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March 15, 2006
Beware Wolves in Sheep's Clothing
Every investor today must wrestle with the problem of how to create enough low-risk income during their retirement. In years gone by, this income was guaranteed by government entitlement programs and employer sponsored pensions. ERISA changed all that. Since Congress passed ERISA in the 1980's, the burden of retirement income has shifted almost completely from employer to employee. Today, less than 18% of American workers are covered by a defined benefit plan.
For years, I have been writing about why I think variable annuities are terrible investments. The costs are too high, the sub-accounts perform poorly, your money is locked up for years with a penalty for withdrawal and they are taxed as ordinary income when the money is withdrawn.
For awhile, variable annuity sales climbed in spite of these problems. Annuity salesmen preyed on the fears created during the 2001 - 2002 decline in the stock market to breathe new life into annuity sales. Fortunately, people are beginning to wise up.
VARDS founder Rick Carey predicts a 50 percent decline in 2005 variable annuity sales over the previous year, once the final figures come out. "The VA business is exhibiting classic S-curve behavior, signifying a stagnant business," Carey says. "If the entire industry were a single insurance company, it wouldn't be long before it would be out of business."
In yet another ploy to spin variable annuities, insurance companies are now dressing them up as "personal pension plans." In 2004, MetLife rolled out Personal Pension Builder. Genworth Financial has created ClearCourse and New York Life will soon be releasing Personal Pension.
Joseph Belth, professor emeritus of insurance at Indiana University warns against getting caught up in the marketing hype. "They're renaming things with jazzy names...that aren't that much different than what has been offered in the industry over the last 50 years."
Financial engineers are working feverishly to invent new investments to meet the income needs of retirees. These investments have low costs, better performance, more transparency and, in some cases (like mine), investor control.
Control is a huge issue in retirement planning. Dan Danford of the Family Investment Center in St. Joseph, Mo., says, "From my viewpoint, the last thing the average boomer needs is to lock in payments they'll be forced to live with another 30 years! Would any of us want to live in the same house we bought 30 years ago? If we had developed a budget 30 years ago, could we have envisioned new cars costing $30,000 apiece, or gasoline at almost $3 a gallon?"
Flexibility and control of assets are essential, in my opinion, for successfully navigating the financial markets before and during a 30 year retirement. What are your thoughts? As always, you can leave them below.
TIP OF THE HAT:
Thanks to Snider Method Workshop alumni Mike McCorstin for pointing out the Wall Street Journal article on "personal pensions".
SOURCES:
1. Tom Lauricella. "The Latest Pension Substitute." Wall Street Journal 11 February 2006, B1.
2. David Drucker. "Breaking the Rules." Financial Advisor March 2006, p101.
http://www.fa-mag.com/issues.php?id_content=2&idArticle=1176
3. John Sullivan. "Fear and Greed." Boomer Market Advisor February 2006, p10.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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