FSO E-NEWS WEEKLY
















US FlagJuly 1, 2008 Edition
 
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FED HOLDS...WHAT IT MEANS – The Federal Reserve took no action on the prime interest rate, but sometimes “silence speaks louder than words.” Most agree that this reflects a concern about inflation and the rate is likely to rise. Generally this results in higher consumer interest rates.  For more insight on what the Fed decision means, visit CNNMoney.com. 

P & C INCOME DOWN BIG – According to Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI), the U.S. property and casualty insurance sector suffered a 49.3% decline during the first quarter of 2008. Reasons: Losses on underwriting results and poor investment results. The property and casualty sector had more than $3.4 billion in catastrophe losses for the quarter...the highest first quarter loss since 1994.

PRESIDENTIAL CAMPAIGNS – We’re starting to see a good bit of speculation concerning the potential economic and tax policies that a McCain or Obama presidency would bring into office.  For starters, who is Wall Street naming as possible picks for Treasury secretary?  If it’s McCain, the pundits are naming former U.S. Senator Phil Gramm or former H-P CEO Carly Fiorina as strong possibilities.  If Obama wins the election, the financial community is intrigued by the possibility of New York Federal Reserve President Timothy Geithner being named as Treasury secretary.  On to estate tax reform, where the two candidates share common ground.  Neither candidate believes that the estate tax should be permanently repealed.  McCain, however, would set the exemption at $5 million and the top rate at 15%, while Obama favors a $3.5 million exemption and a 45% top rate.  Both candidates support making the exemption portable for spouses, which would simplify estate planning for surviving spouses.  What role would the government play in the U.S. economy?  Both candidates see a bigger government role in the economy...here’s a Bloomberg.com article to review.  Both candidates are also reported to favor a reduction in corporate income taxes. Finally, Obama has stated that he will raise taxes on “high-income taxpayers,” but what does he mean by high income?  According to a CNNMoney.com article, married couples with at least $250,000 in gross income are likely to see their taxes go up; $200,000 for single filers. 

READY, AIM...FIRE? – Here’s an interesting BusinessWeek article titled “Wall Street Takes Aim at Itself.”  The article details how the research arms of various banks and brokerages are “mercilessly training their analytical firepower on each other, making the big banks and brokers look increasingly like a circular firing squad” and contributing to the plunge in the value of their stocks.  For a better idea of what Wall Street has lost over the past year, check out this International Herald Tribune article. 

UNUM TO “COOPERATE” WITH FEDS - Unum has agreed to enter into an "agreement to cooperate" with federal agencies (including the FBI, IRS, Post Office and the Employee Benefits Security Administration!) that were investigating the company's broker compensation arrangements. The company will reportedly pay $5.5 million in fines and penalties for violating broker fee disclosure requirements and making payments to insurance brokers without disclosing the fees to benefit plan administrators.


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HOME VALUES DOWN – The 20-city Home Price Index declined 15.3% throughout the past year and represents the most significant decline since the 20-city index began tracking home prices 19 years ago. Now would appear to be a pretty good time to buy a second home. Prices are down and mortgage loan rates very low.

CONSUMER CONFIDENCE VERY LOW - Consumer confidence dipped to the lowest level in nearly 16 years. In fact, The Conference Board's index fell to 56, a decline from 57.2 in May and the lowest level since October 1992. “Things will forever be going up and down but they will never go up or down forever.”

PERFECT TOGETHER? – An InvestmentNews editorial says it’s about time that the Federal Reserve Board and the SEC got together last week “to hash out a way to fill the regulatory gaps revealed by the mortgage bubble and its consequences.”  Check out this Reuters article for some additional background on this critical regulatory issue.  With a potential Fed/SEC agreement on investment banks in the works, however, leaders of the Senate Banking Committee are issuing a message of their own...not so fast...don’t get ahead of Congress with any Wall Street reforms.  There are those who might respond that it’s difficult not to get ahead of Congress. 

MEDICARE ABUSE – A Government Accountability Office report reveals that thousands of hospitals, nursing homes and other Medicare health providers owe the federal government more than $2 billion in payroll and other back taxes. In some cases, they used the money to buy luxury cars, million-dollar homes and other personal items, congressional auditors say. "As federal deficits continue to mount, the federal government must take all effective measures to collect the billions of dollars of unpaid taxes," investigators wrote. "Because payroll taxes fund the Medicare program, Medicare providers should especially pay their fair share of taxes owed."

HOUSING RESCUE – Here’s a comparison from Reuters of the Senate and House mortgage rescue legislation.  The House legislation has already passed, while the Senate legislation remains stalled by a procedural maneuver.  Since passage is politically important for both parties, we’ll probably see something pass this summer.  

STRATEGIES FOR CUTTING SOCIAL SECURITY – Click here for a Treasury Department analysis of various strategies to cut Social Security benefits.  

UP AGAIN – PricewaterhouseCoopers estimates that employer medical costs will increase by 9.6% in 2009, just barely below the double-digit increases of a few years ago.
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GLASS HALF FULL – Okay, here are 10 reasons to love a recession!
1. Family dinners. Lots cheaper than eating out!
2. Shorter gas lines!
3. Less junk mail; direct mail for credit cards is down 19%.
4. More coupons; watch for “2'fers” at restaurants.
5. Free fitness; eat better and cheaper!
6. Bargain SUVs; best buy is in Hummers.
7. Business startup opportunities abound!
8. Growth in gardening, tomatoes in particular!
9. Musical inspiration; “Hey buddy, can you lend me a dime.”
10. New perspectives; life may be more than acquiring things.

EIA REGULATION – It appears likely that the SEC is going to classify some indexed annuities as securities.  The annuity would be treated as a security if its performance is linked to the performance of a security, a group of securities or a securities index and if “the amounts payable by the insurer were more likely than not to exceed the amounts guaranteed under the contract.”

MEDICARE LEGISLATION – The House has passed legislation that would cut Medicare Advantage program funding by $13.8 billion over five years and impose new restrictions on Medicare Advantage marketing.  The Medicare Advantage funding cuts would be used to reverse a 10.6% cut in Medicare physician reimbursements scheduled to take effect July 1.  The Senate, however, has been unable to get its Medicare funding bill to the Senate floor.  Expect some action on this legislation when the Senate returns from its July 4th recess.

PRE-RETREES FAIL TEST – According to MetLife, 59% of pre-retirees are seeking financial advice on 401(k)s, retirement savings, and long-term care insurance. Why? Because they are not at all well versed on retirement plans. In fact, individuals within five years of retirement failed MetLife’s second Retirement Income IQ Test with scores of 43 on a scale of 100. Here’s a scary finding:  43% of pre-retirees say they can withdraw 10% or more of their retirement nest egg each year while still preserving their principal. The full Retirement Income IQ test is available at www.maturemarketinstitute.com.

RETIREMENT SPENDING MODE - Changing from accumulation to preservation and liquidation requires a different financial mindset. Here are some tips for you and your clients. 1. Set aside cash 2. Get organized 3. Set a withdrawal strategy 4. Keep an eye on asset allocation 5. Tap into your accounts.

HOW TO CREATE A RETIREMENT PAYCHECK – There are a lot of options in turning an assortment of assets into a regular paycheck...probably too many options. The best starting point is creating a budget to determine how much income you will need. As a rule of thumb, retirees should withdraw no more than 4% of the value of their portfolio.  Replicate your paycheck by setting up a direct deposit from your cash reserve into the checking account. Try not to tap principal in the early years of retirement. One way to generate income without tapping principal is to shift more of the stock portfolio into dividend payers. Another useful tool to generate regular income is a bond ladder, but a good income annuity will go a long way in creating the peace of mind necessary to enjoy retirement.

MDRT EXPERIENCE OPEN TO ALL - For the first time in the U.S., MDRT will share the magic of its Annual Meeting with all financial services professionals. In January 2009, MDRT will host the MDRT Experience meeting at two exciting venues: January 21-23, 2009, Los Angeles, CA and January 25-27, 2009, New York, NY - Radio City Music Hall. The MDRT Experience is open to both MDRT members and nonmembers. Attendees will be exposed to the finest and most innovative sales ideas and motivational concepts, as well as networking opportunities that will help them grow both professionally and personally. If you have never attended an MDRT meeting, we urge you to try to attend one of these and guarantee it will improve your “bottomline.”  For more information and to register, visit the meetings section of www.mdrt.org, or contact MDRT's Meeting Services Department at (847) 692-6378.

TIME TO RETHINK DEFERRED COMP - Before 2005, executives could put money in a nonqualified deferred compensation plan and secure tax-advantaged investment growth without having to worry much about the downside ...restricted access to the money. To raid these accounts at times different from those elected at the outset, an executive merely had to pay a 10% penalty. The penalty is now 20% plus ordinary income tax and interest, but the deadline for implementation is Jan. 1, 2009. Many expect tax rates to rise by 2011 and therefore increase the amount owed when money is withdrawn from the plans. Further, if your employer runs into trouble, you may not be able to recover the money in your plan since deferred comp isn't protected from creditors in a corporate bankruptcy.

FRAUD AGAINST SENIORS – Legislation was introduced in the Senate that would increase penalties for people who commit securities fraud against seniors.  InvestmentNews reports that, “Additional fines of up to $50,000 would be levied for violations, which could include selling unsuitable products to seniors or failing to disclose fees or lock-up periods for investments.”

WOMEN EAGER TO LEARN – An Allianz survey reveals that about 44% of women find financial information is overwhelming or too hard to sort through, but more than half said they want to learn more about retirement planning and entry-level saving and investing. Where are they getting their information? 46% from the Internet, 34% talked to family members and 30% to financial advisors.

NOT TOO REASSURING! – Morningstar reports that, “47% of the managers of U.S. stock funds reported no ownership in their funds at all.”  That’s good, however, compared to the 71% of managers of balanced funds who hold no ownership in their funds. 

STUDENT LOAN INTEREST RATES – Good news: interest rates on variable federal Stafford and PLUS Loans decreased significantly on July 1.  Click here for more information.  

LIFESTYLE AFFECTS CREDIT - Most borrowers know a late payment or high outstanding balance can hurt their credit. But what about frequenting a massage parlor, retreading a tire, or visiting a marriage counselor? Such activities count according to a suit filed by the Federal Trade Commission in federal court against card issuer CompuCredit. Goodness, Big Brother is on the prowl.

OLD AND BANKRUPT – According to an AARP paper, people 55 and older accounted for 22% of bankruptcies in 2007, up from only 8% in 1991. The top three reasons for filing are job loss, medical problems, and credit cards. "We expect to find that, for people 65 and older, the medical issues are going to take the lead because the cost of prescriptions and care has gone up." Meanwhile, people under 34 filing for bankruptcy have dropped from 46% in 1991 to 26% in 2007.

HSA QUESTIONS – The IRS has issued Notice 2008-59 in which it provides employers with detailed information about running health savings account programs.  A copy of the notice is available here.  
 
STILL GIVING - Giving USA reports that charitable giving in the United States reached a record high of $306.4 billion in 2007, despite the country's ongoing economic woes. That is a 3.9% increase over the prior year. Americans give about 2.3% of the average individual's disposable income to charities.

FINANCIAL PLANNING HOT - According to the Certified Financial Planner Board of Standards, the number of people receiving the "certified financial planner (CFP)" designation is rising by 6% a year, with especially fast growth in the 30- to 39-year-old age group. Of the close to 60,000 planners with such credentials nationwide, at least 20% fall into that age range. Check out the rising numbers of certified financial planners nationally: 1999 – 34,656; 2002 – 40,375; 2005 – 49,117; 2008 – 57,978.

BOOMERS BUY ANNUITIES – No secret here. According to LIMRA, annuity sales are surging across the country, up 9% in first quarter and 94% since 1998.  Boomers nearing retirement age see annuities as an attractive option because they can provide benefits over traditional investments like certificates of deposit. Further, enhancements in fixed annuities and the addition of variable annuities have aided sales.

ANNUITY LADDER – Laddering bonds is one popular method of establishing a stream of income. Another way is by laddering immediate annuities (IAs). No bonds to shop and IAs’ payouts generally top bonds. The advantage of IAs is that they're simple to understand. You know what you're getting. You get it without taking much risk. A disadvantage is that by avoiding risk, you give up a chance to get a much better return on your money. In addition, spreading your purchase over time reduces your risk of committing too much money when interest rates are low. For example, you can buy a small annuity in 2008, another one in 2009 and so on until you've invested your target amount.

SSA STATEMENT ON LTC - “Social Security pays retirement, disability, family and survivors benefits. Medicare, a separate program run by the Centers for Medicare & Medicaid Services, helps pay for inpatient hospital care, nursing care, doctors’ fees, drugs and other medical services and supplies to people age 65 and older, as well as to people who have been receiving Social Security disability benefits for two years or more. Medicare does not pay for long term care, so you may want to consider options for private insurance.”

GLOBAL RETIREMENT PROBLEM - According to recent MetLife surveys, nearly half of U.S. employees (46%) have not taken any steps to determine income need in retirement; however, the studies found that eight out of 10 Mexican (81%) and Indian (80%) employees, more than half of Australian employees (58%), and more than one-quarter of U.K. employees (31%) have done no retirement planning independent of any mandatory government programs.

HOME EQUITY LOANS SCARCE – In January, some 122,000 borrowers with Countrywide home-equity lines of credit, or HELOCs, received letters that their lines had been frozen or reduced.  The move was quickly followed by other major lenders, including Bank of America, Chase, Citibank, SunTrust, USAA, Wachovia, Washington Mutual and Wells Fargo. This is a big shock for those who have relied on their home-equity line as an emergency fund, an all-you-can-eat buffet or as a line of credit on a "buy now, pay later basis.”

VARIABLE ANNUITY SALES – According to NAVA, total U.S. variable annuity sales increased to $42 billion in the first quarter, up 1.7% from the total for the first quarter of 2007.

DONATE AND FEEL RICH - Acts of generosity can help us feel content with what we have. "The irony is...you can't be giving money away and feel like you don't have enough. The act itself changes the message you tell yourself."

RETIREMENT HEALTH BENEFITS OPPORTUNITY - One-third of large employers are still offering retiree medical coverage, but that is down from 66% less than 10 years ago. This may create an opportunity to offer post-retirement medical coverage on a voluntary benefits basis.

BANK INSURANCE SALES UP – According to Michael White Associates, bank insurance brokerage earnings climbed 8.6% throughout the past year, reaching $1 billion in the first quarter.

NO PLASTIC, LESS SPENDING – Money Magazine suggests that you will spend less money if you simply stop using your credit cards...use cash and check only. Here's why. Studies find that paying with a card turns you into a different shopper, one who is less price sensitive and more extravagant. Some proof? After McDonald's began accepting credit and debit cards in 2004, diners who paid with plastic spent $7 a visit on average vs. $4.50 when they paid in cash.