Investment
Opinion | The Perfect Retirement Investment Nobody Wants, Part 2 – The New York Times
Readers were intrigued by my newsletter last Friday, “The Perfect Retirement Investment Nobody Wants.” It was about a concept, never realized, for a hybrid product combining long-term care insurance with an immediate annuity — a stream of monthly payments that begins right away and lasts as long as you live.
Some readers said such policies already exist. Not exactly, as I’ll explain. Others wanted to know when or where they could buy one. Nowhere right now. Many wrote about the challenges of trying to protect themselves and their families from the vicissitudes of either ill health or such good health that they outlive their savings.
The idea that appeared in a 2001 article by the economist Mark Warshawsky and two other scholars is that insurers could charge less for long-term care insurance and annuities by combining them, because the risks to the insurer would partly offset each other: If customers needed lots of long-term care early on in the policy, they probably wouldn’t live long enough to get a lot of annuity payments. If they lived long enough to suck up lots of annuity payments, it’s probably because they hadn’t needed much long-term care early in retirement. Insurers could offer the two protections together more cheaply than each one separately because of the offsetting risks — the hedge, in finance lingo.
In their vision, the premium for the hybrid coverage would be paid in full upfront and benefits could never be cut. People who were certified as needing long-term care would get a guaranteed bump-up in their monthly annuity rather than having to seek reimbursement for individual expenses such as nursing care.
I’ll share excerpts from emails I got about the plan and then give you some additional thoughts from Warshawsky and other experts.
Henning Sieverts of Norwich, England: “It’s a smart insight, but as formulated, never accessible to the bulk of any population. Most people have neither the wealth nor the income even to consider buying into such a scheme. The public sector, with or without involving not-for-profit social enterprises, is entirely capable of it efficiently and responsibly.”
Rebecca Bartlett of Brattleboro, Vt.: “Wow! As a recent retiree who tried a crystal ball, tea leaves and entrails and (probably) failed to make the right decisions on annuities and Medicare, I think the U.S. government is the right organization to enact the Warshawsky plan. That’s what government is for: to feed us our greens.”
Ethan Schwartz of New York City: “Savers may have a rational reason for not liking longevity annuities: The returns they offer are pretty skimpy. Today, the annual investment return on a longevity annuity that begins payments to a couple at age 80 is only 5.8 percent, and that’s only if one of them lives to age 100.”
Jim Pisula of Fort Collins, Colo.: “The insurance companies are their own worst enemies — the products are laden with fat commissions so agents push them heavily, they’re difficult to compare one against another, they require big chunks of money to start with, and they’re illiquid.”
Tom Wilson of Berlin, Md.: “I have long-term care insurance and so do my sister and a number of my friends. In each case, the insurance company has come back long after we initially purchased the insurance and either raised the rates or reduced the benefits. It’s like making a bet with someone and having them change the terms of the wager or the stakes retroactively.”
Henry Pashkow of Philadelphia: “I like broccoli and brussels sprouts, but I don’t like the insurance policies. Is this rational? Not to a rational economist (if there are any). But that’s me.”
All of those are valid points. People feel annuities and long-term care insurance are unnecessarily expensive. They worry that the insurers won’t be around to pay when they need the money. Some admit that they probably ought to have coverage, but for whatever reason don’t.
Cost is a particular concern. Only about one-third of households could afford a policy along the lines of the one in the 2001 article, assuming they could not tap more than half of the equity in their homes to pay for it, according to a 2007 article by Brenda Spillman and Christopher Murtaugh for the Office of Disability, Aging and Long-Term Care Policy in the U.S. Department of Health and Human Services. Spillman and Murtaugh were Warshawsky’s co-authors on the 2001 article.
Warshawsky told me that he heard from a lot of people after my newsletter came out, but not, alas, any insurers who wanted to offer the policy. I asked him about Spillman and Murtaugh’s piece, which he had not read. He said he wasn’t sure that the joint product would be as unaffordable as they estimated, though he did email me later that it would not be “suitable for low-income retirees who are covered by Social Security for the annuity and Medicaid for long-term care.”
I also asked Warshawsky about Rebecca Bartlett’s idea that the federal government should offer such a product. He said it would be hard to keep it from being politicized, with segments of the population fighting over who should be subsidized. “It would be great to introduce it in the private sector first and see if it works,” he said.
As for Ethan Schwartz’s argument that the return on annuities isn’t good, Warshawsky cited research by himself and others that found that plain-vanilla annuities — at least those that pay out immediately, rather than later in life — do pay a fair return based on expected longevity. “It’s not what you would get in the stock market,” he said. “These are like bond returns.”
Scott Olson, an insurance broker on Camano Island, Wash., who specializes in long-term care insurance, told me in an interview that several companies in addition to the one I mentioned, OneAmerica, offer hybrids of long-term care insurance and annuities. But as my article explained, the existing policies don’t have the natural hedge that’s built into the Warshawsky-Spillman-Murtaugh concept.
Likewise, some readers cited policies that combine life insurance with long-term care insurance. Those don’t have a natural hedge, either. The risks to the insurer are all loaded on one outcome: that the person will get sick and die young.
Long-term care insurance (coupled with longevity protection) is “an absolutely critical part of retirement planning,” but until recently it hasn’t been sufficiently available because many insurers that sold long-term care as a stand-alone product lost money by underpricing it, Chuck Goldman, a financial services adviser in Swampscott, Mass., told me. The number of long-term care policies sold annually fell more than 90 percent, to 57,000 in 2018 from 754,000 in 2002, according to a Treasury Department survey.
“There isn’t enough competition to make companies deliver the best products they can,” Goldman said. That clearly needs to change.
The Readers Write (About Other Things, Too)
I have a computer science background and spent many years with the ill-fated congressional Office of Technology Assessment. Regarding your newsletter on the regulation of artificial intelligence, I worry that, in the absence of an organization like the O.T.A., we are letting so-called “autonomous applications,” like Teslas, be made commercially available without really assessing their safety or looking at the broader social and policy questions. The trucking industry is talking about autonomous 18-wheelers barreling down our freeways, for God’s sake. Technologists, economists, psychologists, social scientists and ethicists need to put their expertise together. And, as you point out, it needs to be an international effort. Learning on the fly can be hazardous to our health.
Fred Weingarten
Annapolis, Md.
Quote of the Day
“Once the N.H.S. arrived, if you were poor and you got sick, you weren’t on your own anymore. You were in a crowded waiting room full of other sick people.”
— “Cunk on Britain,” Episode 4: “Twentieth-Century Shocks” (2018)
Investment
Warren Buffett Says 'When It Rains Gold, Put Out The Bucket' And This High Yield Investment Is Making It Rain – Yahoo Finance
Benzinga and Yahoo Finance LLC may earn commission or revenue on some items through the links below.
In his 2016 letter to Berkshire Hathaway shareholders, legendary investor Warren Buffett wrote, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.” According to Buffett’s sage advice, now might be the perfect time to invest in high-yield assets while interest rates remain elevated.
One popular high-yield stock that has caught the eye of income-hungry investors is AGNC Investment Corp (NASDAQ:AGNC). With a jaw-dropping dividend yield of 15.38%, it’s easy to see why. However, a closer look at AGNC’s performance reveals some notable risks.
The Risks of Chasing Yield: AGNC’s Shaky Track Record
While AGNC’s sky-high dividend yield is certainly enticing, the company’s recent performance paints a less rosy picture:
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Year-to-date, AGNC shares are down 4.3%
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Over the past year, the stock has fallen 5.18%
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The 5-year performance is a dismal -48.55%
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AGNC’s dividend rate has remained flat since early 2020
More on Buffett: Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.” These high-yield real estate notes that pay 7.5% – 9% make earning passive income easier than ever.
AGNC primarily invests in agency mortgage-backed securities (MBS), which are backed by government-sponsored entities like Fannie Mae and Freddie Mac. While these securities are considered nearly risk-free due to their government backing, financing them through short-term leverage has become increasingly challenging in the current interest rate environment.
As rates have risen, AGNC has seen its debt servicing costs skyrocket while its interest income has stalled. The company has relied heavily on derivatives like interest rate swaps and shorting U.S. Treasuries to hedge against higher rates and prop up earnings. But as these hedges begin to expire, AGNC’s ability to maintain its lofty dividend and shareholder value is being called into question.
A More Stable Alternative: Cityfunds Yield Fund
For investors seeking high yields backed by real estate assets without the excessive risks, the Cityfunds Yield fund offers a compelling alternative. While AGNC primarily invests in residential mortgages, Cityfunds focuses on home equity investments – a key distinction.
Here’s what makes the Cityfunds Yield fund stand out:
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Targeting a stable 8% APY with quarterly distributions
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Backed by a diversified pool of collateralized real estate loans
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Invests in home equity agreement-backed notes and short-term mortgage notes
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Offers a manager-guaranteed base yield of 7%
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Five-year term fund with redemption available after a 12-month lock-up
By investing in a mix of home equity-backed notes and short-term mortgages, Cityfunds aims to generate steady interest income that can be distributed to investors on a quarterly basis. The fund’s 65% to 80% loan-to-value target on its home equity investments provides an added layer of security.
Unlike AGNC, which has seen its book value per share plummet from nearly $18 to under $9 in just over four years, Cityfunds’ focus on home equity and conservative LTV ratios helps protect investor capital. And with a guaranteed base yield of 7%, investors can count on a reliable income stream even in challenging market conditions.
The Bottom Line
While AGNC’s 15%+ dividend yield might look like a golden opportunity at first glance, savvy investors know that all that glitters isn’t gold. The company’s shaky performance, overreliance on complex hedging strategies, and exposure to a shrinking agency MBS market should give potential buyers pause.
For those heeding Buffett’s call to “put out the bucket” and capture high yields while the economic storm rages on, the Cityfunds Yield fund offers a more stable, risk-adjusted way to invest in real estate-backed cash flows. With quarterly distributions, a guaranteed base yield, and a conservative approach to home equity investing, Cityfunds is making it rain for income investors.
Ready to learn more? Click here to explore the Cityfunds Yield fund and start putting Buffett’s timeless wisdom to work in your portfolio.
Read Next:
This article Warren Buffett Says ‘When It Rains Gold, Put Out The Bucket’ And This High Yield Investment Is Making It Rain originally appeared on Benzinga.com
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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The Indonesia Investment Authority (known as the INA) is Indonesia’s state-run investment fund and has been around for about three years now. When the INA was first proposed, it was not really clear what it was going to do or how it would be structured. But with a few years of operations under its belt, the fund’s role in the Indonesian economy is snapping into sharper focus.
In 2021, the INA was seeded with $5 billion in state capital. This included about $1.7 billion in cash, most of which went into interest-earning bank deposits and government bonds. It also included $3.3 billion worth of shares in two state-owned banks, Bank Mandiri and Bank Rakyat Indonesia. In 2023, the fund’s total assets had grown to around $7.3 billion and it booked a net profit of $269 million.
The INA’s main source of income and operating cash flow right now is not from its investment portfolio, but rather interest income it earns on bonds and bank deposits, as well as the dividends paid out by Bank Mandiri and Bank Rakyat Indonesia. Indonesia’s banking sector is seeing strong growth, and the value of the shares the INA holds in these banks has increased from $3.3 to $4.8 billion over the last two years.
This was actually a pretty clever way to structure the fund because it minimizes the direct cash outlay required by the government. As long as the banking sector continues doing well, the INA’s shares in Bank Mandiri and Bank Rakyat Indonesia will generate cash flow while the fund continues to build its portfolio.
And that brings us to the next big question: what exactly is in that portfolio? The INA’s mandate is to invest in priority sectors such as transportation, logistics, healthcare, green energy, and the digital economy. In previous years the INA created sub-holding companies that invested in telecom tower operator Mitratel and state-owned pharmaceutical company Kimia Farma. They continue to hold these investments.
But most of the INA’s significant activity so far has been in the toll road sector. Through sub-holding companies, the fund has acquired ownership stakes in several toll roads in Java and Sumatra and what it’s doing is very interesting. Let’s look at the Pejagan–Pemalang toll road as an example. This is a stretch of highway in Java operated by the state-owned construction company Waskita Karya. Waskita is struggling financially at the moment in large part because it incurred lots of short-term debt building these toll roads.
The INA came in and acquired 100 percent of the Pejagan–Pemalang toll road from Waskita, which will help relieve some of the financial pressure on the state-owned construction firm. I think we are likely to see more of this, as Indonesia’s toll roads have significant long-term economic value and operators like Waskita can use injections of fresh capital. In the case of Pejagan–Pemalang, the INA then turned around and sold 53 percent of the toll road to a pair of foreign investors from the UAE and the Netherlands.
These kinds of co-investment partnerships are starting to develop in other areas as well. In 2023, the INA created a sub-holding company called PT INA DP World in which it owns a 51 percent stake. The other 49 percent is held by DP World, a massive logistics firm based in Dubai. Right now this co-venture is small in terms of its book value, but they are clearly setting it up to be a major conduit for Middle Eastern investment into Indonesia’s port infrastructure. A similar co-investment deal is in the works with China’s GDS to develop data centers, and there are big plans for green energy in the near future.
And this, it is becoming clear, is what the INA’s main function is likely to be. It isn’t funded nor does it really operate like a traditional sovereign wealth fund, such as Singapore’s Temasek. Temasek mainly reinvests accumulated reserves by buying and selling assets, often overseas, to maximize returns to the state. Instead, the INA is more of a co-investment fund designed to attract foreign capital into key parts of the Indonesian economy.
Historically, a big barrier to foreign investment in Indonesia has been investor uncertainty. Regulatory hurdles can be significant, and breaking into a market that is heavily dominated by state-owned companies can be daunting. Throughout 2023 it has become clear that one of the INA’s main functions is to help allay those concerns by partnering with foreign investors in priority sectors and we should expect to see a lot more of this activity in toll roads, logistics, green energy, and the digital economy moving forward.
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Honda Motor on Thursday said it would invest $11 billion to build batteries and electric cars in Ontario, a significant commitment from a company that has been slow to embrace the technology.
Like Toyota and other Japanese carmakers, Honda has emphasized hybrid vehicles, in which gasoline engines are augmented by electric motors, rather than cars powered solely by batteries. The Honda Prologue, a sport-utility vehicle made in Mexico, is the company’s only fully electric vehicle on sale in the United States.
But the investment adjacent to the company’s factory in Alliston, Ontario, near Toronto, is a shift in direction, raising the possibility that Honda and other Japanese carmakers could use their manufacturing expertise to push down the cost of electric vehicles and make them affordable to more people.
“This is a very big day for the region, for the province and for the country,” Prime Minister Justin Trudeau said at an announcement event in Alliston, where Honda manufactures the Civic sedan and CR-V S.U.V. The investment is the largest by an automaker in Canadian history, he said.
The company also plans to retool its flagship factory in Marysville, Ohio, near Columbus, to produce electric vehicles in 2026. The investment in Canada is a sign that Honda expects the technology to grow in popularity, despite a recent slowdown in sales.
Canadian leaders have been wooing carmakers with financial incentives as it tries to become a major player in the electric vehicle supply chain. Vehicles made in Canada can qualify for $7,500 U.S. federal tax credits, which are available only to cars made in North America.
Volkswagen said last year it would invest up to $5 billion to construct a battery factory in Thomas, Ontario. Northvolt, a Swedish battery company, announced plans last year for a $5 billion battery factory near Montreal.
Honda will benefit from up to $1.8 billion in tax credits available to companies that invest in electric vehicle projects, Chrystia Freeland, the Canadian finance minister, said Thursday at the event.
Canada also has reserves of lithium and other materials needed to make batteries, and generates a lot of its electricity from nuclear and hydroelectric plants, which allows carmakers to advertise that their vehicles are made with energy that releases no greenhouse gas emissions.
“As we aim to conduct our business with zero environmental impact, Canada is very attractive,” Toshihiro Mibe, the chief executive of Honda, said Thursday in Alliston. Honda will also work with partners to convert raw materials into battery components, he said.
However, recent declines in the price of lithium have raised questions about whether mining the metal in Canada will be profitable.
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