Money Update: News about you and your money
PRE-RETIREES: LONG ON HOPE, SHORT ON READINESS
In 1988, when Merrill Lynch first surveyed middle-aged Americans on their attitudes toward retirement, the company discovered a paradoxical mix of high hopes and skimpy financial preparation. In its second annual national telephone poll of 400 adults ages 45 to 64, conducted last fall by the Wirthlin Group and released exclusively to Money, the same unfounded optimism persists, though it’s now tempered a bit.
Eight out of 10 questioned say they are looking forward to retirement. Yet just 24% of the respondents say they are highly confident of maintaining a comfortable standard of living in retirement, down sharply from 32% a year earlier, (The margin of error in the poll is plus or minus three percentage points.) Also, the proportion saying they are not confident soared to 21% in 1989 from 15% in 1988. Furthermore, 23% report that they save nothing at all toward retirement, about the same number as in the previous year; most say they save 1 % to 20% of their income. But 78% claim they’d save more if the government offered tax incentives — a timely message to Congress and President Bush, who are currently debating proposals to encourage savings.
When asked about particular problems, 45% of the respondents say they are afraid that they will outlive their money and a whopping 69% foresee a risk of being overwhelmed by health-care costs. (Neither question was asked last year.) Those heightened concerns may stem in part from last year’s debate over Medicare’s expensive catastrophic-care provisions, which were repealed, and from the growing clamor for government coverage of long-term care.
Even if they are worried about paying for retirement, most of the people surveyed are not willing to take risks to increase their investment earnings. Though 93% recognize inflation as a serious threat and 72% say long-term gains are important when selecting investments, 84% prefer the safety of banks rather than going for higher returns with investment brokers (favored by only 21%) or mutual fund companies (26%).
That doesn’t surprise Helen Stecklein, a retirement planner in St. Paul. “Many people in their late forties and fifties are the first generation in their families to have any money to save for the future,” she says. “Risk frightens them, and the stock market mystifies them.” In fact, nearly all of those questioned expect to rely on Social Security as one source of income, and 32% rank it as their most important source. Curiously, more than a third doubt that they will be paid all the benefits they’ve earned. Adds Stecklein: “People aren’t much more realistic about retirement than they are about death.”
GRAPE EXPECTATIONS: BUYING WINE FUTURES
For three straight months last summer, the sun beat down on the fertile slopes of Bordeaux. It willed the tourists, but it was great for the grapes. The weather presaged a very good vintage and. maybe, if the perpetually upbeat talk in the wine trade proves true, an outstanding one. You will have to wait until mid-1992. when the Bordeaux reds arrive Stateside, to sample the ’89 vintage for yourself. And by then, prices may have risen by as much as 50% from current levels. There is a way. however, to beat the price hike: forget the old Orson Welles pitch: buy the wines before their time.
You can do that in April, when many larger wineshops around the country begin offering futures on the ’89 vintage of leading Bordeaux. Burgundies and California cabernets. The term “wine futures” lends an aura of high finance to a routine transaction. You are simply paying in advance for a specific number of cases at a set price; you take possession of the wine about two years later, after it has been bottled and shipped from the vineyard.
But don’t confuse wine futures with conventional investments. For sought-after vintages, like 1986. retail prices can climb well above the futures prices (as the table shows). Even so. there are just too many obstacles to making money on wine. Foremost, in every state except Illinois and California, it is illegal for unlicensed individuals to sell alcoholic beverages. So you must consign your collection to an auctioneer in Illinois or California, paying shipping fees and transaction costs that can easily soak up any gains.
Late this month. U.S. wine merchants and critics (including Wine Advocate editor Robert M. Parker Jr., profiled on page 76) will travel to Bordeaux to taste the young ’89s. Their opinions will affect prices. But the early evaluations may not be accurate. “I’m not rushing to buy,” says Washington Post wine critic Ben | Giliberti. “Every promising vintage in the ’80s except ‘82 has turned out to be overrated.”
So buy for pleasure, not for profit, and plan to liquidate your investment the civilized way—over, say, chateaubriand, suggests Philip Tenenbaum, president of the Chicago Wine Co. He sells futures, but he doesn’t pitch them as moneymakers. “It’s just like stocks,” he says. “No guarantees.”
—Leslie N. Vreeland
ELECTRONIC TAX FILING WILL COST YOU FAR MORE THAN A STAMP
To the Internal Revenue Service, Jan. 29 was national electronic tax-filing day. Missed the media blitz? Just consult the blue 1RS announcement in your 1040 instruction booklet. It describes how taxpayers can get refunds in two to three weeks if they file electronically. That sounded so tempting that by Feb. 1, the IRS had already received 608,000 electronic returns, up from 176,000 at the same time last year.
But the new system may not be as good a deal as it sounds. Here’s how it works: If you expect a refund, you can take your completed return to a participating credit union, bank, savings and loan, tax preparation office or electronic filing service. Returns are then transmitted to the IRS over a special computer link. The charge: as much as $40. H& R Block, for example, would demand $35; if Block does your return, the electronic filing charge drops to $25.
In most cases, paying such fees to get your refund a few weeks early doesn’t make sense. Taking a credit-card advance the day you mail off your return is quicker and cheaper. Let’s say you expect to get $875. which was average for the 70% of taxpayers who received refunds in 1989. At the average credit-card rate of 18.66%, you would pay $17.45 in interest while waiting six weeks for your check. So unless you’re owed a large sum — about $1,500 or more — stick with the U.S. mail.
LIFE INSURANCE FOR THE LIVING
It sounds like a good deal, and for a few people it could well be one. In a move that is expected to be widely imitated—at least two companies are already studying it — Prudential will allow policyholders to claim their life insurance proceeds while they are still alive, provided that their doctors certify they have less than six months to live or that they are permanently confined to a nursing home.
Called Living Needs Benefit, the plan is available to current policyholders with death benefits of at least $25,000 and to new clients who buy policies worth $50,000 or more. There is no up-front charge. When Prudential pays out an accelerated benefit, however, it will deduct an amount equal to six months’ interest on the policy’s face value. As MONEY went to press. Living Needs had been approved by 16 state insurance commissioners. Some 25 other companies that already offer accelerated-benefits options demand extra fees, and most do not pay the full death benefit. Prudential president Joseph J. Melone says his program is intended to help meet expenses “during a time when medical needs can be a big financial drain.”
Yet the main value of Living Needs, which garnered front-page attention in the New York Times, may be as a marketing coup. Silver Spring. Md. insurance broker Webb St. Clair calls it “a pretty neat gimmick.” He adds: “It’s a big plus for the salesman, but after 33 years in the business. I can’t think of more than one client whom it would have helped.”
And there is a major potential catch beyond the fact that you would be leaving less money to your survivors. Unlike regular life insurance payouts, accelerated benefits may be taxable. The internal Revenue Service has not yet ruled on the matter. If an accelerated benefit is treated as ordinary income, you would be liable for federal taxes of as much as 33% on the amount by which the proceeds exceeded your premium payments. Says insurance analyst Glenn Daily of New York City: “All of these policies could turn out to be far more expensive than they seem right now.”
TAKE ANOTHER LOOK AT GINNIE MAES
Investors seeking decent returns with moderate risk might look at Ginnie Maes — mortgage-backed securities issued by the Government National Mortgage Association. Last summer, the Ginnie Mae market slumped as troubled S&Ls dumped billions of dollars of the securities to raise cash. But the market has stabilized, and newly issued Ginnie Maes were recently yielding 9.75% — 1.3 percentage points more than Treasury notes of comparable maturities. “In difficult times like these. Ginnie Maes have the two most important factors going for them,” says Sheldon Jacobs, editor of the No-Load Fund Investor. “They are guaranteed by the government, and their yields are attractive.”
Ginnie Maes are backed by pools of mortgages bought from lenders. Although the government guarantees repayment of the underlying mortgages. Ginnie Maes, like any fixed-income investment. lose market value when interest rates rise and gain value when they decline.
But Ginnie Maes pose a special problem if rates fall. The reason is that along with interest from the security, you regularly get back a portion of your investment as homeowners pay off the mortgages in the pool. When rates drop, prepayments increase as owners refinance their homes, and your principal is returned at a faster clip. Chances are that you will have to invest the money at a lower rate than you were getting from your Ginnie Mae. Right now, however, after two years of relatively low mortgage rates, refinancing isn’t considered much of a threat. Analysts say that it would take a decline in mortgage rates of at least two points, to 8%. to set off a new spate of refinancings.
Individual Ginnie Maes cost $25,000, but you can invest for less through mutual funds, usually at a small sacrifice in yield. An advantage of Ginnie Mae funds, says Chet Ragavan, first vice president of Merrill Lynch Capital Markets, is that their diversification protects against “prepayment surprises.” Jacobs likes Vanguard Fixed Income GNMA (currently yielding 9.33%t because of its low management fees. He also recommends Lexington GNMA Income (yielding 8.87%), which had the best total return in its category (15.6%) in 1989. For other Ginnie Mae funds, see Fund Watch on page 50.