity benefits by sending a check to the Social Security Administration. The $100,000 cap is arbitrary, but the idea behind having a cap is to leave the high-end market to the private sector. Payments would just be added to the usual Social Security check, so the administrative costs would be small.

These reforms will not solve everyone’s problems, but they would make household budgeting easier and less worrisome. With baby boomers starting to reach retirement age, now is a great time to take these steps.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He is also an academic adviser to the Allianz Global Investors Center for Behavioral Finance, a part of Allianz, which sells financial products including annuities. The company was not consulted for this column.

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Activist’s Undercover Videos on Rules for Voter IDs Lead to an Investigation

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The remote server returned an unexpected response: (417) Expectation failed.
The government should focus its deportation of immigrants on “violent offenders,” not struggling parents.

Poor cartography almost derailed George McClellan’s 1862 campaign.

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Mortgages - Paying on Time

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The remote server returned an unexpected response: (417) Expectation failed.
Being in such a predicament almost always proves costly for borrowers — both in terms of fees they will owe and the lower credit rating that will result.

Mortgage delinquencies are “about halfway back to long-term prerecession levels,” said Jay Brinkmann, the chief economist for the Mortgage Bankers Association, in its fourth-quarter delinquency report, which was released last month. Some 7.58 percent of all residential loans were delinquent at the end of 2011, down from a 10 percent high in 2010 but well above the 5 percent prerecession average. All together, 12.63 percent — one in eight homeowners — were in trouble or in foreclosure at the end of the year, the association reported.

Meanwhile a separate report last month, from the credit-reporting agency TransUnion, found that delinquency rates fell to 6.01 percent in the fourth quarter of 2011 from 6.4 percent the same period the year before, though they rose slightly from the third quarter. Delinquencies of 60 days or more are expected to rise again in the first quarter of 2012, then decline the rest of the year, said David Blumberg, a TransUnion spokesman.

With so many homeowners still pinched financially, it is crucial to understand and adhere to payment deadlines. In general, payments are due on the first of the month; many lenders, though, allow a 15-day grace period. That means “not written by, not posted by, but received by the servicer” on that day, said Michael McHugh, the president of Continental Home Loans in Melville, N.Y., and the president of the Empire State Mortgage Bankers Association. In scheduling automatic electronic payments, he advised, allow at least “five days’ leeway.”

If the payment arrives even a day past the grace period,  your lender will very likely charge a late fee of  2 to 5 percent of the monthly payment, Mr. McHugh said. The late fee and timing are spelled out in mortgage documents. Some late fees may be waived, especially if you have a history of on-time payment.

What is less often waived is the nick to the credit score. At 30 days tardy, a lender sends the credit bureaus a report, which is immediately transferred to your credit report, said Rod Griffin, the director of consumer and public education at Experian, another credit-reporting bureau. The black mark stays on the books seven years, he said, unless successfully challenged.

“That late payment on a mortgage is going to have a significant negative effect on your credit score,” Mr. Griffin said.

Research last year by FICO, the provider of one of the most popular credit scores used by lenders, showed a 60- to 110-point drop in scores for being 30 days late, with the biggest reduction to those with the highest starting score of 780. It could take nine months to three years for the FICO score to recover fully, the research indicated.

VantageScore, a rival to FICO, estimates that the initial hit would be 60 to 100 points at 30 days delinquent and another 10 to 20 points at 60 days.

The key, the experts say, is to pay up before you are 30 days behind — or, failing that, to keep the payments no more than 120 days delinquent to avoid foreclosure proceedings and many extra costs, they say. “If they can stay between 90 and 120 days’ delinquency,” said Carol Yopp, the manager of the foreclosure program at the Long Island Housing Partnership, “they typically don’t get referred for foreclosure.”

Ms. Yopp, who also has 16 years’ experience as a mortgage underwriter, notes that many lenders will not take partial payments on mortgages; they will hold them in a “suspend account” until the borrower has the full amount. Still, she suggested homeowners make a partial payment anyway, so they’re not tempted to use the earmarked funds elsewhere.

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Web Site Stole Job Seekers’ Data in Tax-Fraud Scheme, Manhattan Prosecutor Says

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The remote server returned an unexpected response: (417) Expectation failed.
The site, www.jobcentral2.net, listed nonexistent jobs and used applicants’ identities to file the bogus federal tax returns and collect tax refunds, said Cyrus R. Vance Jr., the Manhattan district attorney.

Petr Murmylyuk, 31, a Russian citizen living Brooklyn, preyed upon unemployed people because they were unlikely to have income and unlikely to file a tax return, reducing the chances that the fraudulent returns would draw attention, Mr. Vance said.

“His scheme hurt jobless individuals and society as a whole,” Mr. Vance said.

The ease with which a bogus company can look legitimate on the Internet has created a perfect scenario for fraudulently “phishing” for Social Security numbers and other personal information under various pretenses.

Filing fake tax returns, in particular, is a growing problem. In January, the Internal Revenue Service and the Justice Department announced that a law enforcement sweep through 23 states had revealed the potential theft of thousands of identities and taxpayer refunds.

The I.R.S. has devoted a Web page to listing enforcement actions involving identity thefts used to fraudulently claim tax refunds. In the most recent case, a woman from Monroeville, Ala., who had conspired with a tax return provider to file bogus returns was sentenced to 75 months in prison and ordered to pay more than $1.3 million to the federal government.

The most common form of identity theft complaint received by the Federal Trade Commission’s Consumer Sentinel Network relates to the filing of fraudulent government documents or benefits.

Mr. Murmylyuk’s site claimed that its job placement services were “sponsored by the government and intended for people with low income,” prosecutors said. He sent e-mails with links to his fake Web site through legitimate job search forums and college electronic mailing lists, they said.

He collected refunds in the names of 108 job seekers, an indictment against him said. The amount collected on each was about $3,500 to $6,500, which totaled more than $450,000. Mr. Vance’s office said that money was stolen from the federal government.

Mr. Murmylyuk recruited 11 students from Kazakhstan, who let him use their bank accounts to cash the tax refunds, according to court documents. Some of the students returned to Kazakhstan shortly after opening the accounts for Mr. Murmylyuk, and were indicted in absentia.

Mr. Murmylyuk, also known as Dmitry Tokar, was charged with money laundering, identity theft and other charges. He faces up to 15 years in prison if convicted on the top charge of grand larceny.

Federal prosecutors in New Jersey, meanwhile, charged Mr. Murmylyuk on Tuesday with working with a ring that stole $1 million by hacking into retail brokerage accounts at Scottrade, E*Trade, Fidelity, Schwab and other brokerage firms and executing sham trades.

He was charged with conspiracy to commit wire fraud, unauthorized access to computers and securities fraud. He faces a maximum of five years in prison and a $250,000 fine on the federal charges if convicted.

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ID Theft Firms Criticized on 'Free Trial' Policies

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The remote server returned an unexpected response: (417) Expectation failed.

A new report on identity-theft protection services says the most frequent complaint from customers concerns misleading trial offers.

Customers sometimes didn’t understand that they would have to pay once the trials ended, the report found, or had trouble reaching the companies to cancel the service.

The Consumer Federation of America, working with commercial providers of identity theft services, last year proposed voluntary “best practices” for the firms to follow in marketing their products. These companies offer a range of services, from credit report monitoring to correcting actual damage caused by an incident of identity theft.

The best practices state, in part, that companies shouldn’t misrepresent their ability to protect consumers from identity theft; that they should have clear, easily accessible privacy policies; and that they clearly explain how the service’s features may help consumers.

The federation recently completed a review of about 20 providers’ Web sites to see how firms were doing in meeting the guidelines a year later.  It found that most of the services’ Web sites did a “fair job” of complying with the guidelines, but there is still “need for improvement,” said Susan Grant, director of the federation’s consumer protection division and leader of the project, in a news release.

The full report looks at the sites and ranks their compliance with each of the voluntary guidelines. The researchers didn’t actually test the services; rather, they tried to gauge how well the companies were doing in providing straightforward information to prospective customers.

If the federation decided the company met the standard, it awarded a “thumbs up” symbol; if it needed some work, it got a hammer; and if it didn’t meet the standard, it got a “thumbs down.”

The report found that some of the sites’ marketing hype remains over the top, and may promise more than the company can deliver. “While these services may alert consumers about possible identity theft quicker than they would discover it themselves,” the report said, “they can’t prevent consumers’ personal information from being stolen or detect identity theft in all circumstances.”

But the most common complaint found during an online search had to with “free trial” offers, an area that wasn’t directly addressed in the original guidelines.

When the federation’s researchers searched online for complaints, looking at sites like ripoffreport.com, it didn’t find much concern about the quality of the identity theft services. (That isn’t surprising, the report said, since “the real test of these services is how well their alert systems and fraud assistance work when consumers become identity theft victims, and many will never experience that situation.”)

Rather, they found complaints about trial offers, in which companies offer their services free for a week or a month, after which customers are charged a fee. Customers often didn’t understand that they had to cancel the service to avoid being charged a fee. And some said they did try to cancel but couldn’t reach a company representative to do so. Still others said they never agreed to try the service in the first place.

The federation recommends that identity theft service providers give customers 48 hours’ notice that a free trial is ending, along with information about how to cancel if they wish and what the terms of the contract will be going forward, if they want to continue using it. And, the federation added, services should provide a quick, easy means of cancellation — “no endless busy signals, no multiple hoops to jump through.”

Have you encountered problems when trying to cancel an identity-theft protection service?

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