How are you saving for retirement? I share some thoughts on retirement annuities.
I admit that I have a penchant for ranting about the misuse and abuse of annuities. And, yes, you have heard and read others doing the same. But, we have all also conceded that annuities can have a place in our portfolios and may be appropriate for some investors. It seems that that controversy will continue and will probably be even more exasperated by Washington’s newest “bright idea”.
The current economic landscape and many of the well known problems with Wall Street firms have fueled further fear of people never reaching their retirement goals. Couple that with the fact that the average American has small to negative savings rates, this fear is probably more a reality than ever. For those folks who are retired or are close to retiring, this is only magnified by the risk that large expenses or financial obligations will outlive their funds set aside for their golden years. It doesn’t help that savings account rates are scraping the floor these days either.
So, what’s the newest solution? Some members of the Obama administration, as well as some elected legislators, are proposing using retirement annuities as a possible solution to at least one of these problems — longevity. What is being considered is some form of a requirement that participants in a work-sponsored retirement plan would have to have some of their assets in a retirement annuity or some other investment that will provide income for life. Guess the point is, if you cannot do it alone, they (the government) will force you.
The impetus for enacting such a requirement is the huge growth in the popularity of 401K plans and the shift to a more personal ownership society over the last decade or so. Pension plans and other “guaranteed” forms of retirement payments have been on the out, while your personal savings and investment success are in. Basically, it was, and is, up to you. But, in light of the overwhelming retirement preparedness statistics and the recent economic turmoil, frankly the government thinks that we cannot handle it ourselves. I don’t argue that point: we need help.
Despite what the 2008-2009 financial “meltdown” did to people’s portfolios, a huge number of working Americans still have substantial funds in their 401Ks or in similar plans. And again, despite the economic environment, a huge percentage of these funds remain in equity investments — generally in mutual funds. More on how to get started with mutual fund investing here.
The recent problems of the financial markets notwithstanding, equity investments remain perhaps the best and maybe even the only types of investments that provide working people with some hope of achieving and maintaining their financial goals for retirement.
I cannot help but think that Washington’s motivation for this proposal is really a knee-jerk reaction to the recent instability in the financial markets. Frankly, the negative and scary statistics on American retirement preparedness have been there for a while, so what’s changed? The point is that longevity is certainly a factor, but if you have not saved and invested enough to begin with, what’s longevity have to do with it? Great! Your measly savings will last for the next 100 years, but you will still be living off of Spam because it’s still simply not enough. Here’s more on the topic of financial retirement planning for a life expectancy of 100 years.
Beyond that, the question remains that if some form of longevity guarantee will be required (for annuities), what form will it take? If we accept the premise that a retirement annuity issued by a life insurer provides the simplest method to guarantee against outliving retirement funds, then such a product provides the easiest way to solve the problem. Obviously, the life insurance industry is actively supporting this alternative. At the same time, other sectors of the financial services industry are not happy to see life insurers become the only entities that can service this possible new requirement.
But, more fundamental than that is what strategy or investment product would be the magical elixir for this ailment? As everyone knows there is a fine balance between income generation with preservation and growth. Can annuities, for instance, sufficiently achieve both goals after costs? And, when would these fixed payment instruments be required — immediately, upon retirement, before retirement, etc.? What about all the IRA money and funds from previous employers? Would they be required to contain annuities as well? It’s too early to say if anything will come of it, but frankly it worries me when the government tries to get involved with changing or artificially constructing investor behavior — especially, when it’s simply a reaction to a short-term event (recession). In concept, the ideas are good, but in substance, they typically have little impact.
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