Although the election is over, the economic and financial fundamentals remain unchanged. Until the credit market is freed from the bailout programs, then the recession (or worse) will end and the economic downsizing will reverse its direction, no change can be expected. As I have mentioned in my retirement blog, the market remains unpredictable. Retirement accounts are down 40 to 50% from 2007 highs, and market investments can be extremely risky. As is predicted, if consumers tighten their belts between Thanksgiving & Christmas, you can expect a severe turn in the stock markets, shrinking jobs, falling earnings, and corporate failures. Is there a safe place to store your retirement assets?
Life insurance companies are the only sector of the financial services industry that have largely avoided financial trauma. Although AIG Corporate was unable to pay its debts, their problems were not due to “insurance”, but unregulated Credit Default Swaps. AIG’s insurance subsidiaries suffered “guilty by association”, but they have retained their independent financial strength rating. These insurance subsidiaries will no doubt be the primary assets sold to pay the federal bailout loan to AIG Corporate. You are probably wondering about the solvency and safety of the insurance industry, particularly fixed annuities. Let’s go on a safety tour to insurance companies.
Insurance companies are known for their stability and operating history, which is a huge advantage over banks and brokerages. Their investments are conservative and boring, which means they rarely face market risks. To ensure the safety of the public and to protect the company’s solvency, the state Insurance Commissioner must approve the products they offer. In difficult economic times, there have been small but frequent failures. The home-state Insurance commissioner is armed with strong regulatory power when failure appears likely. Insurance Commissioners can levy fees on any other state-based insurance company to help pay for the rehabilitation, merger or liquidation failed companies. The system works flawlessly because no insurance policyholder has ever lost any of their principal investment with an insurance company. Insurance companies have survived global depressions, scandals and stock market crashes, as well as world wars and other crises. Americans are proud to have insurance on their homes, cars and health.
What about annuities that are fixed-rate or index-linked? Market losses have never caused annuity holders to lose a penny. Index-linked annuities not only offer a guaranteed minimum interest rate, but also the possibility to earn more if the index is rising. The annuity will not lose its value if the index drops, as has been the case during the current market meltdown. Annuity owners also get no market losses. They have income tax deferral until withdrawal, protection against creditors in most states and probate-free transfers upon death. Additionally, they can convert to guaranteed lifetime income. Penalty-free withdrawals are available to cover emergency situations.
Wall Street has given fixed annuities, particularly index-linked, a poor rap in recent years. This is due to their popularity taking stock brokers away from variable and mutual fund sales. Fixed annuities, despite the fact that market investments have suffered massive losses, are risk-free, pay a guaranteed rate, and can earn extra interest should the market recover. Annuity owners don’t need to delay retirement or worry about market losses. Fixed annuities are not the best way to get rich, but they can make a living and stay wealthy.
You shouldn’t be surprised when the financial advisor who introduced you to annuities calls you and tells you that your money is safe and that you have no losses. If the market recovers, you will do even better. You might want to convert more of your market money to fixed annuities. These days, stock brokers don’t have much to cheer about as they can cause massive losses if you follow their advice. They are still offering advice on where to place your money. I think the theory is that the more they get wrong, the greater the chance they will guess correctly the next time. This theory doesn’t appeal to me and it shouldn’t for you. You can’t borrow money to finance your retirement, so it’s important to protect your retirement funds. You will live for one-third of your retirement income. Make sure you protect it.
