Since something is better than nothing, then more of that something is usually even better – thus, the reason why so many traditional bank savers have been researching annuity rates lately.
Annuity rates may not seem a lot higher yet the difference between 2 and 3 percent over time can generate sizable differences. By the way, that is the difference between the top paying bank rates and the top paying five year multi-year **guarantee annuities (MYGAs) as of today (3-11-16)…[continued below video]
Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
[continued]…Are we saying you must be crazy to put money into the bank instead of an annuity? NO – we are saying you may seriously be missing out if you don’t compare and consider the advantages offered by fixed annuities.
Annuities are best utilized by individuals seeking income and long-term accumulation for retirement or to protect funds that have already been saved once retirement is near or at hand.
Both banking products and annuities are considered safe, lower risk portfolio options that avoid market loss.
Annuities have advantages such as tax deferral (Dick even discusses triple compounding in this weeks segment), probate avoidance, stretch for beneficiaries, and **guaranteed lifetime income when elected.
Not long ago, most people worked as long as they were able and eventually either “died in harness” or relied on younger family members to care for them in their old age.
Then along came this idea of retirement, where through hard work, shrewd investing and some help from a pension (if you’re lucky) and Uncle Sam, you could hang up your work boots a little early and spend your golden years enjoying a bit of leisure and fun.
But for most people, the math of retirement works only if they’re able to earn some interest on their savings. That is a challenging task in a world where central banks the world over seem to have declared war on savers.
What does this mean for the long-term viability of your retirement, and what can you do to keep your plans on track?
The 4 percent rule
In the early 1990s, financial adviser William Bengen did research on sustainable portfolio withdrawal rates. Assuming an asset mix of half stocks and half bonds, he back-tested withdrawal rates against historical 30-year periods in the market.
His conclusion was that if you want your portfolio to last 30 years, the maximum withdrawal that you should take each year is 4 percent.
That rate has worked well for millions, and many assume that it will continue to work unless future returns are significantly worse than past returns. Enter the central banks.
ZIRP and NIRP
The global economy has been stuck in slow-growth mode since recovering from the near-death experience of the 2008 financial crisis.
To stimulate growth, central banks around the world lowered rates to near zero and engaged in endless rounds of quantitative easing. When that didn’t work, some of them started adopting negative interest rates. That’s right, zero apparently wasn’t low enough.
ZIRP (zero interest rate policy) has given way to NIRP (negative interest rate policy) in countries such as Denmark, Sweden, Switzerland and Japan. The logic is to force banks to lend, weaken currencies to help exports and stimulate economies.
Not surprisingly, there are a lot of people who think these policies could come with some significant unintended consequences, not the least of which is that it will be pretty tough for savers, pension funds and governments to meet those future withdrawal needs if large portions of their bond portfolios are earning zero instead of the 4 percent to 5 percent that history has taught us to expect.
The $64,000 question (more like $64 trillion) is whether or not these low interest rates will derail retirees and the portfolios, pensions and Social Security program on which they rely to fund retirement.
I can say with certainty that … it depends. If these low rates are an anomaly and they eventually return to normal, then the 4 percent rule of thumb and the return assumptions that pensions rely on can continue to work.
But if they stay this low for a long time, then retirement as we have come to know it is at significant risk. Which will it be? I have no idea, but it makes sense to plan for the worst even while hoping for the best.
What to do. [Read More…]