Tuesday, February 8, 2011

Secondary Market Annuity - is it for you?

Lets start with understanding what annuity means. An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. The insurer, in return, commits to make periodic payments beginning immediately or at some future date.

Now lets understand the secondary market. A secondary market is one in which an investor purchases a financial asset from another investor rather than the issuer, subsequent to the original issuance in the primary market.

Lump them together and you get some idea of what secondary market annuity means. In this article,we will focus on the simplest kind; an annuity that guarantees a fixed payout for a fixed time period.

why should you consider an annuity...simply put, it guarantees fixed income. Interest rates will go up and down, bond yields will vary, stocks will fluctuate but an annuity income once guaranteed and in contract with the insurance company is set in stone. You are pretty much guaranteed the cash flow.

why secondary market...only 2 basic reasons. First, there is a seller who is desperate to sell at a discount. Second, for every seller there is a buyer eager for a higher ROI. Of course, the underlying assumption is that the average interest rate on a secondary market annuity beats all other investment options for the same period. The insurance company does not reset the contract to a higher interest rate, its simply that you purchase it at a discount from the original buyer for an effective higher interest rate.

what are the risks...any investment is as good as the strength of the insurance company backing it, so the stronger the credit rating and stability of the insurance company, the better off you are. Another consideration is your own outlook on future interest rates. If you expect CD rates, bonds, regular annuities to provide better returns in the future, you need to evaluate the secondary market offering for a like to like comparison. If you are investing with foreign funds, exchange rate fluctuations need to be factored in and last but not the least is the fact that the funds you invest will NOT be available to you. This is not an investment that you can liquidate easily. Only funds that you do not ever intend to use should be invested.

this is complicated, how can one get more info...Mr Andrew Murdoch from Somerset Wealth Strategies was my guide to understanding this complex investment vehicle. I am sure he can be of help if needed. Also the following web sites.

Additional Info:

How much should I save?

Saving money is neither a new concept nor one that needs too much discussion but the fact that its the least pro-actively planned budget item is mind-boggling. Saving is just as important a budgeting item as anything else and should be a line item in any budget rather than being the number that remains after all other budget items are accounted for. The logic behind this is simple as brainstormed below...

control your spend...simply speaking, check and double check your monthly budget. There are must have "needs" like rent, insurance payments, grocery, fuel, utilities and there will be "wants" electronics, new clothes, eating out, movies etc. If Saving is not in the "needs", begin by listing it there and assigning a target $ value to it. The best way to save is to wisely spend and put off at least by 24 hours anything that is not on your budget list.

target $ value for saving...every one's economic scenario is different. Some have saved in the past so have something to fall back on, some have utilized it all in the downturn and some have yet to embrace this idea. Rule of thumb simply is "as much as you can". Yes, save the maximum you can every month till you have about 12 months of reserves. Reserves would be your monthly budget for all your "needs" times twelve. This would be a healthy number. Alternately if percentages are your thing, most recommendations are for 20% of your pre-tax income but at least 10% for sure. Getting to that reserve target will take time but the inner peace and confidence that it provides is awesome.

saving tricks...there are several methods people can adopt such that they save automatically which means the money is never with them in the first place to re-direct into a savings account post budgeting. One of them is directing a portion of your salary pre-tax directly into your 401k, second is to direct a portion of your salary into an IRA account, third could be to direct a fixed sum every pay check into a savings account, fourth could be a direct deposit into an education fund (if you are saving for college).

don't save to be a millionaire...almost every article or discussion ends up calculating how much someone should save at what age and how long and at what annual return to save up to a million. I have never understood the fancy for this target. Saving has a higher purpose than that. It is to provide for your needs when you need help. It is to provide you peace of mind that if things go south, you can depend on it. It is to allow you to buy things and have vacations or share gifts with your loved ones if you choose to do so.

Lastly...Saving is the same as dieting. Do not go overboard else you will lose interest or suddenly splurge on fatty items breaking the discipline and long term goal. Keep it steady and only to the point that you do not feel strangled in your own saving plan. The idea is to enjoy life continuously and be prepared...

Saturday, January 15, 2011

Rich in India, Tight-fisted in USA - should you revisit your global portfolio?

This posting mostly applies to Non Resident Indians but parts of it may be applicable to readers migrated from other places as well.

Rich or not so rich, could be defined as a state of mind, heart, social outlook but lets simply keep to something quantitative and that is money. Its odd how many NRIs in the US spend years and decades earning, saving and investing but always restrict their financial planning to just US or just India and not as one global portfolio.

is that really optimal? lets explore this.

know your portfolio....your financial portfolio is everything you own, globally, not just that has your immediate attention or is easily accessible to you. It should include bank accounts, credit union accounts, 401k accounts, brokerage accounts, stocks, bonds, insurance, annuity and all real estate - land, home, rentals etc. Lot of folks never put this portfolio together and really get a full realization of their global assets and its net worth. Ofcourse, you know about it and occasionally think about it but rarely do you consolidate it all in a financial tool and take it in. Your overseas bank account ...put it in. Your overseas investments in some stocks, mutual funds, put it in. Your overseas investments in real estate, put it in. Fidelity.com has some nice tools that will allow you to input and track all the above.

be fair....true market valuations of your assets and their future growth or appreciation potentials is essential. Do not value them on what you think their value is or what you think you should get for them, but a frank down to earth assessment of what the market will bear. I would even advocate that you factor a reduction of 5% to the final assessment to account for minor fluctuations or brokerage costs if you were to liquidate them all at the time of assessment.

evaluate your future....lots of folks hold on to offshore assets presuming they will use it some day? really? will you? will your kids? if this presumption does not really hold strong, then your ability to manage the asset remotely, being on top of ever changing laws in the country of investment, differing inheritance and estate planning laws, guarantee of your asset being safe, counting on your friends/relatives' support, inheritance laws of the country of investment or the ability of your kids to go there and sort it all out become primary considerations. Remember, you are not getting any younger and your most reliable connections will become stretched and thin over time.

What if scenarios?....it would be prudent to run through some What if scenarios for your portfolio. Should you liquidate offshore investments and bring it together in your adopted country where you might have better control. Can you invest it better here, get better loans, get better rates on reduced loans, pay off some debt and increase your standard of living or lifestyle.

Taxation....There will be tax implications, both in the investment country and again in the USA. USA has tax treaties with some countries. This is where having the right tax professional with international tax laws helps best. This is also where the wonderful foreign tax deduction or tax credit provision in US tax laws helps big time. You can read more at: http://www.irs.gov/businesses/article/0,,id=183263,00.html

Money Trail....keep records. If you made investments via your NRE/NRO accounts, kudos!!! you have records that your CA or Tax professional can use to calculate your cost basis and subsequent taxes based on the sales receipt. If via any other account or any other means, as long as you have receipts and you can show proof of your cost basis, you should be ok. Depositing sales proceeds in the same accounts as the one you want to use to repatriate funds in USD would be a good idea. This will allow your bank to provide all money trail paperwork, even guide you towards a CA or Tax professional they work with who could validate payment of taxes on the profits, thus clearing your funds to be repatriated. Repatriation via wire transfer or certified check deposits is most recommended, again, so you have a complete trail if ever audited.

Know your bank and relationship manager....NRI departments in banks have relationship executives and managers that are experts in this field and its important to know yours well. They can really do wonders in terms of evaluating your situation and recommending the fastest way to reach your goal. Ofcourse, no bank likes to lose deposits and funds, so keep pushing aggressively for your timelines.

Lastly....you only live once and there are limited golden years you will get with your kids before they go off to college and on with their lives. Its worth considering if being rich on paper with limited access to offshore investments is really an optimal lifestyle. Thats what this is all about, isn't it?

Additional Info:

Wednesday, January 12, 2011

How well do you know your 401k?

Lets start with what is a 401k. Definitions on the web, in newspapers and in magazine articles are as simple or as complex as the prospective audience. Simply put, its a savings plan. I will stick with that simple definition and focus on aspects of 401k that may help you.

pretax dollars....401k allows you to save in pre-tax dollars, invest in pre-tax dollars and grow your money in pre-tax dollars. Ofcourse there is a limit that resets every year or so but a decent limit.

employee match....401k contributions are matched by a lot of employers for different contribution amounts and for different percentage matches. Some may match $ for $ upto 3%, some upto 3% for first 6% and so on. One way to look at it is getting an immediate ROI on your contribution. This feature by itself is worth making 401k your first savings account.

investment options....401k investment options vary by plans from safest (money markets) to riskiest (you investing in stocks with your own analysis) and everything in between. Depending on your comfort with risk and knowledge on the stock market, you could be at one end of the spectrum or all over meaning you can be 100% in money market or stocks or have 5% invested among 20 different mutual funds. My recommendation would be to read about the funds being offered, their investment strategy and past performance, evaluate what maps to your long term goals and make a decision. Some funds have a higher management fees versus the other so look out for that when making a choice.

contribution options....401k contributions again vary with plans and features being offered. Some allow a flat % each paycheck, some allow for a gradual increase in contributions over time. Some even allow different contribution % options depending on the source of income; salary, bonus etc. Depending on your own financial outlay and market perception, you could decide to start slow with gradual increases or alternately start aggressively with max contributions upfront. Note that employer matches will likewise adjust so find the right balance.

investment re-balance....401k plans offer this amazing feature that allows you to move your investment between the multiple investment options within your plan by simple % allocations to each. This is handy if your perception of the market has changed and want to adjust. Some plans even allow a forward looking re-balancing.

withdrawals....401k plans have withdrawal options. You have got to invest some time to get answers to the following questions. How much can I take out? What is the penalty, fees etc? How much time does it take and what are the qualification criteria? Lot of articles have been written about how taking money out from 401k is a bad idea. I agree with all of them but when you need the money and have exhausted all options, you got to do what you got to do. Having the knowledge ahead of time on how you can access the money will allow for a peaceful demeanor when making this tough decision.

Lastly....its your money so give it attention like any other investment. A 30-60 minute review once a quarter can go a long way in building up your savings with the investment options that map to your plans the best. Thats what this is all about, isn't it?

Additional info:

Saving some money on Car Insurance

know your coverages....lot of us buy insurance and keep sending in the checks to renew the policy without ever reading the coverage we bought. Not cool!!! its important to know your coverages and your deductibles.

...why? Simple. It can save you. Save you from spending a fortune if you are under-insured and save you some money if you are over-insured. Lets look at how it can save money.

coverage amounts....discuss with your agent what the right coverage amount should be depending on your overall financial exposure and value of the car. They are best at this and you are paying them to guide you, so why not use the expert.

deductibles....depending on your driving habits and mindset, you could always consider higher deductibles which should lower the premiums.

discounts....we all love discounts and insurance companies have so many, there is a big likelihood, you qualify for one or more that have not been applied; examples include - home, multiple cars, safe driving record, age, low mileage (if you are driving less, that should help), education (cleared HS, got a degree etc), credit union membership, costco or sam's club membership, car features (new alarm system, ABS) plus lots more

shop around....this might help, might not. If you have a clean driving record last 3 years, chances are you will get good competitive offers else remaining faithful to your current insurance provider might be the only option.

premium revision....happens all the time with insurance companies. They re-evaluate their premiums but most do not pro-actively communicate it to you unless you are up for renewal. In some cases, the agent may not pass along the lower premiums. So call, find out when the last premium revisions were done and if your agent can look at your policy and work their magic.

paying your premium....insurance companies tag a surcharge for paying monthly or in installments which can add up. This is over and above your premium so if you can, plan to pay for 6 months at a time. You can always cancel a policy and get your money back on a pro-rated basis if needed.

moved residence....insurance premiums vary by zip code. Not only is it important to keep the info on your policy current but if you moved to a new residence, started parking your car in a garage etc, it can help a little bit.

Lastly....you will not get anything if you will not call. So call your agent and ask for help trimming your premiums. A 15 min conversation can save you atleast $50-$200 every 6 months, not much for some, but over time we will find multiple such small saving opportunities which will add up. Thats what this is all about, isn't it?

Additional info:

Saving some money on Cable

we may or may not like our Cable service but definitely do not enjoy getting that huge bill every month. Lets look at some ways to find some savings.

promotions....Cable providers always have some promotion which is basically the same service at a lower rate for some time so pick up the phone and ask if you can avail them.

they want you....Cable providers are losing existing customers faster than gaining new ones, so your worth to them keeps going up every day. Contemplate telling them you are evaluating competition and negotiate for 6 -12 month waivers on modem rentals, special pricings, free premium channels.

bundle pricing....Cable providers offer triple play - voice, video and data. It might be worth considering the bundle as compared to a la carte services by different providers.

do you need them?....ofcourse you should really evaluate if you need the services they provide. Do you need the land line or can your mobile be the primary phone? Do you really need access to the network channels or would a $50 HD internal antenna do the job?

Lastly....you will not get anything if you will not call. So call your provider and ask for help trimming your bill. A 5 min conversation can save you atleast $10 every month, not much for some, but over time we will find multiple such small saving opportunities which will add up. Thats what this is all about, isn't it?

Additional info: