June 13, 2011

By Brent Wilkes

The Orlando Sentinel

Over the past several decades, many Hispanic-Americans and their families have come to this country for a chance to live in a place where freedom means endless possibility. For Americans of all ethnic backgrounds, this means freedom to live where we want, earn a living in the way that we choose and retire with the security of knowing that we can live out our final years with dignity and in happiness.

Indeed, it’s the cornerstone of the American dream. Creating a better life for your family and future generations is what we all strive for — and that includes financial prosperity and security.

Those in our Hispanic communities approaching retirement represent the first generation that had a real opportunity to pursue this American dream. Many worked hard to earn a decent living and are now ready to reap the benefits in retirement.

But for many aging Hispanics, like all Americans, realizing this final phase of the American dream has been met with apprehension and widespread concern.

We all know the facts. On average, people are living longer and the cost of living has surpassed what Social Security and savings will provide. Declines in the stock market have devastated many 401(k) plans.

And while these conditions adversely affect all Americans, Hispanics are hit disproportionately hard when it comes to retirement. Although Hispanics work in all sectors of the economy, they are more heavily concentrated in jobs lacking traditional retirement options and typically earn a lower income, affecting their ability to save for retirement.

In fact, a study conducted by The Hispanic Institute and Americans for Secure Retirement found only 25.6 percent of Hispanics are covered by pension plans, compared with 42.5 percent of whites and 40 percent of African-Americans.

Moreover, a lack of financial literacy among the Latino community means greater disparities in retirement preparation. Hispanics suffer from an absence of information on the retirement-savings vehicles available, how they work and why they are important. This is more prevalent among many first-generation Hispanics, who choose to keep their savings in their homes and out of banks and retirement plans. Complicating matters more is an often-overlooked language barrier.

June 4, 2011

By Richard H. Thaler

The New York Times

Imagine a set of 65-year-old identical twins who plan to retire this summer after long careers. We’ll call them Dave and Ron. They have worked for different employers and have accumulated retirement benefits worth the same amount in dollars, but the benefits won’t be paid out the same way.

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 his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principal he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

Who is likely to be happier right now? Dave or Ron?

If this question seems a no-brainer, welcome to the club. Nearly everyone seems to prefer the certainty of Dave’s pension to Ron’s complex options.

But here’s the rub: Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.

Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

So, why don’t more people buy annuities with their 401(k) dollars?

Here’s one part of the answer: Some people think that buying an annuity is in some way a bad deal for their heirs. But that need not be true. First of all, a retiree can decide to set aside some portion of a retirement nest egg for bequests, either immediately or at a later date. Second, if a retiree chooses to manage his or her own money, the heirs may face the following possibilities: Either they get financially “lucky” and the parent dies young, leaving a bequest, or they are financially “unlucky,” meaning that the parent lives a long life, and the heirs take on the burden of support. If you have aging parents, you might ask yourself how much you’d be willing to pay to insure that you will never have to figure out how to explain to your spouse, or whomever you may be living with, that your mother is moving in.

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

An annuity can also help people with another important decision: when to retire. It’s hard to have any idea of how much money is enough to finance an appropriate lifestyle in retirement. But if a lump sum is translated into a monthly income, it’s much easier to determine whether you have enough put away to afford to stop working. If you decide, for example, that you can get by on 70 percent of preretirement income, you can just keep working until you have accrued that level of benefits.

IN the absence of annuities, there is reason to worry that many workers are having trouble with this decision. Over the last 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years, from 66.9 to 61.6. Of course, there is nothing wrong with choosing to retire a bit earlier, but over the same period, live expectancy has risen by four years and will likely continue to climb, meaning that retirees have to fund at least an additional nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Annuities may make some of these issues easier to solve, but few Americans actually choose to buy them. Whether the cause is a possibly rational fear of the viability of insurance companies, or misconceptions about whether annuities increase rather than decrease risk, the market hasn’t figured out how to sell these products successfully. Might there be a role for government? Tune in next time for some thoughts on that question.

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.

September 28, 2010

By Humberto Cruz

Boston Globe

For the past 10 years, my pension check has been deposited directly into my checking account the first day of each month. It will keep coming until both my wife, Georgina, and I have died.

On or about the second Wednesday — the first time was Aug. 11, after she turned 66 — Georgina’s Social Security payment also gets direct-deposited. Mine will start coming next year when I’m 66, unless I decide to wait to collect more later.

You may not think of pensions and Social Security benefits as “immediate lifetime income annuities.’’ But that’s what they are, paying a set monthly amount for life. (With Social Security, it’s adjusted for inflation.)

Georgina and I also have bought four lifetime income annuities from insurance companies. In return for a lump-sum premium, each pays us a monthly income until we both die. (In one case, the payment started lower but goes up 3 percent a year to counteract inflation.)

These payments, with my Social Security benefit, will provide all the money we’ve calculated we’ll require to cover basic needs. The peace of mind this brings is to us the most important and often unheralded benefit of lifetime income annuities.

You may well achieve a greater rate of return by investing your money elsewhere, particularly with interest rates so low (annuity payouts are based on age, sex, and prevailing rates when you buy). But an annuity may provide a bigger return if you live a long life and collect for many years.

The point: An immediate annuity is not so much an investment as insurance against outliving your money. Independent studies have found that including an immediate annuity in a retirement portfolio boosts income because the steady annuity payouts lessen the need to sell other investments for living expenses during a down market.

“What counts most is that if things really turn sour, one’s annuity payments are always there,’’ said Dick Duff, a chartered life underwriter in Denver.

Income annuities, of course, are not the only way to generate income in retirement. I prefer a combination of approaches. A few to consider:

■ Variable annuities with guaranteed lifetime withdrawals. Unlike an immediate annuity, you retain access to your principal. There is a guaranteed amount you can withdraw each year. If the account runs out of money with these withdrawals, the insurance company keeps paying you with its own money. In general, minimum guaranteed payout rates are lower than with income annuities.

■ Living off the portfolio income, such as withdrawing interest or dividends only. That’s virtually impossible with today’s low rates unless you’re a multimillionaire.

■ Systematic withdrawals: Withdrawing enough for living expenses from your portfolio each year. You risk having to sell investments when prices are low and running out of money.

Humberto Cruz can be reached at AskHumberto@aol.com.

September 16, 2010

By Josh Kraushaar

Hotline on Call

A new bipartisan survey offers yet another striking example of how deep and widespread voter economic anxiety this midterm election.

The poll, conducted by Lake Research Partners (D) and Public Opinion Strategies (R), shows why issues of Social Security and Medicare reform are so politically fraught. Nearly half of respondents said they are “very concerned” about being able to maintain a comfortable standard of living throughout retirement – with nearly three-quarters of voters (73 percent) expressing some concern. The level of retiree confidence is the lowest level in 17 years.

Republicans will take heart in that most respondents support more options dealing with retirement – presumably, not limited to Social Security – that “help retirees make sure their savings last throughout their lifetime.” Only 32 percent of current workers consider Social Security “a major source” of their post-retirement income, while 45 percent say it is just a minor source.

“Democrat, Republican and independent voters are worried about retirement, and all believe Congress should place a high priority on creating retirement options that help retirees make their savings last throughout their lifetime,” said Republican pollster Rob Autry, who conducted the survey.

Democrats will be pleased to hear that 45 percent of respondents say candidates’ “commitment to retirement concerns” will play a very important role in who they vote for. One of the major lines of attack from Democratic Congressional candidates is accusing Republicans of wanting to dismantle Social Security.

“Of particular importance is the fact that retirement issues are resonating strongly with those who will most likely play a role in swinging November’s elections – older voters, blue collar voters, and women of all ages and political affiliations,” said Democratic pollsterCelinda Lake. “These influential constituencies are responding to those candidates who are addressing their concerns about retirement security.”

A full third of workers believe they will still have to work even after they’re 65 — up 10 points in the last five years.

The poll was commissioned by Americans for a Secure Retirement, an umbrella group of more than 70 member and affiliate organizations ranging across the political spectrum.

September 16, 2010

By: Emily Brandon

U.S. News

Retirement security issues are on voter’s minds as we approach the mid-term elections. Almost three quarters of voters are concerned about being able to maintain a comfortable standard of living throughout retirement, according to a new survey of 917 registered voters.

Majorities of workers of all ages are concerned about their ability to retire, with those on the verge of retirement the most concerned, the poll conducted by Lake Research Partners and Public Opinion Strategies and commissioned by Americans for Secure Retirement found. Republicans (76 percent) were generally slightly more concerned about their future retirement security than Democrats (71 percent) and Independents (67 percent).

Almost half (45 percent) of the registered voters surveyed said a political candidate’s commitment to addressing retirement concerns was very important to their voting decision. The majority of workers age 50 and older (53 percent) said retirement concerns were a voting issue.

Voters have valid reasons for being concerned, according to a new study. The gap between what American workers ages 32 to 64 have saved and what they will need in retirement to maintain their current standard of living is a staggering $6.6 trillion, Retirement USA, a coalition of workers’ groups, announced this week. The figure, calculated by the Center for Retirement Research at Boston College using Federal Reserve Board data, takes into account pensions, Social Security, 401(k) balances, and other savings and investments.

Tell us, does a candidate’s position on retirement issues influence how you vote?

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