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July 25, 2016

How Your Retirement Can Go Haywire

An interesting point was brought up at this week’s CFA Institute’s Financial Analysts Seminar: retirement is a long enough period of time for something to go haywire. The point was brought up by Barton Waring, a retired chief investor officer for Barclays (which is now BlackRock). He raised the topic during a discussion about retirement income and annuities.

As I’ve written about before, life-spans have a right-tail risk in terms of economics. The longer you live, the more money you will need. The Social Security Administration’s actuarial table lists the life expectancy at 76 years for men and 81 years for women starting at the date of birth. These estimates encompass all those who die prematurely (due to accidents, crime, etc.) as well as those who experience shorter life-spans due to illnesses (cancer, heart disease, etc.). As you reach a certain age, your life expectancy increases because all those who have died previously are excluded from the projections.
Let’s assume a couple retires at age 65. The odds of at least one spouse making it to age 85 are pretty good, particularly for the wife. That’s 20 years of retirement to fund. Fellow men, if we make it to 85, our life expectancy gets extended out to past 90. That’s 25 years of retirement to fund. Live to 100 (and the Social Security Administration’s actuaries think nearly 3% of women will as of 2013), the retirement time span is pushed out to 35 years. You get the picture. Now think about what’s happened over the past 35 years: the rise of personal computers, the ending of the Cold War, Blockbuster Video opening, the 1987 crash, Japan’s market crash and (still ongoing) economic slump, the dissolution of the Soviet Union, the S&L crisis, Yahoo/eBay/Amazon/Pets.com launched, the collapse of Long-Term Capital, Netflix started, the bursting of the tech bubble, the collapse of Enron, the housing bubble, the iPhone introduced, the 2008 financial crisis, Blockbuster Video’s bankruptcy, negative interest rates and Yahoo’s auction of its internet assets.
Now, think about your annuity provider and your life insurance company. What are the odds of something occurring to adversely affect them over the next 35 years? And what are the odds of some event you didn't anticipate actually occuring? Insurance companies have failed before. For instance, annuity provider Standard Life of Indiana failed in 2008.
What could cause an insurance company to fail? Bad management decisions, including how the portfolio is invested. A period of financial turbulence brings such decisions to the surface. Bad market conditions will also adversely affect your portfolio and compound your potential headaches.
State insurance commissioners can determine when an insurance company has become insolvent and seek authority to seize the company’s assets. In such instances, policyholders who are state residents can receive coverage up to certain limits. These limits are determined at the state level, but most states provide at least $300,000 in life insurance death benefits, $100,000 in cash surrender or withdrawal values for life insurance policies, $250,000 in present value of annuity benefits and $300,000 in long-term care benefits. The National Organization of Life & Health Insurance Guaranty Associations has a longer explanation of what happens when an insurance company fails. Keep in mind that another insurance company may honor the policies and contracts as well.
There are steps you can take to protect yourself. Check the financial health of the insurance company you are buying a contract or policy from. Consider transacting with more than one insurance company as well, especially if the total dollar amount spent on annuities and/or life insurance policies is significant. The same logic applies to your brokerage and bank accounts. In doing so, make sure you strike a balance between the desire for financial institution diversification and the complexity of managing multiple policies and accounts. Having too many accounts and policies can create financial management problems for you, your spouse and your heirs.

The Week Ahead

Earnings season picks up steam with nearly 200 S&P 500 companies reporting. Included in this group are 12 Dow Jones industrial components: Apple (AAPL), Caterpillar (CAT), Du Pont (DD), McDonald’s Corp. (MCD), United Technologies Corp. (UTX), 3M Co. (MMM) and Verizon Communications (VZ) on Tuesday; Boeing Co. (BA) and Coco-Cola (KO) on Wednesday; and Chevron Corp. (CVX), Merck (MRK) and Exxon Mobil Corp. (XOM) on Friday.
The Federal Open Market Committee will hold a two-day meeting, starting on Tuesday. The meeting statement will be released on Wednesday around 2:00 p.m. ET. The CME’s FedWatch tool signals a 97.6% chance of the target rate remaining between 0.25% and 0.50%. Expectations for no rate hike at the September meeting are currently at 80.0%, but these expectations are very much subject to change.
The week’s first economic reports of note will be the May S&P Case-Shiller home price index (HPI), June new home sales and the July consumer confidence report, released on Tuesday. Wednesday will feature June durable goods orders and the June pending home sales index. June international trade data will be released on Thursday. Friday will feature the first estimate of second-quarter GDP, the Chicago purchasing manager’s index (PMI) for July and the University of Michigan’s final July consumer sentiment survey.
San Francisco Federal Reserve bank president John Williams will make a public appearance on Friday.
The Treasury Department will auction $26 billion of two-year notes on Monday, $34 billion of five-year notes on Tuesday, $15 billion of two-year floating rate notes (FRN) on Wednesday and $28 billion of seven-year notes on Thursday.

About The Author - Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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