A recent headline from the Yahoo Daily Ticker caught our attention – American Incomes Are Falling And Near-Retirees Are Getting Crushed: Study.
The report was based upon findings from Sentier Research, a data analysis company, and (to the surprise of no one who works with individuals in or nearing retirement) they found that the inflation adjusted incomes of those age 55-64 were down nearly 10 percent from December of 2007.
Dick and Eric examine how interest rates hovering near zero have impacted savers and near retirees, in addition to discussing how annuities can be utilized in these situations.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
An excerpt of the Yahoo report.
Annual incomes in the United States have dropped sharply in recent years, and near-retirees are getting hit the worst.
That’s the conclusion of a new study by Sentier Research, which looked at the trend in median U.S. household incomes since 2000.
Twelve years ago, after adjusting for inflation, the median household in the United States earned about $55,000 per year, reports Catherine Rampell of the New York Times, citing Sentier’s data.
Now, the median income has fallen to about $51,000.
The two age-groups that have been hit the worst in this period are households led by those in the 55-64 age group and those in the 25-34 age group. The incomes of the near-retirees have fallen by nearly 10% in the past three years.
This data explains why our economic recovery is so sluggish. [Read the Full Article]
Annuity Guys® Video Transcript:
Dick: Today Eric, we’re going to talk about a subject that . . . we’ve just looked at a study, and this study basically talks about those folks that are near retirement just being crushed by all of the negative economic factors that have happened; their income, their assets, and different things. I guess this is something that you and I have experienced our own practice with this age group.
Eric: In fact I just talked to a gentleman earlier today who talked about, the last 12 years in his 401K, it’s just now back to where it was 12 years ago. Here’s a generation, he’s in his mid 50’s preparing for retirement, what’s he going to do? He is literally grasping, because what he anticipated having and what’s reality right now just aren’t happening.
Dick: When you look at the way 401Ks have been affected; IRA’s, 401K’s, all of this qualified money, you look at the property values, retirees, or those near retirement in that age group, and this age group we’re talking about is about 55 years old to 64. They don’t have that equity in their home anymore.
Eric: We all approached homeownership. For a lot of us, it’s our biggest investment. We put dollar after dollar into our houses anticipating when we get to retirement the equity is there. With the depression in the housing market, boom, that option for a lot of us has gone away. Not only do we not have the amount of equity, in some cases, we don’t have any equity.
Dick: It can be negative equity.
Eric: It’s been just devastating. The study talks about, the [inaudible: 01:51] Research Study, they’re talking about declines for this 55 to 64-year-old households are age range, the average income. When you factor the median adjusted income, so you’re looking at it at inflation-adjusted number, incomes dropping since December 2007 to now; almost 10%.
Dick: Pushing 9.7%, I believe it was.
Eric: If you think about the cost of gasoline, the cost of food, the things that impact our lives, I see it, I feel it, so you know as you get closer to a fixed income . . .
Dick: You start to sense the old idea of stagflation: Inflation is increasing, and yet, the incomes are decreasing. We find ourselves in a position of saying, “Where do we turn?”
Eric: You’re traditional, ‘I am going to put it in my [inaudible: 02:40].’ As you’re getting closer to retirement, you’re supposed to become more conservative, you don’t want to lose money; you don’t want to go backwards.
Dick: Based on our fed direction right now.
Eric: We’re all going to be saying, ‘We were Bernake’d.”
Dick: We’re being penalized if we’re in this age group, because the savings rates are so poor.
Eric: We keep on saying we’re trying to boost the economy; we’re trying to get the engines fired.
Dick: At the expense of what? Our retirees
Eric: We’re killing our retirees. The headline was ‘Crushing the Retirees’. They are literally getting crushed by 0-returns in their options.
Dick: When we turn even to annuities, and that’s our headline up here, ‘Can annuities help?’ Annuities are affected by these low interest rates.
Eric: Yeah. Let’s be honest, these insurance companies utilize investment vehicles as they hedge.
Dick: Bonds, treasuries, and the like to . . .
Eric: To take those dollars, they grow them, and that’s how they return those dollars back to those retirees. They’re getting the same level of constraints placed on them as many of these individual retirees.
Dick: Eric, one thing that I’ve seen and I think it’s unfortunate; I’ve seen some retirees, or those that are near retirement, they panic a little bit. I can understand why they panic. They want to make up, maybe for lost time or they want to make up for market losses. Whatever has caused this, sometimes they’ll tend to take more risk on than what maybe they should.
Eric: That’s the black/red syndrome. If you keep betting red, it’ll hit red sooner or later, won’t it? If you’ve given away all your chips, you can only spin the wheel so many times before you’re done. It’s the gamblers mentality. Like the guy I talked to, 12 years to get back to where we were 12 years ago. He’s not where he thought he’d be.
Dick: You really have to start where you’re at. We have seen those folks that were fairly-well positioned, that came through the financial crisis very well, but those are few and far between as compared to those that were following some of the traditional methods of investment and found themselves not doing so well.
Eric: They always say, ‘There’s something that makes money in every economy, for somebody.”
Eric: The hard thing is, as we’ve got people in this age range, what’s been my . . . if we look at an annuity that’s going to be a potential for some of these folks, I like for someone who still has over 5 years of, basically, working years left.
Dick: Before you’re going to need to turn on that income stream.
Eric: Let’s look at hybrid annuities, because they have those **guarantees that it will roll up and defer.
Dick: They increase your income dramatically if you can leave them alone.
Eric: Right, and that’s the key. You have to be able to leave it alone. Let it set in deferral. For people that are panicking because they’re getting close and they don’t want to sit in the market and have another 12 years of 0 gain . . .
Dick: Or go backwards.
Eric: . . . it’s an option. It’s an option for a portion of those dollars. As I say, we talk about the foundational aspect of income. You’ve got Social Security in a pension, and then if you can stack a . . .
Dick: That’s going to get you to that number that you need.
Eric: Your basement, cover the foundation.
Dick: It’s going to cover the basic needs of life.
Eric: That hybrid is one of those options; it works well in that situation. If you’re a little bit closer to retirement, there’s other options in the annuity world. It’s the immediate annuity; it’s your self-directed pension plan. You can turn it on, you can set them up so that you get little bumps in your income, or you can set up so that you just turn it on, you can set and forget it. It’s there as long as you are. Then there’s, of course, the pre-issued side if you’re looking for . . .
Dick: With the pre-issued I think that a person would look at maybe just taking the yield off of the interest that’s coming in off of it and preserve that principle to reinvest into another pre-issued annuity or some other financial vehicle that’s available at the time, that’s a better choice.
Eric: It’s the old CD mentality, when you’re going to take your interest earned and use that as your income stream.
Dick: The big difference right now between the pre-issued and the CD is about 5% or 6%. It just depends on the situation.
Eric: Those are annuity options, and obviously, there are other investment options out there, as well. You have to balance: Guarantees, its risk/reward. That’s why we like annuities for that foundational aspect; it takes a little bit of the risk out.
Dick: Exactly. Eric, when we start to think in terms of retirees getting crushed, and what is the answer, I think we, folks, we want to state pretty clearly that there really are no silver bullets; there’s no perfect answers. There’s different financial vehicles such as annuities or could be bonds.
Eric: Paying stocks.
Dick: That are going to be the best in your situation. That’s where it really takes a good advisor to help determine what is going to best in your situation.
Eric: It’s weighing your options. We’re not a big proponent of putting all your eggs in one basket. We like asset allocation, diversification of assets, and asset classes. Look at what’s available to, and then make that decision based off those factors.
Thanks for tuning in today.
Dick: Thank you.