The election is over but the economic and financial fundamentals have not changed. Nor is change expected until the bailout programs loosen the credit market, the recession (or worse) runs its course and economic downsizing reverses directions. Meanwhile, as I mentioned in this retirement blog, the market is unpredictably volatile, retirement accounts are down 40% to 50% from their 2007 highs and market investments are exceptionally risky. If consumers tighten their collective belts between Thanksgiving and Christmas as is forecast, expect a decided nasty turn in the stock market, shrinking jobs, falling incomes and corporate failures. Where is a safe place for retirement assets?
The part of the financial services industry that has largely escaped financial trauma has been life insurance companies. Granted, AIG Corporate failed but their troubles were not related to “insurance” but to unregulated Credit Default Swaps. The insurance subsidiaries of AIG suffered “guilt by association” but have maintained their financial strength rating as independent entities. No doubt these insurance subsidiaries will be the primary assets that are sold to repay the bailout loan extended to AIG Corporate by the federal government. You’re probably asking questions about the solvency of the insurance industry and the safety of their products, especially fixed annuities. Let’s take a safety tour of insurance companies.
First and foremost, insurance companies have an operating history of stability that is the envy of banks and brokerage firms. Their investments are limited to conservative, boring options that rarely carry inordinate market risks. The products they offer must first be approved by the state Insurance Commissioner to assure suitability for the general public and guard the insurance company’s solvency. There have been failures – mostly small – that have occurred in troubling economic times. When failure seems likely or actually occurs, the home-state Insurance Commissioner swings into action armed with powerful regulatory might. Insurance Commissioners have the power to levy fees on other insurance companies operating in the state to pay for rehabilitation, merger or liquidation of failed insurance companies. This system has worked flawlessly, because not one insurance policyholder has lost a penny of their invested principal with an insurance company. Bear in mind, insurance companies have survived world wars, global depressions, scandals, government failures and stock market meltdowns. Americans have insured their homes, cars, health, life, business and retirement nest eggs without fear of safety.
What about fixed rate and index-linked annuities? Again, never has a fixed annuity holder lost a penny due to market losses. Not only is there a clearly stated guaranteed minimum rate of interest, but index-linked annuities offer the potential to earn extra if the market-linked index rises. What’s more, if the market index falls – and that has been the case in the current market meltdown – the annuity is guaranteed not to lose value. In addition to no market losses, annuity owners get income tax deferral on earnings until withdrawal, protection from creditors in most states, probate-free transfers at death, the right to convert to a guaranteed lifetime income, penalty-free withdrawals to cover emergencies and total control over their money if circumstances change.
Fixed annuities, especially index-linked annuities, have gotten a bad rap from Wall Street in recent years, primarily because their popularity has taken mutual fund and variable annuity sales away from stock brokers. While the current meltdown has created massive losses for market investments, fixed annuities are loss free, earn a guaranteed rate at a minimum and will pay extra interest if the market recovers. Annuity owners are not postponing retirement, leaving retirement to find jobs or spending sleepless nights worrying about market losses. Savers will never get rich by choosing fixed annuities, but may very well stay rich.
Don’t be surprised if the financial professional who introduced you to annuities calls and says: “your money is safe, and you have no losses – if the market recovers, you’ll do even better”. It might be a good time to think about converting more of your “market” money to fixed annuities. Stock broker don’t have much good news these days because if you followed their advice you have massive losses. Of course, they are still giving you advice about where to put, or keep, your money – I suppose the theory is “the more they’re wrong the higher the probability they’ll guess right next time”. I don’t like that theory and neither should you. Safeguard your retirement money because “retirement is the largest purchase you’ll ever make and you can’t borrow the money to pay for it”. Your retirement nest egg will pay for the last one-third of your life…safeguard it wisely.
Shelby J. Smith, Ph.D.