Are Guarantees Enough?
The word “guarantee” most often breeds two responses—
1. Sigh of relief...Safety
2. Is this too good to be true???
I think it’s safe to say that anyone facing imminent retirement today or anyone who has been retired for quite some time would tell you that they would love to see the success of their retirement guaranteed. As a matter of fact, this is what countless sales professionals rely on to sell guarantees. However, there is not a product out there that can guarantee “the success of retirement.”
Yes. Products may be able to guarantee income, a rate paid, etc., but buyer beware! This does not automatically yield a successful retirement.
Imagine you retired at the end of 2020 and you purchased an annuity for $7,500 per month that guaranteed income for your life and that of your spouse. Fast forward three years. It is now the end of 2023. The purchasing power of your $7,500 is now only $6,306. Another way to look at this, is that in order to buy the same things you bought when you retired for $7,500, it will now take $8,828.41! 1.
That could be quite a hit to your retirement right off the bat. What will make up that extra $1,328.41 each month for rest of your retirement plus any future inflation?
Guarantees are not evil, despite how I just described them. They can be very misleading, though, and should never be implemented in vacuum. They are not too good to be true because they’re usually a result of you giving up something to get them. This could be:
1. Growth on your income or the asset itself;
2. Limited growth on the income or the asset itself;
3. Limits to the restricted allocations, the performance of the company itself and its ability to manage its financials/investments;
4. Loss of control of the asset itself or the ability to modify your strategy down the road;
5. Long periods with hefty surrender charges;
6. Additional costs, which in some cases, could become exorbitant in unfavorable markets;
7. Oh, and by the way…a guarantee is only a guarantee by the company or government issuing it. It may not be what you think it is.
Guarantees may have a place in a retiree’s plan, but they may not. Most often, that cannot have the only place—they simply are not enough. They sound simple, but they are anything but.
As with many things, it is often what you don’t know that you don’t know that could hurt you. Proceed with caution, proceed with a plan, and proceed with a Life Planner.
1. Inflation rates: https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-