Ryan Report
Bill Ryan
September 02, 2008 01:26 am With millions of baby boomers hoping to retire during the next few years, recent market turbulence has many shaking in their boots as they look at their retirement assets (or lack thereof). They are asking themselves what will happen if the market doesn't recover. They worry about outliving their assets, and, most importantly, they are frightened by the daunting task of navigating treacherous financial markets by themselves. It is a well-known fact that investors who go it alone usually fail to outperform accounts run by professional money managers. But even the best portfolio managers can't give any guarantee that retired clients won't run out of money. So it seems that the ideal situation would be first to work with a time-tested financial adviser, and also to invest in a type of account that will guarantee a monthly income for life. The problem of outliving one's money is a relatively new phenomenon for the average American. Most boomers' parents retired with a pension that paid a monthly income for life, and many plans continued paying something even until the second parent died. Unfortunately, those plans are gone for all but a select few. During the early 1980s, the 401(k) plan took the place of the traditional pension as corporations shifted the burden of funding retirement from the company to the worker. To this day, it would seem that the average employee has not yet gotten the message that financing his or her senior years is now his or her problem. Most workers have less than one year's income in their retirement accounts. There is not much one can do for them, but even those who have made a reasonable attempt at saving still find themselves worried about living too long. Mutual fund companies like Fidelity have recently been advertising accounts that promise "lifetime income," but if you read the footnotes, there is no ironclad guarantee. These accounts are simply systematic withdrawal plans which liquidate enough shares every month to provide a steady cash flow. Sounds good, doesn't it? However, should the market decline significantly while withdrawals continue, running out of money is no longer a possibility, but rather a probability. One solution to this problem is by revisiting an idea that has been around for generations but recently has been modernized - annuities. First-generation annuities were the vehicles that backed up those traditional pension plans that boomers' parents enjoyed. The benefit was indeed lifetime income, but the drawback was that the monthly income ended at death, and the children inherited nothing. Because these annuities were fully funded by the employer, the progeny had nothing to say. But in this environment, where retirement assets were funded largely by the worker himself, that type of arrangement is generally unacceptable. The most recent version of annuities provides guaranteed lifetime income to the retiree, with an opportunity for growth and, at death, the remainder of the underlying investment fund goes to the beneficiary. Traditional pension annuities are rarely adjusted for inflation, while the most modern annuities have yearly "step-ups" that result in monthly income increases if the underlying funds grow more than the withdrawals. It may seem like a complicated idea, but it is deceptively simple. The client pays a small insurance premium, typically .65 percent per year within the annuity, to guarantee that the benefits continue for life. This insurance premium guarantees that even if the underlying investments went to zero, the monthly income would still continue. There are no other investment opportunities that can boast that, but there are critics of this approach. They say that annuities have higher internal costs than a mutual fund - and they're right. Annuities cost more, and they should, because they do so much more. Last week, Scott Burns wrote in his Boston Globe column that investing in a no-load mutual fund would yield a higher return than investing in an annuity with similar funds. Talk about inaccurate and incomplete analysis! The total difference was due to the charge for the guarantees of principal and lifetime income. Funds have no guarantees, but annuities do. If you want the guarantees, you have to pay for them. But with the stock market firmly in bear market territory, more and more investors are saying that the tiny difference in cost is more than made up for by significant upside potential and no downside risk. Look at it this way. If it costs you .65 percent for the guarantee, with the market down 20 percent from its October 2007 high, that doesn't turn out to be a bad deal for 30 years. It sounds reasonable to me. ÔÇ ÔÇ ÔÇ William T. Ryan is president of Ryan Financial Advisors in Andover. The owner-managed firm provides highly individualized wealth-management services and financial advice to families, individuals, corporations, trusts and pension plans. Reach him at 978-475-1500 or by e-mail at wtryan@ryanfinancial.com.
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