In a recent article in Schwab’s customer magazine (Charles Schwab on Investing, Winter 2007) how to develop tax strategies was the subject of “Fixed Income for Everyone” [page 29-32]. The curious thing was that in this discussion of “fixed income” not once was annuities mentioned — isn’t that curious since annuities are the only tax-deferred fixed income investment available outside of 401(k), IRA, etc. accounts. Why would Schwab not talk about annuities? I’m glad you asked…Schwab is a brokerage firm and brokerage firms sell securities — not life insurance products. Yes, they could have talked about the fee-loaded, under-performing variable annuity but it would have been impossible to talk about variable annuities without mentioned their super safe no-downside-possible-if-held-to-term fixed index annuities. Schwab didn’t mention fixed annuities because they don’t make their money selling annuities — think mutual funds, stocks, bonds, etc. This pinpoints the problem with brokerage firms, stockbrokers, financial columnist and others who make their living selling or touting securities — they never mention the super safe alternatives life Bank CD, U.S. Government Savings Bonds and Fixed Annuities. Unfortunately, this means that mainstream retirement-minded savers who are risk averse never hear about how to keep their money safe from loss — they only hear about mutual funds, stocks, bonds, diversified portfolios, etc. that all carry the risk of loss. And, what is the one thing a retirees — or near retiree in the red zone — can’t afford because they have no way to recover from: right, losing part of their retirement nest egg because the market tanks. I still have a vivid memory of the market meltdown in 2000-2002 that came with the dot.com bust — many would-be retirees had to postpone their plans or actually go back to work because they they lost substantial amounts of their retirement money. Ironically, on page 6 of the same Schwab magazine the following appeared:
“Many older workers saw their retirement portfolios balloon during the late 1990s bull market and opted to retire early. However
the bursting of the technology-fueled bubble and the resulting bear market between 2000 and 2002 dramatically devalued those new
retirees’ portfolio. Subsequently, some Americans who had taken early retirement found they had to return to work.”
When will this lesson be learned? There is only one question you need to answer before committing your money to the market: What will I do if the worse case outcome become reality? If you don’t like the answer, don’t put your money at risk.
