Typical retirement-minded boomers along with most retirees, as mentioned in this retirement blog, are agonizing over the downward spiral in the value of their retirement nest eggs. Their money was committed to mutual funds, stocks, bonds, variable annuities and other “securities” because they listened to the loud voices of Wall Street telling them about the safety and high rates they could expect. Little thought was given to their risk tolerance because they were assured that “long term” they would do just fine by putting their money in the market. In fact, they were warned that unless they invested in the market they could not possibly keep up with inflation. Most who followed this advice – whether in a 401(k) or another retirement plan, or with their life savings earmarked for retirement use – now find themselves down 30% or more from a year ago. Over the past ten years they’ve also lost money in the market after accounting for inflation. They now want to know where to put what money they have left. To answer this conundrum, let’s look at the options.
There is currently underway a flight to the safety of FDIC-backed bank CDs. Granted, this option is rock-solid safe if the FDIC limits are not exceeded, but rates are very low. In fact, the interest rate on CDs will be significantly less than the rate of inflation. What’s more, every dime earned is subject to ordinary income taxes and early withdrawal comes with penalties. Also, CDs cannot be converted to a guaranteed lifetime income without being withdrawn and reinvested. The only advantage of a bank CD is the safety and a set, albeit paltry, rate of return. When the principal is returned at maturity, its purchasing power will be less than when deposited. The CD’s declining purchasing power will lead to the self-fulfilling prophecy of a retiree’s greatest fear: outliving their retirement money.
U.S. Government bills and bonds are another favorite safe-harbor. Again, rock-solid safe but even lower interest rates than bank CDs plus an added hazard. If interest rates rise as most economic sages believe they will in the face of the rapidly expanding federal deficit, the price of bonds with below-market coupon rates will fall. The longer the maturity of the bond, the greater the price drop when interest rates rise. If a bond owner sells prior to maturity because they need the money, a loss will result. While U.S. Government bonds are free from default, such is not the case with the bonds of private companies and other governments like municipalities. There is widespread anticipation that bond defaults will escalate if the economy suffers a recession – and recession is the consensus opinion. If you look at the trend of past bond defaults, you’ll find many municipalities among the casualties. Many bonds are far too risky for retirees.
Committing retirement money to the market in mutual funds, variable annuities, stocks and other securities is risky as millions of Americans now know. Yes, the value may return in the “long run” but many retirees and soon-to-be-retirees don’t have the time to wait for the market to recover. In fact, the market indexes (DJIA, S&P, etc.) are currently lower than they were at the start of the Millennium in 2000 – and the outlook is negative at this time. Retirement money should not be placed at risk in market investments unless the risk of loss can be tolerated or the investor has the time to wait for a market recovery – to take unsuitable risk means jeopardizing retirement. Most who now find themselves with massive paper losses are discovering too late that their risk tolerance is not as great as initially thought. The recent market losses will result in continued employment or scaled-down retirement just as the market meltdown did in 2000-02 and 1973-74. Sadly, losses could have been avoided with a better alternative: fixed annuities.
The fixed index-linked annuity has again proven to be a safe place to put retirement money. There is no limit on the amount, taxes are deferred until withdrawal occurs, the worst result is a small guaranteed rate of return with the potential to do much better, 100% of the money is working since there is no “load” if held to maturity and the money can be withdrawn as a guaranteed lifetime income that cannot be out-lived. There are other advantages as well, like: partial liquidity for emergencies, no withdrawal requirements, the bypass of probate, and choice of earnings crediting methods. The best feature is the unconditional guarantee of global financial companies that have survived wars, depressions and failure of governments over the past centuries. If the greatest fear of retirees is outliving their money (longevity risk), why not buy an insurance policy to offset the risk as is done with homes, cars, health, life, business and virtually every other asset? Why take the low rates and pay taxes on bank CDs? Why take unaffordable risk in the markets? Fixed index-linked annuities are an alternative that can deliver safety and assure a better retirement.
