What a crazy week - words like apocaplyptic, biblical, and cataclysmic come to mind. By all accounts the financial world was crashing down in such a manner as to make October 19, 1987 look like a junior varsity scrimmage game.
In times like these, the ability to make decisions with regard to one's retirement assets can ironically be, um, a bad thing. How many of you in the last week or two threw in the towel and moved equities into cash? How many of you could have possible guessed that after a string of ulcer-inducing days, the market would rally an historic 8.5% on Thursday and Friday, in the wake of historic moves by the Fed and Treasury? The weeks losses were nearly completey erased! Talk about to hell and back. HOLY COW WAS THAT EVER NUTS!
So here's the rub. If you did decide to go to cash at or near the bottom - you were not alone. Historic volumes of flows jetted into short term treasury notes paying historically low yields. But the massive boomerang effect of the 8.5% rebound happened with lightning speed - those who pulled out Wednesday missed out on an average years worth of gains in 48 hours.
And hence the term "liquidicide". Not yet recognized by Webster's, but intended to define what it sounds like: financial destruction due to unfettered access to and control over the disposition of retirement assets. Hey, let's start with me. Yours truly bought an internet mutual fund on March 11, 2000, when the NASDAQ was at it's all time high of 5000 and change. Why? Because I could! I turned $40,000 into $8,000 in about 4 months. And eight years later, it's back up to a whopping $12,000! That's liquidicide! Fortunately, I'm 20 years from retirement, God willing. But what about those who are retired right now? I contend that there's a high risk of liquidicide when all assets used to produce retirement income are left liquid and in complete control of retirees.
So what can be gleened from this? Be Wise - Annuitize.
Consider the alternative that continues to be a rare choice precisely because it removes the ability of the retiree to have access to the income producing asset. It's a bilateral lifetime contract where the company and the client are committed for life. And that is offputting to some folks - many folks - at first blush.
But think about the emotional and practical advantages of knowing you have a baseline of guaranteed lifetime income - in good times and very, very bad times like we just experienced. The emotional, fear based desire to call in all assets and hibernate until the storm subsides is reduced, because the stakes are lower. Your bases are covered with the annuity and Social Security, maybe a pension. The rest, while still precious, can be left to recover when the smoke finally clears. The annuity is for surviving - cover that first. The rest is for thriving.
Next Post: The Entry Level Millionaire
Subscribe to:
Post Comments (Atom)
3 comments:
Well said. The focus of my interest on the retirement income issue has been consumer and behavioral research. It fascinates me. When people declare – as they do in all popular consumer surveys -- that they want control over their assets, I have to challenge that they truly appreciate or even consider the ‘cost’ of this illusionary ‘control’. What does that really mean? Do people really want the ability at all times to be able to consume all their assets in a single day? Hardly. No one would ever do that. It seems to me that guaranteeing an income floor that accounts for inflation and longevity would create enormous true control because now you can determine and plan for other needs, health care, legacy and fun without having to guess what you can afford. that feels more like control to me.
I couldn't agree more about the basic principals you're talking about, but I am now concerned about the effects of uncertainty on public confidence. The concept of "guarantee" is predicated upon the claims paying ability of the guarantor, and this has come into little doubt here in the U.S. I believe it is one of the driving forces behind the support of AIG; many sound businesses there threatened to get pulled down by one very bad set of business circumstances.
Although we prevented AIG from falling, we may still see some doubt erode people's confidence in the system. Not only will basic ratings matter more, but people will rely on the basic protections of state guaranty funds. However, it is unclear to me what the limits of these funds are, particularly when it comes to life annuitization.
This isn't necessarily a deal breaker, but it does color the texture of business moving forward. Also, I have very serious concerns about the industry's ability to broadly support additional living benefit guarantees on variable annuities. Many of these are backed by the complicated repackaged (and misrated, dubiously insured) derivatives that Goldman Sachs of the sort presumably purchased from AIG. Even if this is not specifically the case for individual insurers, high volatility increases the costs of these instruments and there will certainly be a tighter squeeze on securitized products generally; this will in all likelihood limit both available instruments and capital sources. Of course, this will have a constricting effect on the market as a whole but it also has a direct effect on insurance products.
If nothing else, this speaks to even greater appeal of annuitization, which does not rely on the level of complex financial engineering as VA living benefits and has a much more favorable effect on insurer balance sheets. Perhaps this will finally push carriers to need to better package and market annuities.
The major objections to annuitization can be overcome with proper planning, packaging and design. If more insurer commit to getting this accomplished, more consumers will be able to take advantage of the real benefits of annuities.
Stmoluag makes an excellent point regarding the complex financial engineering required of today's favored income solutions in the annuity space.
The crisis we find ourselves in today is a direct result of fantastically complex instruments, albeit in the mortgage space. And the more engineering, the more assumptions that need to fall favorably in line in order to avoid blow ups.
Meanwhile, we've had for years at our disposal, but have largely ignored commercially, what I'll call the organic solution built not on unknowable outcomes but on the knowable - mortality -based approaches to income. The law of large numbers in unrepealable and will continue to operate regardless of market conditions.
Post a Comment