Written By: Cal Burgess | Retirement Servicing Group
This morning I took my son to a local diner for breakfast. During the meal I couldn’t help notice the couple to the booth in front of me discussing how to protect a lump sum of money. This couple was in their mid 30s, with a 3 yr old they were busily entertaining. The option they were discussing was a 5 year CD. I found it interesting that the husband made the remark “5 years from now who knows what will happen in the market. By then it could be a whole different world”. The more I thought about that statement, the more I think he hit the nail on the head.
In order to better understand this, let’s take a look at the financial arena today. The market is rallying to all new levels while the Federal government is still pumping $35 billion per month into bonds and mortgage backed securities as a counter measure to a fragile market. Ironically, a fragile market that is somehow at an all time high; even though interest rates remain at an all time low. The rules are literally set in opposition and the outcome is impossible to determine. We know that many who lost big in the market has had the good fortune to recapture their losses. We also know that the Federal Stimulus has managed to lay a foundation of confidence under the average investor. However, this mentality is short term in nature and long term planning has taken a back burner to day-to-day market fluctuations, which unfortunately seems to discredit the reality of a strong economic turnaround.
So when you talk about long term goals (5 to 15 plus years out), identifying the right financial plan can prove to be quite the conundrum. As the man sitting next to me in the diner said, given the current financial climate how can you even begin to assess what the future can possibly hold? This is an interesting question that is failing to be addressed in most income and retirement planning models.
If we are printing over $400 billion dollars per year how long will it take us to pay this back? What will happen with the market as inflation creeps up? How high to you think Federal taxes will climb, considering the average marginal tax rate since 1913 exceeds 60%? These are only a few of the questions that investors should be addressing within their retirement planning.
I don’t think today’s investor distrusts the market, they simply don’t like the unpredictability that comes with today’s market environment. Why should they? Many have seen their portfolio look like a roller coaster over the last few years. The only difference is that now their eyes are wide open knowing anything can happen. Meaning investors have already been exposed to the most volatile decade on record. The question is are you willing to roll the dice moving forward or will you take precautions to lock in financial guarantees to protect your long term financial goals?
When you take into account that over 90% of working Americans do not have any sort of pension put into place, along with employees paying into a bankrupted social security, it is clear to see an income epidemic is right around the corner. Where is your future income going to come from? Can you count on social security along with a 401k to be a solution to your financial security within retirement? Without taking precautions to exempt your money to an uncontrollable financial climate you may be inadvertently placing yourself in dangerous spot. Once again, given current market conditions, anything is possible.
The only remedy to an unpredictable market lies within concepts such as annual reset, providing true financial guarantees. Guarantees that expel any future volatility with long term growth potential and lifetime income. These concepts reposition your portfolio from securities to fixed, asset protected concepts. Simply put, deposits are protected within this concept through reserve pools mandated by the state in order to offset the most extreme financial circumstances. Institutions that offer these product front large sums of liquidity to match all deposits, usually on a dollar for dollar basis.
There is a reason why you may have never heard of this philosophy. The massive reserve requirements needed for annual reset usually poses a conflict of interest to security based firms offering deferred compensation plans. Instead, traditional securities, or stock based plans usually rely on leveraging assets to drive in additional income. Companies that leverage assets, by default, cannot afford to front reserve pools in order to protect the money; as it is a conflict of interest. Leveraging assets, or borrowing against funds, is the exact opposite of placing cash into reserve pools. Therefore it should be of no surprise that in the wrong financial environment leveraging can prove to be of severe consequence. To put into perspective, many experts believe the fall of MF Global stemmed from leveraged asset as high as 43 to 1. Meaning for every dollar deposited, $43 dollars were borrowed in hopes of trying to drive in profit. So when the market crashed, excessive debt obligations effectively rendered the company insolvent. Since the assets within these plans were leveraged, the money in turn was completely exposed to volatility.
What happens in the market remains to be seen. Those concerned about unanticipated market downturns should educate themselves on concepts that provide true financial guarantees. This is especially true for those who strive for a comfortable lifestyle in retirement regardless of how the market performs. However, before you start exploring safe money solutions that incorporate annual reset, it is highly recommended that you seek the advice of a financial professional to help determine if these products are right for you.
About the Author: Cal Burgess is a financial professional in Austin, TX who specializes in both college and retirement planning solutions exempt from market volatility. His specialties lie in both lifetime income and tax free withdrawals. Many of his clients have utilized his services as a remedy to a non-existent pension. He can be reached at (877)701-7787, or emailed at email@example.com, in the event that you would like to receive a no-obligation income illustration.