A great number of Americans are either about to retire or already have. The No. 1 fear of many is that they may run out of money in retirement. The vast majority may live for decades in their retirement years without having a guaranteed pension or receiving income from work. Social Security benefits alone will likely not be enough. Many have accumulated a retirement nest egg in a pension account (401(k), 403(b), thrift savings plans, IRAs, and more), and some have other savings and investments -- but even these measures may leave retirees in a financial lurch at a time when they need the most help.
Boomers and seniors are living through the same economic developments as their younger counter-parts -- the sub-prime credit meltdown that has affected housing and may now spread to automobile debt and credit card balances; highly volatile stock and bond markets; a weak dollar, fueling higher prices for oil and other commodities; more unemployment and rising inflation; retail sales, consumer confidence, and new-job creation in sharp decline; drastic interest rate cuts by the Federal Reserve to avoid a recession; a money giveaway stimulus package from Washington to help prop up the economy; and widespread talk of recession and stagflation.
So, in these troubling economic times, where should you suggest that retirement-minded clients put their money?
We're told the stock market is the best in the long term, but is there a "long term" in retirement?
Wasn't there a stock market meltdown in 2000-02 that sent many retirees back to work and prevented others from retiring? Isn't it true that the current inflation-adjusted stock market indexes are below their previous peaks? No one denies there is substantial risk associated with stocks, mutual funds, variable annuities, and everything else with market-determined value, yet the loud voices of Wall Street and investment companies advertise that now is the time to buy at bargain prices. Is market exposure a sound recommendation for retirees, or is this advice self-serving?
If the stock market craters as it did in 1973-74 and 2000-02, how and when will lost retirement money be replaced? Is today's stock market too risky for retirees who may not get a second chance if they lose their money? Unfortunately, far too many unsuspecting retirement-minded investors are overexposed to market risks because they've been assured that mutual funds, variable annuities, and diversified portfolios will perform well over the next 10 years. Think about it: Ten years could make up as much as one-half of the average retirement. Can retirees wait this long for a market rebound -- and is a rebound certain?
What about fixed-rate investments such as government and corporate bonds, bank CDs, and money market accounts? These are rock-solid safe unless your greatest fear is outliving your money. Since current fixed rates are lower than inflation, purchasing power may shrink. Also, when bond rates rise, the value of old bonds falls, which makes selling painful. Doesn't the potential loss of purchasing power add to the risk of outliving your money?
What about real estate, commodities, collectibles, and non-market investments? These are not only risky, but they're generally illiquid. Sadly, many Americans will opt for investments that promise above-market rates without taking into account the immutable law of investing: Risk and reward are always traveling companions. While reaching for higher returns is a natural tendency in today's low-rate, uncertain economic climate, the temptation should be avoided by most retirees. Before allowing retirees to commit their retirement money, you should confirm how they intend to handle the worst-case outcome.
There is one savings-based product that can offer retirees an opportunity to make an above-market rate of return without the risk of loss if held to term. It is guaranteed by some of the world's oldest, strongest, and largest financial companies. The rate of return is determined by stock/bond market indexes with owners sharing in the upside potential but avoiding downside losses. The worst-case outcome is a guaranteed minimum positive rate of return. The earned interest is tax-deferred until actually withdrawn, and there is no mandatory age by which the money must be used. Additionally, it can be turned into a guaranteed lifetime income that can be started, stopped, and stored at the desire of the owner. What's more, it offers penalty-free partial liquidity for emergencies and bypasses probate if the owner names a beneficiary. It can be opened for a small or a large amount, and sometimes more money can be added to the account. There is no law which limits the amount of money that can be placed in it and both qualified and non-qualified monies are accepted. It is truly a safe place to keep retirement money.
Unfortunately, this product is maligned by Wall Street and bankers because it competes with their products.
The financial press hasn't been too keen on it, either -- primarily because they are uninformed, misinformed, or just plain biased. We're talking about the fixed index-linked annuities issued by insurance companies -- the same companies that insure America's homes, lives, health, businesses, and every other asset of value. The worst-case outcome is a positive, albeit small, rate of return if held to maturity, but there is an opportunity to do much better. Fixed index-linked annuities deserve consideration by the retirement-minded in today's uncertain economic climate. Where is your clients' retirement money?
Shelby J. Smith is chief operations officer and senior vice president for BHC Marketing Ltd., which is involved in retirement planning, Internet commerce, and the training of financial advisors and planners. He can be reached at smith@bhcmarketing.com.
