Archives for July 2010

Immediate Annuity Options & Trade-Offs

These days, everyone has a regained respect for stock market volatility. One way to maintain a more stable income in retirement is to take part of your nest egg and buy a single-premium immediate annuity (SPIA). With an SPIA, you pay a lump-sum upfront to an insurance company in exchange for a guaranteed stream of income payments for life. You’ll usually get a much higher income than from bonds or dividend-paying stocks. However, once you die, the payments stop and your upfront payment is gone.

How much income can you get?

The two main factors that affect your actual payout are your age and the current interest rate environment, but there are also additional options to consider. Here are a few of the biggies:

  • Single vs. joint life. Will the payments be guaranteed for only one life, or the longer of two lives? This is a popular option for couples living together.
  • Minimum guaranteed payout period. Some folks may hate the idea of losing your entire lump-sum in the event of an early death, or want a minimum payout amount. With this option, you can guarantee that payments will be made for a specific minimum period (i.e. 5 or 10 years) no matter what.
  • Inflation-adjusted payments. With this option, your monthly payments will increase or decrease by a certain percentage each year, as pegged to inflation. This will protect you from decreased purchasing power in the future due to inflation, but will significantly decrease your initial payout.

Below, the July issue of Money magazine included a nice graphic that helps show how each affect your possible payouts based on a $250,000 investment. Data is from, a handy site to get free quotes.

Auto Insurance Rate Averages by State

Here is a chart of average auto insurance rates by state, via, shaded by overage ranges. Click for an interactive map with more details and a ranking.

I wonder why rates in Louisiana are so high. $2,500 per year? Is it fear of flooding? Laws that encourage suing other drivers?

From the site: “Rates were calculated for more than 2,400 vehicles for model year 2010; based on a 40-year-old single male driver who commutes 12 miles to work; includes $500 deductible on collision and comprehensive coverage.” I wish they also shared how much liability coverage they chose, as that is the largest component of my premium.

Buffett On Municipal Bond Risks

After being asked (well, forced) by Congress recently to testify regarding the credit rating agencies Moody’s and Standard & Poor’s and their role in the last financial crisis, Warren Buffett was also asked what he saw the next big related risk. Buffett’s reply:

Well, the huge question … if I were running a rating agency now, how would I rate states and major municipalities? I mean, if the federal government will step in to help them, they’re triple-A. If the federal government won’t step in to help them, who knows what they are? If you are looking now at something where you could look back later on and say, these ratings were crazy, that would be the area.

“I don’t think Moody’s or Standard & Poor’s or I can come up with anything terribly insightful about the question of state and municipal finance five or 10 years from now except for the fact there will be a terrible problem and then the question becomes will the federal government [help]

It’s no question that many states and municipalities are in big financial trouble. But their municipal bond debt still has relatively low interest rates suggesting that the risk of default is very, very small. No doubt, this is because the historical default rate of municipal bonds is also very, very small. But Buffett points out that in the past, not very many muni bonds were insured by private insurers (such as Berkshire Hathaway). In today’s environment, it is much more likely that a local government will go “oops” and let the insurers pick up the tab. If those dominoes start falling, then a federal bailout will be needed. Then what?

As usual, Buffett summarizes the situation nicely:

“It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,” Buffett told shareholders in Omaha, Nebraska, at Berkshire’s May 1 annual meeting. “I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations.”

When I wrote about investing in California municipal bonds in September 2009, the yield on the Vanguard California Intermediate-Term Tax-Exempt Fund (VCAIX) was 3.49% and exempt of both federal and CA state income taxes (avg maturity 7 years). Today, it is down to 3.02% with an average maturity of 6 years, indicating a lower overall fear of default.

Still, if you are in the 33% federal tax bracket and 9.55% CA bracket, that 3.49% would be the same as a taxable bond yielding 4.98%. Compare this to the Vanguard Intermediate-Term Investment-Grade Fund (VFICX) which invests in high-quality corporate bonds and only yields 3.70%. Treasuries yields are much lower. For me, the yield difference is so great that it would be hard to not at least consider it as part of my portfolio.

I agree that I can’t see how the federal government will refuse to help bail out the resident investors of states when they’ve already done so many corporate bailouts. But it’s not impossible.

Are You Using Too Much Soap?

Not exactly a hard-hitting topic, but still applicable to those trying to live efficiently. This NY Times article talks about how most people use way too much soap in their washing machines and dishwashers, which is both wasteful and can shorten the lifespan of the appliances. How do you tell if you’re using too much soap?

Take four to six clean bath towels, put them in your front-loading washing machine (one towel for a top loader). Don’t add any detergent or fabric softener. Switch to the hot water setting and medium wash and run it for about five minutes.

Check for soap suds. If you don’t see any suds right away, turn off the machine and see if there is any soapy residue. If you see suds or residue, it is soap coming out of your clothes from the last wash.

“I’ve had customers that had to run their towels through as many as eight times to get the soap out,” Mr. Schmidt said, who lives in Indiana

I’m pretty sure I’m guilty of this. I would imagine too much soap also makes clothes more irritating to the skin.

Historical Mortgage Rates Chart (1986-2010)

While doing some more research into a possible refinance or loan modification, I ran across this chart of historical mortgage rates from 1986 from HSH.

Before, I stated a source that said the 30-year fixed-rate mortgage (FRM) averaged 4.56% for the week ending July 22, the lowest since Freddie Mac started tracking the mortgage in 1971. But that was with 0.7 points, while HSH shows 4.97% with only 0.09 points. While we are experiencing some of the lowest rates in a very long time, I also keep reading about how underwriting has made actually getting approved for a loan harder than ever. But according to this article, some “FHA, Fannie Mae and Freddie Mac borrowers who haven’t refinanced their home before may be eligible to refinance without having to get a new appraisal.” Like I say often… it doesn’t hurt to ask!

I’m still excited about my new 4.75% mortgage rate (that I would never have gotten if I didn’t pick up the phone and ask) since I’m looking to stay in my house for a while, but I am also curious as to what will happen to housing prices when rates start to go back up…

EverBank Yield Pledge Money Market & Checking: Good Offer For $10k+ Balances

Everbank has 6-month bonus rates for their Yield Pledge Money Market and FreeNet Checking accounts. Both of these offers are targeted at new customers opening with at least $1,500, but in the end do offer some of the top rates available for an FDIC-insured bank account with these terms.

Yield Pledge Money Market

With a 6-month guaranteed introductory rate of 1.10% APY, this is higher than any available 6-month CD out there, which again is better than any 6-month CD offer out there.. After that, it is like other online savings accounts with a variable ongoing APY (currently 0.86%).

This online savings account “pledges” to keep the yield on your account in the top 5% of competitive accounts as tracked by Bankrate. (Everbank has indeed ended up on lists of best banks with consistently high rates.) Since it is a savings account, you are still limited to 6 withdrawals or outgoing transfers each month. There is a minimum average balance of $5,000 to avoid a $8.95 monthly fee.

FreeNet Checking

A checking account version, this also has a a 6-month guaranteed introductory rate of 1.10% APY, with a tiered interest rate afterward. (Current tiers and ongoing Annual Percentage Yields are: $100,000 at 0.86% APY, $50,000 – $99,999.99 at 0.83% APY, $25,000 – $49,999.99 at 0.78% APY, $10,000 – $24,999.99 at 0.76% APY and under $10,000 at 0.70% APY). There is no monthly fee.

Again, if you do the math this effectively extends the bonus rate of 1.10% out to between 5 and 6 months on a $10,000 balance, which is still better than any other CD offer of the same length. This account also pledges to keep the yield on your account in the top 5% of competitive accounts, but remember in this case that checking accounts in general have slightly lower rates.

If you are looking to get high FDIC-insured interest rates on a sizable balance for between a couple months to a year, without having to jump through any hoops like required monthly transfers or 15 debit card purchases a month, then this continues to be one of the best rates out there.

Better Financial Motivator: Stick or Carrot?

We all have financial goals that we want to reach. Some of us do better with a reward attached to reaching our goal (carrot), while others may actually try harder if trying to avoid a punishment (stick). We are motivated by personal desire, by our family, by our friends… but how about a website?

For the those that need that extra bit of discipline, check out, which lets you create a “commitment contract” which have real penalties attached to them. For example, you could commit to saving an extra $150 each month in a separate savings account for 6 months. You could set a penalty of $250 if you don’t follow through – send to a friend, enemy, or donated to an organization that you dislike (NRA, PETA, whatever… dubbed anti-charities).

The site is serious, and started by economics professors who all agree that incentives make the world go ’round. You choose a third-party referee (input their e-mail), as well as give them your credit card information. If you don’t follow through, your card is charged!

If you do better with carrots, you can always set that up yourself. If you reach your savings goal, go out and get a manicure or a nice steak dinner.

Chart: Unemployment Lasting Way Too Long

Above is a chart of the median duration of unemployment from the past 50 years, based on data supplied by the US Department of Labor. That’s quite a scary spike we have going right now. (Chart source, via The Atlantic and Greg Mankiw.)

Not coincidentally, the Senate just voted to extend employment benefits again after much debate. This means that the federal government will continue to provide up to 99 weeks of unemployment assistance, including the first 26 weeks provided by individual states.

People will argue whether this is the best way to combat the problem. I don’t know the answer, especially with the huge deficit, but I do feel that with two years of unemployment available that there is less excuse not to learn some new marketable skills if you need it. Also, this just makes my cash hoard of a year’s worth of expenses that much more important to me. I really didn’t think an emergency fund would provoke such a strong psychological response, but it has significantly lowered my daily stress levels.

If you don’t have your warm fuzzy cash hoard yet, open a separate online savings account and start socking something away! Just look at the chart again if you need motivation.

FDIC and NCUA Insurance $250,000 Limits Now Permanent

The standard maximum insurance limits for both FDIC and NCUA-insured accounts have been permanently raised to $250,000 per depositor as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed July 21st, 2010. The limits were temporarily increased from $100,000 to $250,000 effective October 3, 2008, through December 31, 2010. On May 20, 2009, the temporary increase was extended again through December 31, 2013. (FDIC press release)

The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. You may actually have more than $250,000 of coverage, depending on how you have titled your accounts and where you hold multiple accounts. Here are the official online calculators:

NCUA Electronic Share Insurance Calculator (ESIC)
FDIC Electronic Deposit Insurance Estimator (EDIE)

The new limits were made retroactive to 1/1/2008, which makes 9,500 people really happy who exceeded the FDIC limits between January 1st and October 3, 2008, which were only $100,000 at the time. Well, they got lucky. Don’t exceed the limits! (And congrats if this is still an issue for you…)

Stable Value Funds – Exploring Risks and Rewards

The last time I wrote about stable value funds was in late 2008, both before the 2009 crash and a time when most of my 401k was in stocks. This time around, as I was trying to figure out how to rebalance my larger portfolio in a tax-efficient manner, I took another look at this asset class found almost exclusively in defined-contribution plans like 401ks. According to the Stable Value Investment Association (SVIA), approximately 15 to 20 percent of 401(k) assets are in stable value funds.

What are Stable Value Funds?

Generally, stable value funds are a bunch of bonds which have a insurance “wrapper” around them which protects it from interest rate volatility. The intended result is a product that pays the higher interest rates of intermediate-term bonds, with the liquidity and stable day-to-day price of a money market fund. Think “cash but pays higher interest”. A chart from the SVIA [pdf] illustrates:

The Attraction

Here’s my current situation. The stable value fund in my 401k has a guaranteed net interest rate in 2010 of 3.50%. The low-cost Vanguard Intermediate-Term Bond Index Fund Investor Shares (VBIIX) currently yields 3.17%, but will have a moderate amount of price volatility, especially if interest rates rise. The Vanguard Prime Money Market Fund (VMMXX) currently yields 0.11% with its high-quality, ultra-short-term holdings and Vanguard backing.

I could get the stability of money market fund, with an interest rate more than 3% higher! (All yields are net of fees.)

The Risks

Higher interest rates with no price volatility? Free lunch? Not quite. First of all, any guarantee is only as good as the entity doing the guarantee. Check the safety ratings of the insurer of your fund. Mine is Transamerica Financial Life Insurance Co. (TFLIC):

Not the greatest, but not bad. In addition, there are actually several ways an insurer can get “out” of the contract. From the SVIA FAQ:

Are there instances when book value or contract value does not apply?
There are a few, limited instances when participants do not get book value from a stable value fund. These limited instances are typically contractually defined. One such instance typically not covered is security defaults or downgrades. In order to protect the integrity of the stable value fund, most contracts incorporate investment guidelines establishing minimum credit quality requirements for the underlying securities. These contracts have established mechanisms to address downgraded or defaulted securities that fall outside the contractual guidelines.

Corporate-initiated events, which are employer-driven events such as an early retirement program, layoff, or bankruptcy, are also typically not covered. Corporate-initiated events generally cause withdrawals in masse from a stable value fund. These withdrawals can negatively impact investors and plans that choose to remain in the fund.

First up, if the underlying securities turn out to be utter crap via a default or credit downgrade, then the insurance doesn’t apply? Wait, the insurer gets to choose the securities in the first place? Sometimes smells here. In fact, this happened in 2009 to the insurer State Street, although they decided to step in to make investors whole in order to preserve their reputation. Via this CBS Moneywatch article:

In December 2008 and January 2009, State Street elected to provide support – a total of $610 million – to the bond portfolio in stable value funds the company managed. State Street was not contractually obligated to do this. As the company’s 8-K filing (a report filed with the SEC to notify investors of any events that could be of importance to shareholders) stated, “liquidity and pricing issues in the fixed income markets” so affected the accounts that the wrappers “considered terminating their financial guarantees.” State Street’s action to bolster its portfolios kept the wrappers in place.

Finally, there is the “corporate-initiated event” of a huge layoff or bankruptcy. At the end of 2008, Lehman Brothers infamously went bankrupt, which left their stable value fund managed by Invesco with a negative return of 1.7 percent in December and an annual return for 2008 of 2 percent. In April 2009, a stable value fund for Chrysler employees only paid out 89 cents on the dollar, a drop of 11% due to the company’s troubles.

As you can see, there is a lot of things that can invalidate the guarantee. So, the next step is to understand the holdings, which in the event of a liquidation can help you imagine your worst-case scenario. You should be be able to see at least an overall breakdown of the assets, and a market-to-book-value ratio must be disclosed at least once a year. This will show any discrepancies between what the insurer says is worth $1 and what the market says. My TFLIC stable value fund’s market-to-book ratio was 101.30% as of March 31s, 2010 and here is their holdings summary:

Bottom Line

In good times, the stable value fund has a pretty easy job of maintaining an image of price stability and paying out the stated interest rate. However, when the poo hits the fan there are a lot of ways the insurance wrapper can be worth less than a bubble gum wrapper. The only real good news is that you are still left with some intermediate-term, investment-grade bonds. Even with the upheaval of 2009, the worst example I could find was a drop of 11%. Even Lehman Brothers investors ended up with a overall positive return for the year. These losses are not insignificant, but something the order of the drop in other similar bond funds during that time. The key is to understand the risks that you are taking, which oftentimes people don’t (including me).

As for my personal investments, after doing my bit of due diligence, I am going to put a small percentage (less than 5%) of my total assets in my stable value fund, given the limited alternatives in my 401k. I am willing to take the risk of a small loss in order to earn 3.50% for all of 2010 in this current interest rate environment.

Mortgage Loan Refinance Breakeven Points

Sometimes saving money just involves being lucky. I don’t really keep up with mortgage rates anymore, but last week an e-mail subject line just happened to catch my eye that mortgage rates are at “record lows”. I always figured that my 5.125% rate was so low that another refinance or loan modification probably would never be worth it, but it turns out that rates are so low they just might. Here’s a quick snapshot of rates from a Wall Street Journal article on 7/16/10:

The 30-year fixed-rate mortgage averaged 4.57% in the week ended Thursday, unchanged from a week earlier and down from 5.14% a year earlier. Rates on 15-year fixed-rate mortgages were 4.06%, extending the lowest point since Freddie started tracking it in 1991, and down from 4.07% last week and 4.63% a year earlier. […] To obtain the rates, the mortgages required payment of an average 0.7 point. A point is 1% of the mortgage amount, charged as prepaid interest.

has ads now for 4.25% fixed for 30 years and 3.75% for 15 years. As for me, I might be able to get my interest rate below 4.75% and have a “breakeven” period of less than 3 years. I’m awaiting official paperwork. Ask your loan servicer and/or mortgage broker what they can do for you. Can’t hurt to ask!

Meanwhile, I was playing with the Refinance Breakeven calculator over at DinkyTown and found out that there are multiple definitions of “breakeven period”. Before, I simply figured that a refinance would cost X dollars upfront in fees and closing costs, but would save me Y dollars per month. Divide X by Y, and you’d have a breakeven point. For example, if it cost you $2,400 in fees but saved you $100 per month, you’d break even in 24 months. Past that, you’re saving $100 every month. In this case, if you plan to keep your mortgage for longer than 24 months, then refinancing makes sense.

However, there are actually four possible breakeven methods presented:

  1. Monthly payment savings. The simple formula described above. The number of months it will take for your monthly payment reduction to be greater then your closing costs. Doesn’t take into account that you may be making more monthly payments.
  2. Interest savings (plus PMI if applicable). The number of months it will take for your interest and PMI savings to exceed your closing costs.
  3. After-tax interest savings (plus PMI if applicable). The number of months it will take for the after-tax interest and PMI savings to exceed your closing costs. This takes into account that the interest and PMI being paid may be tax-deductible, while the closing costs are paid with after-tax money only. Depends on your income tax rate.
  4. Total after-tax interest savings vs. prepayment. This is the most conservative breakeven measure, and will result in the longest breakeven time period. This method considers that you could take the amount spent on refi closing costs and instead make a large prepayment on your existing mortgage. Then, it calculates the number of months it will take for the after-tax interest and PMI savings to exceed both the closing costs and any interest savings from prepaying your mortgage.

Which method is best?

First, I should add that you could complicate things even further by assuming any money not paid out immediately could earn a rate of return (savings accounts, CD, etc.) But that would make my head explode, so I won’t. The calculator suggests that methods #2 and #3 are most commonly accepted, and I would tend to agree. If you are sure that your interest is 100% tax-deductible (you exceed the standard deduction provided by the IRS without it), then you should use the value from #3. Otherwise, something in between #2 and #3 is probably the most accurate.

Method #4 compares with another theoretical situation that only applies if you really want to make a lump-sum prepayment and keep the higher monthly mortgage payment over a shorter mortgage term. For many people, the goal is to lower the monthly outlay and improve cashflow as well as save money on interest.

Citibank Back-to-School Student Credit Cards

Going back to school? Citibank has some good card options for college students:

  • Citi mtvU Platinum Select Visa Card
  • Citi Forward Card for College Students – $75 Statement Credit

Both the mtvU and Forward cards offer 5x rewards on bookstores, movies, music, and restaurants – boy do they know students. 5x ThankYou points amounts to 3.45% cash back or 5% back in the form of gift cards from certain retailers. Great deal if you can handle credit responsibly. I’m pretty sure I applied for my first credit card in college in exchange for a cheap t-shirt with a Cal logo on it and no rewards whatsoever. Good thing I’ve always hated owing other people money…

As noted previously, 5x points on bookstores also includes anything bought at (a bookstore!). Would go perfectly with your free year of Amazon Prime.