Financial Opinion and Insights

Americans Love Predictability

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

And the product manufacturers and the salespeople who sell the products all love it.  It’s unfortunate that our emotional desire for ‘safe’ predictable, stable returns is driven by emotion, rather than education.  No wonder so few truly achieve financial independence.

According to an article by Lee Barney writing for Financial Planning magazine just last week, MetLife’s lifetime income annuity sales has passed the $1 billion sales mark since it was first offered just one year ago. 

They’re not alone.  Many providers sell  guaranteed income benefits through some form of annuity product.  Withdrawals are often equal to some percentage of a single premium investment, and it’s not uncommon to find withdrawal rates in the 4-6% range.  Withdrawals, of course, are taxed as income and they’ll likely be taken in a higher inflation environment.  And, it’s unlikely you’ll find withdrawal benefits indexed to inflation.

My parents retired in 1974.  If my dad had retired with $800,000 and purchased a 5% guaranteed income annuity, his $40,000 annual retirement income would have looked great in 1974; but, I don’t think he’d have been too happy in 1979 when interest rates and inflation were in the high teens.  He would have actually seen a decline in purchasing power.  And, if his friends had purchased `safe’ CDs, they would have seen their interest income soar in the late ‘70’s only to see them fall through the floor later, even as the cost of living continued to rise.

From 1979 through 1981, Treasury bill returns averaged 12.1% annually, producing an after-tax return of 8.5% for a 30% marginal tax bracket investor.  Inflation averaged 11.5% during the same period, producing a real loss of 3% per year.  Three years later, the same investors who loved the 12.1% return while losing purchasing power were complaining as T-bill yields from 1982-84 declined to 9.7%, which equated to a 6.8% return for the 30% tax-bracket investor; but these returns were achieved when inflation averaged 3.9%, providing a real return of nearly 3% per year.[i]

Too many investors need to understand the money illusion of supposed safety.

It reminded me of a 1954 Life magazine I’d seen in an old book store in 1984.  I noticed the magazine was 30 years old.  As I looked through it, I came upon one of those old ads from a large life insurance company.  This 1954 ad depicted a happy man with his feet up in a rowboat while fishing out on a beautiful lake.  He didn’t seem to have a care in the world.  The insurance company ad headline read:  “How To Retire in 30 Years on $500 a Month For Life!”   I guess it looked good in 1954; but, it didn’t look so good in 1984.

People love stability and predictability.  It’s an easy sale! 

What investors need to know:  No liquid investment alternatives with stable guaranteed principal values exists that can provide real returns by consistently beating the combined impact of inflation and income taxes.    Anyone living with these misconceptions will learn to their detriment later.  Those buying high-cost products hoping for the best will likely experience a difficult disappointment.

Why do Americans fear volatility and uncertainty?  Why is predictability so important?  Maybe it’s because they wait so long to plan.  People should begin formal planning at age 25 – yes, you read that right – but, of course they never do.   The typical investor, if he plans at all, usually waits until five years before retirement.  Some wait until after they retire and already have their mistakes firmly entrenched.  Either way, even those that do attempt planning often gravitate toward easy answers that end-up hurting them.   In my Why Investors Fail, I discussed how the easy answers are often the most expensive.  Of you’d like to receive a copy you can request it by using the `Request Info’ button on the IFG website.

IMHO[ii], there’s really no substitute for solid, real-world goal-based planning – done well in advance – and implemented with a quality, low cost asset allocation strategy, coupled with the acquired education that allows an investor to sleep at night, knowing that risks cannot be avoided; but they can be managed and even utilized to benefit the realization of long term goals.


[i] Asset Allocation, Roger C. Gibson, McGraw Hill, Fourth Edition

[ii] In my humble opinion

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, http://www.indfin.com.