Investment Markets and

Insurer Stocks

CAA March Workshops - March 23, 2016

Kirk A. Kreikemeier, CFP®, CFA, FSA

4365 Lawn Avenue, Suite 5

Western Springs, IL 60558

708-246-2366 | kirk@pvwealthmgt.com

Topics Covered – Investment Markets

Economic Update

Hunt for yield and caution warranted

Taxes as another source of “yield”

GDP growth positive but sluggish Economic Update

Unemployment falling but so is participation Economic Update

Inflation is low but core is trending higher Economic Update

Oil has fallen hard but gold stabilized; Dollar strong Economic Update

Rates and curve shapes Economic Update

Credit spreads and VIX Economic Update

Fed’s Dot Plots and Global Rates … yes negative Economic Update

Fed’s Economic projections – watch the change Economic Update

Cumulative Total Returns – 2/29/2016 Economic Update

(curr hdg)

Topics Covered

Economic Data

Hunt for yield and caution warranted

Taxes as another source of “yield”

Hunting for yield or income? Hunt for Yield

Yield is the interest (or dividends) generated divided by current value• Variations – coupon, rate, SEC yield, yield-to-maturity (or to-call)

Income to retiree is after-tax money in pocket from investments and other

When rates were higher, income was yield earned from principal• $1,000,000 x 7% = $70,000/year; at 2% = $20,000/year (> 70% decrease!)

View income as total rate of return = interest (or dividends) + price change• As rebalance portfolio, replenish cash bucket

Total rate of return approach to retirement income Hunt for Yield

Replenish cash with interest, dividends and portfolio returns• Look for ways to boost interest and dividends… but also price return

• Be mindful of taxes as recognize income (yield and asset sales)Ok, but I still want

to increase this!

Primer: Bond yield composition Hunt for Yield

By Fred Vosvenieks, Consulting Actuary, Milliman & Russell Ward, Consulting Actuary, Milliman

Primer: Bond ladder Hunt for Yield

As individual bond matures, buy new 5 year bond (could be longer)

Yield-focus strategy typically held to maturity

Watch diversification, transaction costs (implicit in yield)

#1 - Extend maturity of bonds Hunt for Yield

Higher yield for longer maturity… but also more price risk

Taper tantrum in 2013 wiped out benefit of higher yield; 2014 repaid

Price risk differs with mutual funds (never mature) and bond ladders

#2 – Move beyond credit risk-free treasury bonds Hunt for Yield

Get paid extra for chance of not getting paid back in full; diversify a ladder

Default rates vary by quality, phase of economic cycle• Recovery rate expectations also a driver (energy sector)

• 8% default, 40% recovery => 480bps (100x.92 + 40x.08 = 95.2); 10% RR=> 720bp

#3 – Dividend-paying stocks Hunt for Yield

Low yields and potentially rising rates lead some to dividend-paying stocks

Volatility much greater for stocks; consider low beta/vol

Concept of ladder not applicable but diversification is important

#4 – Specialty Asset Classes Hunt for Yield

Financial innovation gives you access to even more asset classes

Compare risk relative to aggregate bond fund, know the sector exposure• Preferred funds are heavy in financials

• MLPs in energy; correlations to underlying commodity higher than expected

#5 – Payout annuities and longevity annuities Hunt for Yield

Enough already - just give me income for life• Annuity advantage over a portfolio – keeps paying as long as alive

Income received includes yield + principal paydown + mortality pool• Like a ‘total rate of return’ withdrawal concept without depletion risk

Annuity purchase locks in current low rates; wait or stagger purchases

Use combination of portfolio and longevity annuity for best of both worlds• Still have issue of locking in current low rates

• Qualifying Longevity Annuity Contracts (QLACs) in IRAs without RMD issues

• Maximum purchase in IRA is smaller of 25% or $125,000

Topics Covered

Economic Data

Hunt for yield and caution warranted

Taxes as another source of “yield”

Qualified vs. Ordinary and Short vs. Long Taxes as “Yield”

Most equity dividends are ‘qualified’; taxed at lower rate

Bond, other income and short-term gains taxed as ordinary income

Example shows tax-aware increases after-tax investment income by 5-10%

Manage your bracket and note Uncle Sam’s share Taxes as “Yield”

Manage income recognition• Delay SS, draw IRAs ‘up to bracket’ before age 70; $75,000 x (.25-.15) = $7,500

• Consider state tax differential if IRA withdrawals are exempt (like IL)

Income thresholds for Medicare premium• Individual < $85k income = $121.80/month; > $160k = 316.70

• Annual difference of $2,338; noticeable for a $75k budget

Consider tax impact of employee benefits in Net Worth• Employee stock options/RSU/NQ Pensions are shown pre-tax on statements

• “What’s your number?” depends if assets in taxable account or IRA