Hot Off the Web- Sepetember 1, 2008

WSJ’s Sam Mamudi suggests that “Managed payout funds reveal flaws” . He argues that with the drop in the stock market serious flaws were exposed by having a significant portion of this year’s payout coming from fund’s capital. (I am not convinced. Suppose that a fund was designed to pay out each year 5% of the fund’s previous year-end value. On what basis would anyone have expected that the fund’s minimum annual return would be 5%? Clearly any one year the performance of the fund’s asset mix may be below 5% (or even negative) and the some or all of the payout would then result in a reduction of previous year-end capital. However these funds were built with the expectation that over the long—term the expected returns will sustain about the same or gradually increasing nominal (not inflation adjusted) withdrawals without significantly affecting real or nominal fund value (depending on whether 3,5 or 5% withdrawal rates were selected).) Vanguard launched this year a group of managed payout funds, which have been affected. Vanguard’s John Ameriks said that “while the funds haven’t been up to scratch so far, he believes performance will even out in the long run, especially with an improved market” and “No one should have any illusions that we are guaranteeing income”. “People need to understand the role of these products — they’re a disciplined mechanism to draw down from mutual fund-based investments.” (My inclination would be not to panic (yet). You can see the relative performance of these withdrawal models compared with other products in my earlier analysis at this website GMWB II- Guaranteed Minimum Withdrawal Benefit II )

The release of the June S&P/Case-Schiller home price indexes show that the “Housing market still under pressure, amid tepid new-home sales, price drops” Phoenix, Miami, Las Vegas and Los Angeles continued to their downward spiral. Denver and Boston showed small increases.

Karen Blumenthal suggests in WSJ’s “It’s an election year: Is your will updated” that you create a “presidential election-year financial duty” list which includes: checking your beneficiaries, update your will and financial and medical power of attorney, review your life and other insurance needs. (I posted this week an introductory blog on Estate Planning )

In WSJ’s “Is a vacation home still a good investment?” Brett Arends challenges the ‘vacation home is an investment’ view. He argues that condo fees, maintenance, insurance and taxes can easily add up to annual 5% of the property value (especially for out of  staters who are gauged on property taxes in places like Florida) add to that 4-6% or so financing costs (mortgage, loss of interest on down payment or on entire payment). He concludes that an effective after tax (in the U.S.) cost comes in at around 9%. “The average annual gain over the past 40 years has only been about 6.4% nationwide, says the National Association of Realtors. (That only beat inflation by 1.8% a year.)” (Other data I have seen was as low as inflation plus 1.3 %.). So according to Arends the true cost of owning a vacation home is 2.6% of the value of the property and it should be compared to the cost of renting the place instead. Financial planner Sean Sebold is quoted as saying that “From a financial perspective, he adds, you’re probably “better off putting your money in an S&P index fund and staying at the Four Seasons instead.” (It is difficult to argue with the fact that owning is certainly nicer that renting, it is your home after all, but it is a luxury especially if you own the place and you only get 2-4 weeks of use out of it each year. You have to do your own calculations (as both costs and realistic future increases in value are very local), but make sure to include all costs, and then you can compare that to the cost of renting for the duration of your expected occupancy. So if you use your property only 2-4 weeks a year and it stays empty the rest of the year, the Four Seasons is probably the cheaper way to go! If you expect to spend 4-5 months a year at your vacation home, then there may be an argument for owning if you don’t buy at market peaks. But then it is still a luxury, that you have to want and be able to afford, given that you are paying for two homes, and one is always empty.)

Ken Hawkins brought to my attention this week a good overview article on some innovative financial planning products on the horizon by Joseph A. Tomlinson in Financial Planning entitled “Retirement income products: A wish list” . Tomlinson highlights three products on his wish list: (1) longevity insurance now available from a number of companies (I have discussed this in various blogs at this website on numerous occasions), (2) life-care annuity not yet available (simplest version is a standard income annuity with a pop-up benefit that pays extra income (e.g. doubles income) if the purchaser’s health deteriorates), (3) ruin-contingent life annuity-RLCA-  not yet available ( “two contingencies generate payments”- longevity and weak investment performance, especially early during retirement).  More work is required to develop these products and increase awareness about their potential.

An finally, in “Bankruptcies rise for older set”WSJ quotes an AP report that (U.S.) bankruptcy filing rate soared for over 55 age groups, “the older the age group the worse it got”. “The filing rate per thousand people ages 55-64 was up 40%; among 65- to 74-year-olds, it increased 125%; and among the 75-to-84-year-old set, it was up 433%.” The main reasons given is the “one-two punch of jobs and medical problems”, people still making mortgage payments in retirement and becoming victims of fraud.