This
morning I took my son to a local diner for breakfast. During the meal, I
couldn’t help but overhear the couple in the next booth, discussing how to
protect a lump sum of money as they busily entertained their three-year-old.
The topic at hand was a five-year CD option and I found the husband’s remark
interesting. “Five years from now,” he said, “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’s 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 everyone who lost big in the market has had the good
fortune to recapture his or her losses. We also know that the federal stimulus
has managed to lay a foundation of confidence under the average investor. This
mentality however, is short term in nature. Long term planning on the other
hand, has taken a back burner to day-to-day market fluctuations, which
unfortunately seems to discredit the reality of a strong economic turnaround.
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. To reiterate the remark
spoken by the man in the booth, given the current financial climate, how can
you even begin to assess what the future will hold? Surprisingly, this
interesting question 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 it back? As inflation creeps up, what will happen with the market? How
high will federal taxes climb, considering the average marginal tax rate since
1913 exceeds 60 percent? These are just a few of the many questions 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 it. Why
should they? These investors have already been exposed to the most volatile
decade on record, watching their portfolio fluctuate like a roller coaster the
past few years. The only difference now, is that their eyes are wide open,
knowing anything can happen. 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 more than 90% of working Americans are without a
pension, along with employees paying into a bankrupted social security, it’s
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 a 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, which provides 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 products front large
sums of liquidity to match all deposits usually do so on a dollar for dollar
basis.
There
is a reason why you might not have heard of this philosophy. The massive
reserve requirements needed for annual reset usually pose 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 use 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, are the
exact opposite of placing cash into reserve pools. Therefore, it should be of
no surprise that in the wrong financial environment, leveraging could prove to
be of severe consequence. To put it into perspective, many experts believe the
fall of MF Global stemmed from a leveraged asset as high as 43 to 1. This means
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.
As
of now, 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. Doing so, will help determine if these products are
right for you.
