Friday Financial Five–August 16th, 2013
Friday, August 16, 2013
Shifting pension funds to insurance companies
The clamor for information regarding the management of Rhode Island and other state’s pensions has alternative solutions being considered. Some congressional members are pushing to get insurance companies more involved in public pensions. A proposal from Orrin Hatch would allow public employees to allocate pension contributions to an insurance company in the form of an annuity. Doing so would take some of the onus off municipal leaders to manage pension funds and shift that responsibility to insurance companies. These companies would collect contributions from employees over the course of their working careers, and then pay out an income stream upon retirement. The idea may have merit depending on the strength of the insurance companies involved and the negotiated fees to those companies.
Taking advantage of Rhode Island’s 529 plan
Rhode Island residents contributing to the RI 529 plan are afforded a state income tax deduction up to $1 thousand for joint filers. For those about to make college payments, it might provide a tax benefit to contribute to the 529 plan first, holding the money in cash, and then pay college expenses. Rhode Island doesn’t currently have a time limit for funds to season in a 529 plan before being dispersed. For those living in other states, there might be an even bigger state deduction to benefit from.
A lesson from Detroit
As the mess in Detroit continues to get sorted out, it can provide guidance for the rest of the nation in terms of fiscal management. A majority of the debacle falls on the major loss of population over the years and subsequently, the tax base. One area that is sure to be affected is the payment to municipal bond holders. A plan currently being reviewed would equate general obligation bonds with the rest of the city’s obligations. If Detroit defaults on municipal debt, it could send shockwaves through the rest of the municipal market, as the strength of the obligation will now come into question.
Guaranteed variable annuity benefits may be going away
The feeble interest rate environment might make a recent variable annuity selling point, guaranteed benefits, a thing of the past. There was a huge surge in the sales of these products following the 2008 crisis, sold with the promise of equity exposure with a safety net. Unfortunately, the insurance industry underestimated how many owners would maintain these contracts. Now, companies are attempting to scale back guarantee amounts or impose other adjustments to contracts in order to curtail losses. Annuity owners should be on the lookout for mail pertaining to any contract changes.
A security blanket on top of Social Security
With retirement the number one concern on every worker’s mind, investment behemoth BlackRock’s CEO Laurence Fink recently postulated that there should be a mandatory savings plan on top of Social Security. There is a retirement crisis, given rising costs, the shakiness of Social Security, and the lack of savings among those close to normal retirement age. Fink’s solution would mean no privatization of Social Security, but instead force a separate mandatory savings plan. This would help retirement projections but would also mean more money out of workers’ paychecks.
Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at firstname.lastname@example.org.
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