Going Broke Safely…

The weaker than expected economic indicators here in the U.S and around the globe has investors seeking safety.

  • Many will seek the safety of cash or CDs.
  • Many will turn to insurance annuities.
  • Some will turn to gold or the next ‘hot commodity’.

This is a great example of people making an emotional decision during short term volatility.

The seal of the United States Department of Labor
The seal of the United States Department of Labor (Photo credit: Wikipedia)

The historic “Risk Free Rate” is about 4%.  The risk free rate is the historic return on government guaranteed T-bills.  Think of them as the CDs issued by Uncle Sam.  They have a very low return but virtually no volatility.  They seem like a sure thing, but after inflation and taxes, the only thing that’s for certain is long term losses.  It’s the safest way to go broke.

There has been abundance of ads for annuities touting the ‘guaranteed’ return of as much as 6.5%. What they don’t tell you is that in order to receive the ‘guaranteed’ rate you need to annuitize after a 5 to 10 year holding period.

This means you give complete control of YOUR money to the insurance company in exchange for a monthly income for life. They also neglect to tell you that once annuitized the ‘guarantee’ is turned off.

You could run out of money. Because of inflation the purchasing power of your money decreases every day.

These products pay the broker/agent a 8 to 10% commission.  When you consider all the fees you pay, you will not keep up with the inflation. The insurance company and the broker wins and you lose.

The truth about these guaranteed products is becoming evident with the new fiduciary standard.

The Department of Labor will be introducing and implementing a new fiduciary standard for anyone working with consumer’s retirement accounts. As a reminder the fiduciary standard states that the adviser/broker/agent must make recommendations that are in the best interest of the client only.

The financial services industry has been fighting this standard for years. Because now they must prove their solution is in the best interest of the client. In the past it only needed to be suitable. This makes the brokerage firms, insurance companies and banks accountable for all they sell.

You need to ask why haven’t they been recommending what was in my best interest all along ?

With the new fiduciary standard the variable annuity may become obsolete as a solution for an IRA rollover. Any annuity sale could put the salesperson as well as their employer as risk.

Most annuity sales are made by using the fear of market volatility.

We need to ask when did Americans become so afraid of risk ?

We must ignore the short term volatility and be adults about our finances. We should realize there is no free lunch. Risk is risk, live with it.

We might look at downturns as an opportunity to rebalance our portfolio. Buy low and sell high, automatically.

Remember, free markets work, capitalism while not perfect, works.

To succeed, we must own equities….globally diversify….rebalance.

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