Paragon Perspectives

In this quarter’s newsletter I will be discussing Estate Planning, Exchange Traded Funds (EFTs), and Retirement.  Although each of the following articles cover a different topic, they are all components of the financial planning process.

 

Although estate planning is a subject that some people would prefer not to discuss, it is a vital part of a financial plan. The first article, "To Trust or Not to Trust," explains why high net worth couples should include a trust in their estate planning process.  Keep in mind that trusts are not just for high net worth individuals.  There are other reasons to include a trust in your estate plan.  Trusts provide asset protection for your heir(s), manage assets for your minor or impaired children, and have age specific asset distribution benchmarks for your heir(s) (i.e. age 25, 30, etc.). 

 

The second article, “Three Reasons to Add ETFs to Your Portfolio," considers why ETFs could be a good addition to your portfolio.  ETFs are a relatively new investment product than became available in the U.S. in 1993 and have gained in popularity over the past several years.  ETFs started as index funds, but in 2008 the Securities and Exchange Commission began allowing the creation of actively managed ETFs.

 

Lastly, the third article “So, You’re Ready for Retirement…Or Are You?” discusses how over the past several years retirement planning has come to include a period of transition.  This transition period is not for everyone, but the option should be explored before retiring.        

 

   As always, we at Paragon Financial Advisors welcome your questions about your account.  If you are interested in Financial Planning or any of the topics discussed please call us. 

 

If you did not receive a copy of this quarter’s newsletter please email info@paragon-adv.com to request one.

 

Sincerely,

 

David W. Hailey CTFA^®, CFP^®

Principal and President

What’s Your Number?

A recent TV commercial featured ads asking individuals the question above. The number referred to the amount of money the individual would need to fund their retirement. While that number was hypothetical, numbers can have significance. Witness the “talking heads” on the financial news channels as they await and report the periodic economic data news (Gross Domestic Product (GDP), unemployment, Consumer Prices (CPI), etc.). They will discuss the numbers, the trends, and the potential impact that data has on the financial markets. Ah, but now-as radio commentator Paul Harvey used to say- for “the rest of the story.”

Columnist Samuel Rines wrote an interesting article entitled “Monthly Economic Data Aren’t Reliable” in the June 28, 2013 Wall Street Journal. His basic premise is that all economic data is incorrect when initially issued; it is then corrected in subsequent time periods as more data are received. For example, the annualized change in GDP for the fourth quarter of 2008 was reported as -3.8%. Following subsequent revisions, the final GDP number for that quarter was -8.9%; an error of 134%. Revisions apply in much of the economic data reported. Those revisions matter. The Federal Reserve uses such economic data to analyze the economic growth and then make economic policy.

Employment data is another example. Initial employment data in February, 2013 was reported as a net new job growth of 236,000. It was revised in March to 268,000, and again in April to 332,000. The unemployment rate (currently 7.2%) is a frequently reported number. Its calculation counts anyone who works at least one hour as “employed,” and does not count anyone who stops looking for work as “unemployed” even though that person does not have a job. A much better number might be the actual employment percent of the eligible workforce—that number stands at all-time lows.

So what’s an investor supposed to do? Consider economic data figures as a “best guess” and view the data in terms of a broad indicator of the economy and its direction of growth. Monitor future adjustments and factor those into your assessment of actual economic growth. Certainly a macro view of the economy is important in your investment plan; but keep in mind your long term financial goals. Make investment decisions with those goals as a guide. We, at Paragon Advisors, will be happy to discuss your financial plans with you and assist you as you work to achieve your financial objectives.

Annuities—Times are a-changing!!

Americans have invested approximately $661 billion in an estimated 6 million variable annuity contracts with benefit guarantees (according to insurance industry researcher Limra in the April 20-21, 2013 Weekend Investor section of the Wall Street Journal). Such products were sold with the promise of a guaranteed retirement benefit that could be “reset” higher if the underlying investments perform well. These products also carried higher fees than the normal “immediate” annuities that started annual payments in exchange for a lump sum contribution.

The decline in long term interest rates has impacted some of the insurance companies who provide such annuities in a negative manner—so much so that the companies are changing provisions of the contracts sold in previous years. Some of these changes include limiting the investment options within the annuity, prohibiting additional contributions to the contract, raising contract fees, and even buying back (or offering alternatives for switching) the contracts themselves. We are experiencing client questions about such changes. Question: would an insurance company want to change a contract that was performing (i.e. making them money) at expected or better rates? The answer is usually “NO.” Therefore, when an annuity contract owner is offered an “opportunity” to switch or modify an annuity contract, it should be viewed quite carefully.

If you hold an annuity contract, there are several things which you should definitely do:

• Read the correspondence—Insurance companies usually give advance warnings of changes they are making to annuity contracts. That warning may come in a letter that looks like “standard document language” i.e. many pages with lots of small print; do not ignore what that letter is telling you. Some of the proposed changes may have a negative impact on your contract.
• “Reset” Opportunities- Some annuity contracts offer “guaranteed minimum income benefits” (GMIB) which can be reset over the life of the contract. That benefit level may change based on the investment performance of the underlying investments. That reset change may also allow for a change (increase) in the fee charged for the GMIB option. Weigh the cost/benefit carefully.
• “Trade-In the Contract”-Some insurers are offering to buy back the “old” contract in favor of a “new” offering. The new contract may not (usually does not) contain terms as favorable to the annuity holder as the old contract in terms of fees and/or benefits. Keep in mind that an advisor may be working on commission and such a trade-in could result in new commissions for the advisor.

Annuities are complex products. They usually carry fees that are higher than investing in the underlying investments directly and the sales commissions can restrict access to the funds invested subject to conditions outlined in the prospectus. One should never invest in an annuity without completely reading the prospectus and understanding the nature of the investment. We, at Paragon Advisors, do not use products that are commission based; hence we have very little need for such products. We will be glad to assist you in evaluating any contract (or proposed changes thereto) you may have.