Many people turn to a financial advisor or similar institution to help them with their retirement planning. These professionals have a lot of cookie-cutter strategies that they can pitch you based on the early feedback you offer them.
Most of them are based on creating a balanced mix of stocks and bonds to develop a safe as well as a diverse portfolio. Along the way, they will like extol upon you the virtues of a whole life insurance policy. All this is well and good. Those are wise, and time-tested factors in a successful retirement strategy.
Beyond this, some financial advisors may also pitch you the idea of investing in an annuity. While it sounds like a fine and familiar term, in most of these scenarios the annuity’s commission to the financial advisor is of more benefit than it is to you!
Indeed, the Federal Reserve recently said that they are expecting an increase in rates. Yet, what isn’t clearly defined is the shifting long-term stance that the Fed is taking with interest rates.
While nominal interest rates are believed to stay positive on a slow increase, speculation is that the Fed intends to keep so-called “Real Interest Rates” negative. What this ultimately means is that the inflation rate minus the nominal interest rate will be negative and its projected to stay that way into the foreseeable future. This can impact the value of annuities in a variety of ways.
Low Interest On Annuities
Fixed annuities come with the inherent problem of low interest rates. In some cases, the rate is indeed very low! With some, the rate of return can be as low as 2%.
Yet when you net out inflation, this type of annuity struggles to even keep pace with things like the increasing cost of housing, goods, and the general cost of living. Projected trends anticipate that they could fall even further behind in the future.
A fixed annuity typically pays out a fixed amount of money over a delineated span of time, or for the lifetime of the owner. This can vary somewhat depending on the type of annuity chosen. In exchange for a lump sum payment, or periodic payments that are made directly to the insurance company. This means that holding an annuity could actually have a negative impact on your financial situation in the long term.
Understanding The Attractiveness Of An Annuity
The primary draw of an annuity for most investors is that it pays out a fixed amount of money, compared to the potential market volatility of investing in stocks and bonds. In a certain light, it can allow you to more carefully budget for retirement, so long as the payout matches with their cost of living expenses.
The underlying issues that many annuity investors run into is that the cost of living can fluctuate and historically it only increases. This can leave you with a trickle of money when you were really planning for a stream! Fortunately, there are some other options worth considering.
A Better Alternative To Owning a Fixed Annuity
While it is arguable that a fixed annuity can help with a small portion of a retirement strategy since it does guarantee a certain level of income regardless of market conditions and economic trends. Unfortunately, as the owner, you end up bearing the all-too-certain inflation risk.
Gold and Precious Metals Help Hedge Against Inflation Risk
Tangible assets like gold or other precious metals like silver and platinum represent a highly effective way to hedge against inflation. Historically, gold, in particular, has proven its value staying power since the dawn of civilization.
Regardless of the currency you own in assets and cash, it still holds its value during times of inflation. Historically, savvy investors have always turned to gold and silver to preserve their wealth while also insulating the financial health against inflation.
This can be illustrated in a simple example.
Let’s presume for a moment that the hypothetical cost of an average vehicle is around 10 ounces of gold. Which roughly equates to $15,000.
Then let’s also presume that inflation causes the value of the dollar (or some other fiat currency) to be cut in half over a period of 5-years. In a scenario like this, that same vehicle will cost you around $30,000.
Yet when we translate the cost of the vehicle into gold it will still be around 10-ounces, because as the value of a currency drops, the value of gold increases. This means that the relative buying power of your gold will remain strong and steady.
Considering Stocks and Bonds In Your Portfolio
There are ways for traditional options like stocks and bonds to help you hedge against the risk of inflation. However, they do still carry with them some inherent and potentially significant risks.
It’s also worth keeping in mind that equity prices also tend to reflect relative value, in a way that is a little bit similar to gold. Yet they also tend to have some unique risks as well as some potential pricing fluctuations, which can make them very risk in certain economic conditions.
Certain stocks may be subject to price cycles which can be influenced by the economy as well as market conditions. The prices may not always correlate to 100% tangible factors, and the price may also be influenced by other market-driven variables.
Gold Still Wins Out
Admittedly gold and other precious metals do experience occasional fluctuations as well as periodic market cycles. Yet when you compare them to stocks these moments of volatility are minor and tend to self-correct in a reasonable amount of time.
When you look at the overarching trend, gold continues to rise, and in many measures of time, its gains have even outpaced the stock market. Gold had the enviable tendency to go up as the stock market trends down. It even tends to go up during times of inflation, or even when the economy is good.
Ultimately, if you want to effectively cushion your future, then you need to include gold as part of your financial strategy both in the short-term as well as planning for retirement.
Leave A Comment
You must be logged in to post a comment.