Top Retirement Investments For 2011

Annuities
An annuity is a contract between an investor and an insurance company. The insurance company pays the annuitant (the holder of the annuity) a fixed or variable amount of money, depending on the type of annuity, on a periodic basis for a specified period of time. Annuities are intended to provide a stable, long-term income stream during retirement.

Fixed annuities offer low-risk retirement income. Annuitants receive a fixed amount of money each month as long as they are alive. Variable annuities generally provide a minimum income - called a guaranteed income benefit option - and an additional payment that varies with the performance of the annuity's investment, allowing annuitants to take advantage of potential growth.

Bond Funds
Bond funds are types of investment companies that invest primarily in bonds and other types of debt securities. Depending on investment objectives, the fund can include municipal, corporate, government and convertible bonds, and debt securities such as mortgage-backed securities (MBS).

A bond fund that is fully invested in Treasuries would incur little risk, while a fund that is invested in mortgage-backed securities or junk bonds would be considered higher risk. While bond funds do incur variable levels of risk, they can be used to provide portfolio diversification and a stable source of income during retirement.

Dividend-paying Stocks
Dividend income receives favorable tax treatment, and the continuation of the 15% dividend tax rate (if the individual has a regular income tax rate of 25% or higher) makes dividend-paying stocks appealing. Even when stock prices fluctuate, dividends can provide a steady income stream during retirement. Companies are careful with the size of the dividend they pay. They want to be able to continue paying the same dividend or larger to avoid the bad publicity that comes with cutting dividends. Holding stock in a few well-picked companies can provide a regular paycheck during retirement.

Emerging Markets
Emerging markets like Thailand, Brazil, Turkey and Israel can provide opportunities for sound investments with the potential for upside growth. In addition, investors can find dividend-paying stocks within the up-and-coming emerging markets.

Criticized for being risky, many of these markets are emerging because they are doing the right things to grow their economies. Many of these emerging economies are climbing the ratings ladder. Brazil, for example, was recently lifted by Moody's to an investment grade status of Baa2 - due in part to the nation's solid banking system.

Retirement Income Funds
Retirement Income Funds (RIF) are actively managed funds that automatically allocate an investor's money across a diversified portfolio of large- and mid-cap stocks and bond funds. These funds generally apply a conservative methodology to manage the portfolio in a manner that allows for moderate growth and to provide income to its investors. Rather than a guaranteed payout as seen with an annuity, RIFs pay regular monthly or quarterly distributions based on the fund's performance. RIFs are managed to achieve targeted annual income returns, often in the range of 3-12%, though income is not guaranteed.

Cash
Cash that is kept in a bank savings account can offer protection since the money is not at risk of losing value, and opportunity because the cash can be withdrawn at any time to use for other investments or emergencies. Some banks offer nominal interest rates on bank savings accounts.

Certificates of Deposit (CDs)
CDs provide a low risk/low reward option for squirreling away money. CDs have pre-determined maturity dates that range from a couple of months to five or more years. Typically, the greater the length of the maturity date, the higher the interest rate. Withdrawals can be made before the maturity date, but will usually incur a penalty fee.

Money Markets
Money markets incur more risk than cash or certificates of deposit, but are still considered safe investments. Accounts may earn slightly more than standard bank savings accounts, and a certain number of withdrawals can usually be made each month without incurring a fee.

Money market funds involve short-term instruments that mature in less than 13 months. The U.S. Securities and Exchange Commission (SEC) mandates that the weighted average maturity of a fund's portfolio be less than 60 days. This restriction helps limit the exposure of a fund to certain risks including sudden movements in interest rates.

Government Issued Securities
Government issued securities include Series EE/E or I savings bonds, treasury bonds, notes and bills. These investments are considered very safe and can be made directly with the U.S. government or a bank. Some of these securities pay no interest until the maturity date, while others pay interest every six months.

Weak Recovery Weighs on Bank of America and Wells Fargo

By ERIC DASH

Even as the big banks stanch their losses, they are reckoning with an unfortunate reality: the anemic recovery is hurting their results.

Second-quarter numbers on Tuesday from the nation’s two biggest consumer lenders, Bank of America and Wells Fargo, showed the toll the sluggish economy was taking on revenue growth. As Americans increasingly dig out of debt, lenders’ income is being reduced by a fall-off in mortgages, credit card and other types of consumer loans.

Bank of America reported an $8.8 billion loss, after taking a $20 billion hit to clean up a raft of mortgage problems. Yet underlying revenue fell around 10 percent, excluding all those big charges.

Wells Fargo reported a record profit of $3.95 billion, up 29 percent from the second quarter of 2010, even though a slowdown in mortgage lending contributed to a 5 percent drop in overall revenue. At Citigroup and JPMorgan Chase, strong investment banking fees helped offset the weaker results of their domestic consumer banking units when they reported earnings last week.

It is no secret that the American economy is still ailing. Even though the recession technically may be over, home prices are falling again, the unemployment rate is above 9 percent and consumer confidence has been shattered by the disappearance of more than $1 trillion of stock market wealth since the market’s peak in July 2007.

Scarred by the tumultuous events of the last few years, consumers are paying off their debts and are reluctant to take out new loans. Over all, lending is expected to fall about 1.1 percent from last year, and is down more than 10 percent from its peak shortly before the financial crisis in mid-2008, according to data from Trepp, a financial research firm.

Credit card and mortgage lending have fared even worse. Outstanding loan balances on each have fallen more than 3 percent since last year, with residential mortgages dropping over 13 percent since the crisis, according to Trepp data.

“It’s a reflection of weak consumer demand. But it’s also a consequence because after the losses in the financial crisis, the lending criteria is tough,” said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York.

Other parts of the banking business have picked up. Corporate lending, for example, has shown signs of modest growth as companies invest in improving their operations. According to a Citigroup analysis of about 700 nonfinancial public companies, planned capital spending has increased 16.7 percent from last year and has even accelerated in the last three months. That bodes well for both the recovery — and the banks.

“Corporate spending is the biggest driver for turning our economy right now, and that is why I am encouraged,” said Tobias Levkovich, Citigroup’s chief investment strategist.

But perhaps the best news for the financial industry is that loan losses continue to ease. Bankers say that the pipeline of troubled loans is dwindling. Those made during the boom years are being purged from the system, and the ones that came after carried more stringent terms.

As a result, the bankers have more confidence to withdraw funds that they had previously set aside to cover future losses.

Bank of America, for instance, released about $2.4 billion, largely as a result of fewer borrowers delaying or defaulting on their credit card payments.

Wells Fargo reversed about $1 billion of reserves after losses declined for six consecutive quarters and troubled loans fell the last three. Citigroup and JPMorgan also announced reserve releases of about $1 billion each.

Still, stopping the spill of red ink is one thing. Expanding revenue is another. And here, the sluggish consumer economy has offered big banks little relief.

Although largely obscured by the strong results of its investment bank, revenue fell at almost all of Bank of America’s consumer businesses. Only its brokerage unit reported an increase.

Bank of America’s mortgage unit said that taking more than $15.5 billion in charges to cover a proposed investor settlement and higher operating costs would help put its problems behind it. Even so, mortgage banking income fell 42 percent from a year ago, to $824 million, because of a drop in consumer demand.

Revenue from Bank of America’s deposits business fell over 10 percent, squeezed by changes it made to its overdraft policies in light of more restrictive regulations. Bank of America’s big credit card division was harder hit. Credit card revenue fell about 20 percent, to $5.5 billion, largely because of lower average loan balances and interest rates.

Consumers are just not borrowing like they used to, said Bruce Thompson, Bank of America’s new chief financial officer.

“We’re seeing consumers spending money but not necessarily borrowing more,” he said. And they won’t take on more debt until they are “more confident about the economy.”

At Wells Fargo, like at Bank of America, new rules curbing overdraft charges and a slowdown in its mortgage business chipped away at income. Mortgage banking revenue fell nearly 20 percent, to $1.6 billion, during the quarter without a refinance boom to prop up its results.

Wells Fargo executives said the strength of other parts of their franchise, like their retirement business and corporate bank, helped the bank power through a difficult business environment. And bucking industry trends, its credit card business, smaller than most of its peers, saw a slight increase in loan balance by picking up market share.

Still, in a sign of concern about their long-term growth prospects, Wells Fargo executives walked investors through a detailed cost-cutting initiative called Project Compass that aims to keep expenses in check.

“Revenue remains king around here,” said John Stumpf, Wells Fargo’s chief executive, in a conference call with investors. “We think that by becoming more efficient, we can actually grow revenue faster.”

Friday, August 19, 2011