by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Wednesday, December 11, 2013: Issue #2183
A Note From the Editorial Director: Marc Lichtenfeld’s tour of Europe with a handful of Oxford Club Members has ended, but a personal situation has detained him overseas for a few more days.
His travels reminded us of the last big trip Marc took with Oxford Club Members, to our Private Wealth Seminar in Southern California last summer. He had an unexpected experience on that journey, too. It prompted him to write one of the most important columns we’ve seen anywhere this year. It first ran on July 24. Income seekers, pay close attention to Marc’s advice.
- Andrew Snyder
Last week, I spoke at The Oxford Club’s Private Wealth Seminar at the beautiful Ojai Valley Inn and Spa.
After going for a run, I was in line at the café waiting to order breakfast when a headline in the Los Angeles Times caught my eye. It said, “Crisis for the very old: Many outlive their nest eggs.”
According to the article, 46% of Americans outlive their assets and die with no money.
That scared the heck out of me. It’s a terrifying thought that nearly one out of two elderly Americans struggle to pay their bills.
The article then went on to give a suggestion for how an investor can avoid being part of the 46% who outlive their assets. The writer’s solution: an advanced life deferred annuity, or ALDA.
Several people in line turned around when I (a little too loudly) blurted out, “What?!” My wife thought something was terribly wrong. I explained that there was: This newspaper columnist was offering the worst advice I’d ever seen.
A Bad Bet
First, let me explain the basics of an ALDA. Like a regular annuity, it will pay a defined amount of money over a specified period of time. However, the ALDA will pay out later in life. So for example, you can be 65 years old, pay a lump sum today and start collecting the income stream starting at 80.
The ALDA will be cheaper than a regular annuity because the income collected will likely be less than if you started immediately at 65. But if you die before 80, the insurance company keeps the lump sum payment. You don’t collect anything. In the words of Willy Wonka, “You lose. You get nothing. Good day, sir.”
In other words, you’re placing a bet with the insurance company that you’re going to live long enough to recapture all of your lump sum payments in the form of monthly income.
Insurance company executives’ mamas didn’t raise no dummies. There’s a reason these executives make millions and fly private jets – because they bet the right way more often than not.
That doesn’t mean you can’t live to a ripe old age. It just means that financially, an annuity of any kind isn’t designed to work out for your benefit. It was created to generate profits for the insurance company.
Make More Money
So forget an annuity that you hope to collect on in 15 years. If you don’t need the income stream for 10 years or more, buy quality Perpetual Dividend Raisers – companies that raise their dividend every year – and reinvest the dividends.
Here’s how it works out.
Let’s say you buy a portfolio of quality Perpetual Dividend Raisers with an average yield of 4% and average annual dividend growth of 10%.
If the companies continue to raise the dividend by an average of 10% every year, as they have over the past 10 years, and the market generates its historical average return, a $200,000 initial investment will be worth $635,549 in 10 years.
If at that point you need the income stream, you simply stop reinvesting and instead collect the $28,808 per year in dividend income. That is likely 50% more than you’d receive if you invested the same $200,000 in a deferred annuity.
In 15 years, the $200,000 portfolio is worth $1,179,868 and spins off $59,968 per year in income. That’s way better than giving an insurance company $200,000 at 65, hope you make it to 80, and then collect less per month than you would investing in quality dividend stocks.
Even better is that as long as the companies continue to raise the dividend, you’ll get an increase every year, something that won’t happen with an annuity.
So if you’re collecting $59,968 at age 80 and the companies you’ve invested in are raising the dividend by 10% per year, at age 81, you’ll collect $65,964. The next year you’ll receive $72,560, etc. And when you pass away, that million-dollar nest egg will go to your heirs instead of an insurance company’s bottom line.
Investing in Perpetual Dividend Raisers is the least expensive method of investing. You get to hang on to and compound those savings rather than pay for an insurance executive’s weekend in Cabo. Furthermore, you’ll make more money than with an annuity, and, importantly, your assets will stay in your family.
You’re Getting Robbed
You don’t know how much you’re paying in investment costs. (I’ll explain why in a moment.) But if you are using a full-service broker or insurance agent, it’s almost certainly way too much. Take mutual funds, for instance. Broker-sold funds don’t just have front-end and back-end loads (commissions), they also come with 12b-1 fees attached.
Worst. Advice. Ever.
Last week, I spoke at The Oxford Club’s Private Wealth Seminar at the beautiful Ojai Valley Inn and Spa. After going for a run, I was in line at the café waiting to order breakfast when a headline in the Los Angeles Times caught my eye. It said, “Crisis for the very old: Many outlive their nest eggs.” According to the article, 46% of Americans outlive their assets and die with no money.
Are Diamonds an Investor’s Best Friend?
All that glitters isn’t gold… but can still be worth a fortune to investors. For example, I have my eye on a sparkling commodity that’s taken its licks this year but looks like it could have a stellar 2014. It’s not gold. I’m talking about diamonds. And diamonds have been selling cheap.
The Next Big Shale Plays
Of all the rigs drilling for oil in the world, about half are operating in the United States – and half of those are in Texas. In fact, for all the attention given to the Bakken shale play in North Dakota, the most activity is occurring in the Permian Basin in West Texas.
|Wealth Building||Investment Strategy||Emerging Markets||Global Metals|
|Energy & Infastructure||Healthcare & Biotechnology||Income and Retirement||Technology|
Last month, movie buffs flocked to theaters around the U.S. to catch the much-anticipated premiere of the newest Hunger Games movie, Catching Fire. Over opening weekend, the cinematic production – based on the second book of Suzanne Collins’ best-selling young adult series – garnered $142.8 million. That puts it in fourth place for the most profitable U.S. movie opening…
Banks are supposed to be a financial safe haven: a place to store money and valuables. People trust their banks to secure their checking and savings accounts, handle their loans, and offer reliable investment opportunities such as CDs. That trust usually extends to the stock market too.
On March 5, 2013, the S&P 500 hit an all-time new high of 1,539.79. By May 20, it was up to 1,666.29. Then in July, it set another new high. The same thing happened in August… and in September… and again in October… and yet again on November 18. Judging by its track record since early 2009, this market seems unstoppable.
Like it or not, the holiday shopping season has already begun. Christmas music is playing over speakers, holiday-themed paraphernalia is lining store shelves… and the markets are wondering how retailers are going to fare over the next six weeks.
Move over, BRIC countries. There’s a new investing acronym in town. And there are plenty of experts out there preaching how it could make you a mint. Whereas BRIC is the term economist Terence James O’Neill coined back in 2001 when he headed up the Goldman Sachs global economics research department, MINT came about much more recently thanks to Fidelity International. Yet it’s only catching on now with some help from O’Neill.