NEW YORK — The option of a lump sum on retirement is likely to disappear for a lot more workers this fall.

Lump sums used to be a fairly common option for workers enrolled in pension plans. It is becoming more rare, however, as dramatic declines in stock values have sent pension assets plunging just as they have to meet more stringent funding requirements. (Pensions themselves, of course, are being offered to fewer workers.)

Some employees may slip through before Oct. 1, the deadline for businesses to update the funding status of their pensions. More companies are expected to be underfunded when the 2009 numbers are run.

The 100 largest pension plans ended 2008 with $217 billion in liabilities, compared to an $86 billion surplus at the end of 2007. The funding status dropped from about 106% at the end of 2007 to less than 80% at the end of 2008.

The Pension Protection Act begins to restrict lump sum payouts when a plan is less than 80% funded, says Judith F. Mazo, senior vice president, director of research at the Segal Co., a consulting firm. At that point, workers can only receive half of the amount in a lump sum and other half as an annuity. Plans that are less than 60% funded are forced to freeze and provide only an annuity.

The limits are designed to prevent participants from draining badly needed cash from the plans. They also give employers an incentive to keep funding at appropriate levels.

But as the markets have plummeted, credit has tightened, making it difficult for companies to add cash to underfunded plans.

While the majority of workers typically choose a lump sum rather than an annuity if the plan offers a choice, Rebecca Davis, staff attorney at the Pension Rights Center, says people need to carefully consider their choice. No one should make any decision before finding out exactly how much the lump sum would be, the center says.

Some people think they can manage the money better on their own, but as last year’s market losses illustrate, there’s no guarantee. A lump sum may be a lot of money, but a big advantage of an annuity is that it’s guaranteed for life, she says.

One disadvantage to an annuity is that many are not adjusted to reflect increases in the cost of living.

It also might be worth taking the lump sum if the Pension Benefit Guaranty Corp. (PBGC) has to take over the plan. About 84% of participants get their full benefits even if the PBGC steps in, but the limit is currently $54,000 a year.

By Jilian Mincer
A DOW JONES NEWSWIRES COLUMN

NEW YORK — Spooked by shrunken savings, even some wealthy retirees are going back to work. One way to boost income further over the long term: Reset the clock on Social Security benefits.

Retirees who collect Social Security can start over — provided they pay back all benefits received so far. Individuals can start collecting Social Security at age 62, but they earn an extra 7% to 8% for each year they defer until age 70.

“By pushing back the start date, retirees can collect a higher benefit for the remainder of their lives,” says Chuck Roberson, a certified financial planner at Modera Wealth Management in Old Tappan, N.J.

The oldest of the baby boomers turned 62 last year, and many began claiming Social Security — believing that government benefits, 401(k)s and other money invested in the market would allow them to retire in comfort.

But the market meltdown changed all that. Now some retirees are returning to work not out of financial necessity, but to more quickly recoup investment losses.

“They’re looking to create a bigger financial cushion,” says Brett Horowitz, a wealth manager at Evensky & Katz LLC, in Miami. He is flagging resetting Social Security benefits as an option to clients.

Retirees who begin collecting Social Security benefits at 62 typically receive benefits that are about 25% lower than if they had waited until full retirement age. (The age of eligibility to receive full Social Security benefits is 65 for those born in 1937 or earlier. The eligibility age increases for retirees born in 1938 or later; full retirement age is 67 for those born in 1960 or later.)

The monthly payment is even higher for those who wait a few years beyond the eligibility age for full benefits to start collecting, “If you can wait from 62 to 70, you can almost double the initial benefit,” says Christine Fahlund, senior financial planner at T. Rowe Price in Baltimore.

The maximum pretax benefits at 62 are $21,228, compared with $26,064 at 65 and $36,648 at 70, when maximum benefits are available (in current dollar values). Payments are adjusted for each year for the cost of living.

For retirees to reset their Social Security payment schedule, all benefits received must be repaid, using a form SSA-521. (For more information, visit

www.socialsecurity.gov/retire2/withdrawal.htm
 

Individuals in poor health should take the retirement benefit as soon as they can to maximize how much they’ll receive over the rest of their lives. Waiting longer, and then getting bigger monthly payments, is beneficial for those who live to a ripe age.

If he or she lives to 85, someone who waited until 70 to get Social Security would have received $76,896 more in current pretax dollars than the person who took the benefit at 62. If he or she lives to 95, the advantage would be $231,096, according to research from T. Rowe Price.

Because a claimant is required to return only the nominal amount of collected benefits in a reset, he or she could in theory use it as a no-interest loan, investing the money and keeping the interest.

“In essence, the claimant is a ‘borrower” who is required to pay back only the ‘principal” on a loan,” says Alex Golub-Sass, a research associate at the Center for Retirement Research at Boston College, who co-authored a recent paper on this topic.

Commenting on this strategy, Cynthia Edwards, a spokeswoman for the Social Security Administration, says: “This is legal to do under current law, but our Commissioner has some concerns. It’s an issue we intend to raise with the Office of Management and Budget.”

Before doing a reset, investors should talk to their tax adviser.

Married couples in particular need to think carefully about the mortality risk. If the higher earner in the couple takes Social Security at age 62, for example, and dies before doing a reset, the survivor benefits could be reduced.

By Victoria E. Knight
A DOW JONES NEWSWIRES COLUMN

Americans say that despite daunting circumstances, they have developed a more practical attitude toward money and retirement since last year, according to a study by San Francisco-based Age Wave. And that’s good news for financial planners, says Ken Dychtwald, CEO of Age Wave, because Americans know they need planners’ help.

In a new study, Age Wave, a research firm, found that only 4% of respondents strongly agree that Americans behave in a financially responsible manner. An overwhelming 95% of respondents said financial management should be a standard part of high school curricula. Eighty-one percent said that to live within ones means was the most important financial advice that parents could pass on to their children. That figure jumped from 69% a year ago, when the survey was last conducted.

All of these responses underscore the need for guidance and education among financial services clients, and financial planners are positioned to provide those services, said industry professionals. “There has not been a moment in history when more people need to be coached, guided and educated about how to create a long-term plan,” Dychtwald said. “What you’ve got is a population of people who have been spooked. They don’t know who to trust, who’s lying, or what people’s intentions are.”

The study, called “Retirement at the Tipping Point: The Year that Changed Everything,” gathered opinions from more than 2,000 Americans from four generations. The study was conducted with Harris Interactive.

Nearly 60% of Americans lost money in mutual funds, 401(k) plans or the stock market. Respondents believe that it will take about seven years, on average, to recover losses. Among respondents 55 and older, 46% say that medical expenses not covered by insurance is a top financial worry for their retirement phase. Four out of ten respondents said they believe they will have to help support their parents, in-laws or siblings eventually. In light of their financial situations, respondents believe, they might need to postpone retirement by 4.2 years, on average.

Clients might find that they have other reasons for optimism, especially when it comes to the timeline for earning back financial losses. Financial markets typically recover very quickly from recessions, so the U.S. would have to be in a prolonged recession for recovery to take as long as seven years, said Russell Diachok, president and chief executive officer of Centennial, Colo.–based Geneos Wealth Management, Inc., an independent broker dealer. 

“Personally, I think it would be a shorter recovery time, more like three to five years,” Diachok said. Of course, he acknowledged, “that is a significant amount of time if you were planning to retire in two years.”

In the survey, some Americans did express optimistic attitudes about retirement, and even saw working during their retirement years in a positive way. Sixty percent of Americans say that they view retirement as “a new, exciting chapter in life.” That is an increase from the 52% who felt that last year, according to the study. Seventy percent say that working in retirement is a way to remain stimulated and pay bills.    

By Donna Mitchell

After suffering deep losses in their retirement savings accounts, most Americans appear to be in a state of shock, unsure where to move next.

“People are shell-shocked, paralyzed and afraid to do anything,” said Christopher “Kip” Condron, chairman and CEO of AXA Equitable at a “thought leadership program” last week here. “Their retirement accounts have taken a terrible beating. There’s no question that virtually everyone is being affected in one way or another by one of the most severe recessions in generations.”

Mutual fund companies, insurance providers and banking advocates all want to help and are naturally pushing their own products, but battered and weary investors aren’t sure whom to trust.

About the only thing everyone can agree on is that Americans haven’t been saving enough.

“People start saving too late,” said Pamela Perun, policy director for the Initiative on Financial Security for the Aspen Institute. “We’ve been waiting until midlife to save. We need a saving system that covers people from birth to death.”

Employer-sponsored 401(k)s play a valuable role in getting people to put a little extra aside every month, she said, but the tax-deferred incentive is not enough to convince people to change from being spenders to being savers.

“It’s not just how much we save, but how and where we save,” Perun said. “The problem is bigger than just retirement. Saving needs to mean more than just saving on taxes.” Perun noted that 20% of Americans are not in the banking system at all, and the bottom 40% to 60% of Americans may or may not save, but they certainly do not invest.

For decades, there have been major imbalances between big savers and big spenders, particularly among nations, said Eric Chaney, chief economist at the AXA Group. The savings rate in the U.S. dropped from around 8%, where it hovered for decades, to practically zero in recent years as equities continually pumped up stock portfolios.

The extended bull market created the illusion that equity and real estate growth could take the place of saving for retirement, he said. With equities down 50% and the average defined contribution account balance down 27% in 2008, everyone has been reminded of the bitter truth: markets are volatile, and stocks don’t always go up. Financial advisers may be preaching that everything is on sale and now is a great time to load up on bargains-but most investors just aren’t buying it.

A February survey conducted by AXA Equitable found that 65% of Americans were worried about meeting everyday expenses should they lose their job, up from 54% in a similar study last year.

“Our research showed that paying bills was a middle-of-the-pack concern last April,” Condron said. “The fact that it is now a top priority underscores how the year-long market volatility has shaken Americans’ sense of security about their immediate financial future, most notably as a result of job instability.”

Securing guaranteed income for life remains the top priority for 69% of Americans, particularly among women, who tend to live longer. Approximately 75% of women surveyed said getting guaranteed income payments for life was a top priority, compared to 58% of men.

Annuities can provide that guaranteed income stream later in life, but many cash-strapped investors are hesitant to lock up money they need right now for an uncertain future.

AXA found that 61% of men said they planned to shift the asset mixture of their investments to react to the changing markets, whereas women were less likely to act, with only 51% saying they would make changes. Half the survey respondents said they had taken no action to change their financial situation.

“Women continue to show more concern than men as the period of economic instability lingers on,” said Barbara Goodstein, executive vice president and chief innovation officer at AXA Equitable. “What is troubling is that it appears that their sense of caution has morphed into an inability to take the prudent steps necessary to navigate through this crisis.”

“The fact that people are still concerned about the health of their retirement during the market volatility we are experiencing makes it clear that they still understand the importance of preparing for their financial future,” Condron said. “What is alarming, however, is that so many are still not taking the steps needed to achieve these goals.”

Beyond working longer and spending less, most Americans don’t seem to know how to recover their losses. The fastest way to recover their losses might be to take another risky gamble on equities, but most investors can’t afford to lose any more of the money they have left.

Approximately 40% of men and women within 10 years of retiring said they planned to delay retirement. Among the men surveyed, 40% said they would work an extra three years to retire at 64, while 39% of women said they would work an extra four years, retiring at 66.

Contrary to many reports, Social Security is not doomed, and experts say the program should have no trouble providing retirement benefits to future generations of Americans for the foreseeable future. It might not be much, but Social Security should provide most elderly Americans with enough money to survive. For those who can save a little more, it will provide a steady and reliable income supplement.

Unlike a personal retirement account that has a set period of wealth accumulation followed by an open-ended period of decumulation, the nation’s Social Security program is structured so that the income for the monthly payments to retirees are generated by current members of the workforce. Payments can keep up with inflation because the average income keeps rising.

Since the program began, there have always been more workers than retirees, providing the system with a net surplus, said Peter Brady, a senior economist at the Investment Company Institute. When the Baby Boomer generation begins retiring en masse, this situation will temporarily reverse, causing a deficit, he said.

“The demographic shock of Baby Boomers is a one-time event,” Brady said, but it won’t break Social Security because the income payments from active workers will keep coming in. The Congressional Budget Office estimates payroll taxes will cover at least 80% of benefits.

When the income/payment deficit happens, the government will have to either reduce payments or increase taxes. Others have suggested raising the minimum withdrawal age, but because of its inherently political nature, most experts don’t think older voters would approve of such hardships on themselves.

By John Morgan

Variable annuities are in the midst of a major overhaul. In recent months, VA providers have been busy raising fees, decreasing benefits and, in some cases, suspending guaranteed income and withdrawal riders all together. As asset values in VA portfolios plummet along side of the market, and interest rates sink, many insurance companies are struggling to fund guaranteed payments on the products. More fee hikes and benefits cuts are expected in May, when new product prospectuses collectively hit the shelves.

It’s a big disappointment for advisors who sell a lot of variable annuities—and it means a lot more work. Frank Dragotta, managing principal of a LPL independent b/d branch office in Lyndhurst, NJ, says variable annuities (VAs) really caught his eye when insurance companies started offering guaranteed withdrawal benefits in 2001 and 2002. Dragotta, for whom VAs account for 40 percent of his $40 million book of business, says over the next ten years benefits quickly became more robust as insurance companies competed to create the most attractive offering.

But at the end of March, Dragotta began to notice insurance companies decreasing benefits and increasing fees, and in some cases discontinuing products all together. In response, Dragotta spent the last two weeks of March documenting these product changes, contacting wholesalers and doing due diligence on the financial health of the insurance companies—in many cases going back to meet with product providers in person. In all, Dragotta says he is spending 30 percent more time now doing due diligence on insurance providers than he used to.

“Of the companies I was doing business with six months ago, some I will continue to do business with, but I am also adding new carriers who are in a better [financial] position, but weren’t as big on the shelf,” Dragotta says.

Like Dragotta, many advisors who use VAs are trying to digest the massive changes in product design, while also spending added time assessing the financial stability of insurance companies. And in many cases, like Dragotta, advisors have decided to switch providers.

“Within two months this product has changed like night and day,” says Joe Spada, managing director of financial planning firm Summit Financial Resources, Inc., in Parsippany, New Jersey. Indeed, it seems the living benefit arms race is officially over, as insurance companies say they are withdrawing benefits to better align their products with the current economic environment.

VA Throwbacks
According to a recent Cerulli Associates insurance survey, insurers are using a number of strategies to manage the risks associated with paying guarantees on variable annuities. On a five-point scale where five indicates “most often used,” formal hedging programs came first, receiving a score of 4.4. Next in line was increased charges for benefits, with a ranking of 3.5, and reduced withdrawal rates on living benefits, at 3.1. Lisa Plotnick, associate director of Cerulli Associates, says many insurers are paring back living benefits of 7 percent to around 5.5 percent or 6 percent. (Fees on such riders range between 20 bps and 100 bps, on top of a base insurance charge of between 140 bps to 160 bps.)

For example, MetLife, a leader in the guaranteed minimum income benefit (GMIB) space, raised fees on its GMIB rider in February from 80 basis points to 100 bps, and hiked fees on its limited withdrawal guarantee rose from 65 bps to 125 bps—with additional changes to withdrawal guarantees scheduled for May. Other companies have also changed pricing; AXA cut its GMIB rate from 6.5 percent to 6 percent in November and then down to 5 percent in February. Effective in May, John Hancock discontinued all variable annuity share classes (“Bonus, C and L shares”) except its B-Share Venture product, which costs 50-60 bps less than other share classes. Meanwhile other companies are suspending benefit riders all together. In March, MassMutual suspended the sale of its GMIB riders, as well as the Guaranteed Minimum Withdrawal Benefit formerly available on its MassMutual Transitions Select and MassMutual Evolution variable annuity contracts.

In addition to these changes, many companies are simplifying products. “If you look at a VA prospectus right now, you need a hand truck to carry it,” says Mike Farrell, executive vice president of Retirement & Wealth Strategies at MetLife. “Part of that is the proliferation of funds that are in the product, and some of that will be simplified. I think the days of having 200 different investment portfolios is going to go by the wayside because it is very hard to hedge and maintain the correlation between the performance of those funds and their respective indices.”

Scott DeMonte, of FRC, an industry research group, says many insurers are also beginning to replace active managers with indexed portfolios. “We’re seeing companies make defensive moves and being proactive about the market decline—it’s not great for the investor but we’d rather see that then, heaven forbid, another AIG-type situation.”

In all, VA net assets dropped 24 percent in the fourth quarter of 2008 versus the year ago period, according to NAVA, which kept the acronym but changed its name recently to the Association for Insured Retirement Solutions. Meanwhile total variable annuity sales fell 15 percent in 2008 versus 2007, to $154.8 billion. Although insurance companies expect a continued downward trend in sales and 1035 exchanges (which allow an individual to replace one insurance product for another of a different brand without tax consequences), they hope to see an increased interest in VAs from baby boomers looking for equity growth and downside protection. “The client can see now what he is getting through one of these withdrawal benefits, that was something that may have been viewable only in the abstract five years ago, but we’re seeing it in practice today,” says Cerulli’s Plotnick.

But advisors who use VAs feel they have been blindsided by the polar change to benefits. To some advisors the new products may be good for the insurance companies but too complicated and risky to justify using and too expensive for their clients. As one advisor on our forum asked, “At what point do the VA companies price themselves out of business?”

As the population ages, wealth advisers increasingly will be called upon to stretch retirement savings over more years — sometimes a lot more years.

Take the case of an adviser in Portland, Maine, who was retained by a 97-year-old man with a big problem. “His wife had just died,” says Tom Rogers, a certified financial planner and a principal in the Portland Financial Planning Group. “I guess because his wife was younger, his lawyer had put together an estate plan that assumed he would pre-decease her. It said that in the event of her death, their assets would go to her children from a first marriage.”

Surprise, surprise: She died first, leaving him with no money.

“The estate wasn’t huge,” says Rogers, who is on the board of the Maine Estate Planning Council. It was about $600,000 including real estate and investments, but it was all he had besides Social Security and a small pension.

In many states, a surviving spouse who is disinherited can petition the court for what’s called a forced share, typically 30% of the estate including beneficiary accounts. “His stepchildren weren’t thrilled, but he was able to do that, and he got $200,000,” Rogers says.

The question became how to invest that money for someone 97 years old.

“He was in good health, completely lucid, actually a bit of a curmudgeon,” says Rogers. “He didn’t know how long he was going to live, but he wasn’t willing to assume he was going to die in two years. Obviously the stock market would not be a good choice, but we wanted better returns than a money market or CD.”

During discussions with the client, says Rogers, “it turned out that he was very loyal to his prep school and college. So my solution was to set up charitable gift annuities with those schools.”

Many charities offer these annuities where, basically, in return for handing over assets to the charity, the donor is guaranteed a lifetime income stream. And because of his advanced age, the client was eligible for a 12.5% annual return no matter how long he lived. No other conservative investment would have offered that kind of return, and he also received a major income tax deduction because it was part gift and part investment. “And it made him feel good that he was giving to his schools,” Rogers says.

As it turned out, the deal wasn’t so great for the schools. He died last year, at the age of 107.

“They probably were not expecting to pay out on that annuity for 10 years,” says Rogers. “But it goes to show you that you just never know.”

Clients don’t have to be centenarians to take advantage of charitable annuities. Rogers says an 80-year-old currently gets a return of around 7%. Rates have declined a bit recently due to increased longevity and lower expected returns on invested assets.

One catch for wealth advisers is that once the donation is made, the money is no longer under management, which means no ongoing fee income — though that wouldn’t stop an adviser like Rogers, who says the satisfaction of helping out his client far outweighed any lost fees.

By Max Alexander
A DOW JONES NEWSWIRES COLUMN

It sounds redundant: Put a tax-deferred investment, like a variable annuity, inside an already tax-deferred IRA or retirement account? But the wisdom of such a move is actually subject to much debate.

In fact, fifty five percent of all variable annuity assets are in IRA rollovers and qualified retirement accounts, such as 401(k) s, 403(b) s and Keogh accounts, according to the National Association of Variable Annuities (NAVA), Reston, Va.

Financial advisors often recommend that clients put annuities in qualified plans or IRAs primarily for their insurance benefits and income guarantees, according to a 2006 NAVA study. Seventy percent of the 1,000 advisors polled cited the variable annuity death benefit—a guarantee that when the policyholder dies, the beneficiary receives the greater of the market value or original principal–as one of three top reasons for advocating using variable annuities inside qualified plans or IRAs. Sixty-six percent named guaranteed lifetime income, and 61 percent listed living benefits.

The majority of respondents also reported that they favored variable annuities in IRA rollovers as a way to manage client investments in a large number of funds from a large number of mutual fund families.

Another top reason: The Guaranteed Lifetime Minimum Withdrawal Benefit. With this common feature, the annuitant is promised, at minimum, a return of all contributions—regardless of how the underlying investments perform. This guarantee can come in the form of regular withdrawals paid over a specific period. The most popular type promises withdrawal rates of at least 5 percent annually for life starting at age 65. Many insurers step up the withdrawal rate annually if the annuity is held for at least 10 years.

Questions
But is it appropriate to put an already tax-deferred retirement account inside another tax-deferred instrument? Many financial advisors believe it does not make sense. Investors, they say, can do a better job diversifying IRAs or 401(k)s to get high risk-adjusted rates of return, as well as income over the long-term. Their other big beef: The high cost of variable annuity insurance and fund management fees reduces the client’s return on tax-deferred investments.
Jeffrey D. Voudrie, financial planner and president of the Legacy Planning Group, Johnson City, Tenn., says one of the main arguments for using a variable annuity inside an IRA is flawed due to the high cost.

Most variable annuities sold through commission-based advisors have mortality and expense charges of 1.45 percent. This is an annual fee that is charged against the entire value of the account–not the original investment. On a $500,000 investment, that can amount to $7,250 the first year. If the value of an account doubles in 10 years, the cost would rise to $14,500 that year, he says.

There are also mutual fund management fees, ranging from 70 basis points to 1.5 percent. Plus optional living benefit riders cost more than 60 basis points annually. As a result, the average variable annuity charges range from 200 to 300 basis points annually.

“That’s $10,000-$15,000 each year on a $500,000 investment—and that expense increases as the value of the account increases,” Voudrie argues. “Do you really think it costs $10,000-$15,000 a year to cover the cost of the insurance associated with (for example, the death benefit)? Of course not.”

Fee-only financial planners, like Jane King, president of Fairfield Financial Services, Wellesley, Mass., prefer to invest IRA rollovers in no-load, low-cost mutual funds. King diversifies in growth and value stock funds, international funds, bonds and money funds for attractive risk-adjusted rates of return. Her retired clients use up their non-retirement savings assets first, leaving the retirement account to grow in value–even while taking the minimum required distributions. As a result, the tax-deferred IRA can be left to a child as an inherited IRA. The child can then take distributions based on his or her life expectancy.

A report by the New York law firm, Milberg LLP, says the insurance features of the variable annuity are not likely to justify sales of the product, because the insurance tends to be actuarially worth only a fraction of the higher fees. Those high fees, the report suggests, go toward profit and high sales commissions.

However, John Huggard, estate planning attorney and author of “The Truth About Variable Annuities–Debunking The Myths,” Parker-Thompson Publishing, disagrees.
The biggest flaw in the high-cost argument is the incorrect assumption that variable annuities are more expensive to own than other qualified investments, such as mutual funds, he contends.

For example, the average cost of owning a variable annuity in a qualified plan is about 2.9 percent. This includes fees paid to money managers, commissions, trading costs and insurance costs. But the average annual cost of owning an A-share mutual fund held in a qualified retirement account is about 3.23 percent.

“The average stock mutual fund held in a qualified retirement account is 33 basis points more expensive to own on an annual basis than a similar variable annuity held in a qualified retirement account,” says Huggard.
Huggard refutes those who argue that the practice of placing a variable annuity inside a qualified plan or rollover IRA results has no benefit because it duplicates the benefit of income tax deferral. “The duplication argument would have validity only where a variable annuity offered some income tax deferral as its sole benefit,” he said.
However, Huggard stresses that people put a variable annuity inside a tax-deferred IRA or 401 (k) to get insurance coverage. They are willing to pay the annual fees and charges to protect principal.
Those guarantees include:
· The guaranteed death benefit.
· Guaranteed minimum withdrawal benefits.
· Guaranteed minimum income benefits: With these, an annuitant can receive a guaranteed dollar amount in monthly income–regardless of how the contract’s investments perform.

Annuities in IRAs, he says, also can help transfer wealth to family members. For example, a variable annuity beneficiary can withdraw in installments over his or her life expectancy. The undistributed amount continues to grow tax-deferred.

In some states, a business owner’s Self-Employed Retirement Plan (SEP) may be subject to creditor claims. So, for example, a doctor concerned about lawsuits, could transfer the SEP to a variable annuity to obtain creditor protection.

In addition, Huggard notes, having a qualified plan in a variable annuity can reduce or eliminate the income tax burden facing beneficiaries who inherit qualified plans. An “earnings enhancement benefit (EEB)” rider, which is only available in variable annuities, can reduce or eliminate income taxes on inherited qualified plans, he says. Additional cash at the annuity owner’s death may help beneficiaries pay the income taxes on inherited money.

If you consider a variable annuity, always evaluate the financial strength of the insurance company and all the fees involved. This is particularly important today because A.M. Best, Standard & Poor’s, Fitch and Moody’s have downgraded the financial strength of many insurance companies due to the ongoing financial crisis.

By Alan Lavine

The financial crisis ravaging the global markets is even taking a toll on high-net-worth (HNW) consumers, as a majority of respondents to a recent survey are now concerned about outliving their assets.

In a survey of 200 high-net-worth consumers and 200 advisors for this market, 61% of the former expressed concern about outliving their assets, while 67% of the latter did the same. In addition, 71% of HNW consumers are concerned about the need to make lifestyle changes during retirement, according to the survey which was commissioned by The Phoenix Companies.

“Even in good times consumers are more concerned about changing lifestyle than outliving their assets,” Walt Zultowski, senior vice president, research and concept development for the Phoenix Companies said in an interview. “That’s always been the case in this market segment. `But I find interesting the fact that 61% of consumers are either more or much more concerned about outliving assets. So that now is much bigger on their radar screen than just having to change their lifestyle.”

Other findings from what Zultowski termed a “quick temperature-take” of the HNW market reflect similar findings from recent surveys of the retirement market as a whole. Among these: About 58% of soon-to-be-retired high-net-worth consumers are thinking they might have to retire at a later or much later date, while another 76% of HNW consumers are receptive to a financial product that guarantees a life stream of income from their retirement assets.

The survey also found that four out of 10 HNW consumers are navigating the turbulent market on their own without talking to their advisors. This lack of communication could be one of the reasons for another finding: Advisors tend to overestimate consumers’ concern with outliving their assets and underestimate the changing lifestyle concerns.

“I think also too it’s part of the advisor’s job to be optimistic,” said Zultowski. “The message that I’ve told a couple of people is that advisors shouldn’t change their views, that they still need to be optimistic, but they can’t be flippant about their clients’ concerns.”

Retirement Income Reporter

NEW YORK — During most of the last expansion, U.S. consumers saved almost nothing from their current incomes. Conspicuous shopping was all the rage; soaring home values and stock prices made people feel wealthier.

But the current recession has changed that mindset. And as U.S. households add more to their nest eggs, the economy will have to adjust to reduced consumer demand.

If so, expect more store closings, bankruptcies and retail job layoffs. Other discretionary industries, from restaurants to casinos to tourism to health spas, will also feel the brunt of the new urge to save. Financial planners and banks may benefit. But investors, once burned by Wall Street, may be reluctant to buy stocks and bonds any time soon.

According to Bureau of Economic Analysis data, U.S. households saved less than 1% of their disposable income from 2005 until April of 2008 — far below the 10% posted in the early 1980s. (Data from the Federal Reserve Board make the situation look even worse: Personal savings, excluding investment in durables, fell into negative territory in 2005 and 2006.)

But despite the meager additions to their nest eggs, households still got richer, at least on paper. Fed data show that household net worth rose by more than $10 trillion in the three years ended in 2007. Direct holdings of equities and mutual funds jumped $3.4 trillion, real estate values rose $1.9 trillion, and credit-market instruments increased more than $800 billion.

In effect, U.S. consumers found a way to have their cake and eat it, too.

Of course, there were other reasons besides soaring asset values for the dearth of savings.

Because the developing world was socking away money religiously, there was a global savings glut. The U.S. government didn’t have to depend on its own citizens to fund huge fiscal deficits when foreign central bankers and sovereign wealth funds were willing to buy Treasury debt. The U.S. economy could increase its current account deficit thanks to investors worldwide.

In addition, in a world of aspirational retailers, product placement in media, and heavy advertising overall, households developed a preference for grasshopper-esque shopping over ant-like saving.

A team of three economists looked into why the national saving rate fell in recent decades, not just in the U.S. but also in France and Italy. They found that each society began to feel less obligated toward leaving capital to future generations. In the economists’ view, the savings rate in each country would have been much higher “had American, French, and Italian societies not become so focused on immediate gratification.”

In other words, we devoted more money to iPods, less to IRAs.

But then the housing and stock markets crashed. From the end of 2007 until the third quarter of 2008, household wealth shrank by $5.6 trillion.

Faced with disappearing 401k retirement accounts, plummeting home prices and a recession that has stolen away millions of jobs and cut into salaries, consumers are salting away more cash. By November, the U.S. savings rate had edged up to 2.8%.

It is very likely the rate will keep rising since consumers tend to save more during recessions. Financial advisers are telling clients to have a nest egg equal to six months of expenses in the event of a layoff. Hoarding has become fashionable.

That’s why last summer’s rebate checks failed to stimulate the economy. Few taxpayers spent the money; most saved the cash or used it to pay off debts.

And it is why many retailers are struggling. The U.S. economy is organized around the consumer as growth engine. That will no longer be the case in coming years as households adjust to a new financial reality.

Alan Levenson, chief economist at T. Rowe Price Group Inc. (TROW), estimates that the rise in savings in the fourth quarter accounted for the roughly 6.5-percentage-point wedge between the annualized growth rates of nominal after-tax income (down 1.1%) and nominal consumption (down 7.7%).

Levenson writes that “the spike in financial market and economic uncertainty likely encouraged caution generally.”

As a result, he forecasts that the savings rate will rise about two percentage points per year to hit between 6.5% and 7.0% by the end of 2010. That would be the highest yearly savings rate since 1992.

If one assumes the recession holds disposable income flat in 2009 (with the expected tax cuts offsetting earnings lost through layoffs) and income grows about a very modest 2% in 2010, the new additions to savings would shift about $400 billion away from consumer spending over the next two years.

In the short run, the shift to savings will be tortuous for all those who depend on consumer spending. But in the long run, a higher savings rate will be a good thing. It will be the only way that the U.S. can finance the retirement of the baby-boom generation, whittle down its massive current account deficit, and pay down the humongous federal deficits that are coming our way.

By Kathleen Madigan
A DOW JONES NEWSWIRES COLUMN

WASHINGTON — Given new expectations that the U.S. economy could contract for as much as a year, Federal Reserve officials stand ready to slash interest rates to levels not seen in half a century, minutes of their most recent policy meeting show.

Meanwhile, officials suggested that the economy could be in for a rather lengthy recession and sharplydowngraded their economic forecasts. The minutes, which were released Wednesday with the customary three-week lag, show that officials generally expect the economy to contract in the second half of 2008 and the first half of 2009. And some officials expect that the economic weakness “could persist for some time.”

Some officials voiced concern that future cuts might do little to put the ailing economy on a healthier path, according to the minutes. And with the target federal funds rate already at 1%, some officials pointed out that the Fed has “limited room” to lower further and should therefore move slowly. Still, others said more aggressive easing could help reduce borrowing costs as well as the odds of a deflationary outcome.

Either way, the Fed has made it clear that it is “unequivocally biased” to further rate cuts, wrote UniCredit Markets and Investment Banking economist Harm Bandholz in a research note.

“The minutes show that not even this historically low level has to be the end of the Fed’s easing cycle,” said Bandholz, adding that he expects the Fed to cut its target rate another 50 basis points at officials’ Dec. 16 meeting.

In their Oct. 28-29 meeting, officials said that “unfolding economic developments” could require the Federal Open Market Committee “to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities.”

Fed officials said they anticipate that economic data would show “significant weakness in economic activity” and that additional policy easing could well be necessary, according to the meeting minutes.

Meanwhile, they said they expect inflation to diminish in coming quarters.

“In any event, the committee agreed that it would take whatever steps were necessary to support the recovery of the economy,” the minutes said.

Overall, officials found that risks to the economy had greatly escalated and the credit crisis had morphed into an “international phenomenon,” leaving them little choice but to cut interest rates to four-year lows.

As the credit crisis worsened last month, the FOMC voted unanimously Oct. 29 to lower the target federal-funds rate at which banks lend to each other by 0.5 percentage point to 1%, its lowest level since the period between June 2003 and June 2004. The decision came in wake of Lehman Brothers Holdings Inc.’s (LEHMQ) September collapse, the near-failure of insurer American International Group Inc. (AIG) and new concerns about the conditions of other financial firms.

The Fed officials agreed that “significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures,” the minutes said.

They also noted that the credit crisis expanded globally since their September policy meeting, at which they held rates steady.

“The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period,” the minutes said. “This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their policy rates, including in the internationally coordinated action announced on Oct. 8.” That day, Fed officials agreed to an unprecedented joint rate cut with other major central banks including the European Central Bank and Bank of England.

Meanwhile, the Fed downgraded its 2008 forecasts for gross domestic product and the unemployment rate, according to a quarterly forecast the Fed released Wednesday.

The central tendency of officials’ forecast is for gross domestic product growth this year to stand between 0.0% and 0.3%, which is lower than its June projection of a 1.0% to 1.6% range.

Meanwhile, they slashed their GDP growth projection for 2009 to a range of -0.2% to 1.1%. In June, they had seen a 2.0% to 2.8% range for 2009.

Officials also raised their forecasts for the unemployment rate. They now see the unemployment rate between 6.3% and 6.5% in 2008, up from the previous forecast of 5.5% to 5.7%, the Fed said.

Amid a deteriorating economy, the unemployment rate had already surpassed the Fed’s previous forecast. Earlier this month, the Labor Department reported that the unemployment rate in October soared 0.4 percentage point to 6.5%, the highest level since March 1994.

By Maya Jackson Randall
Of DOW JONES NEWSWIRES