By Raymond J. Ohlson
"Playing it safe … and losing?" How can that be? In the financial arena, if we only use “Safe Money Products,” then how can we lose?
Okay, unless you break the rules, you won’t lose your principal. You will, however, lose to inflation and taxes. Let’s take a moment, take a deep breath and then take a look at what’s been going on in our financial world.
We don't need to rehash everything that happened in 2008 and 2009. Many of us lost big if we were invested in equities. Many suggest that the average loss in 401(k)s topped 40 percent. Many people headed for the sidelines and swore off the market. But most of those who stayed invested got money back and are probably above that now.
Some investors who did indeed get money back are now getting a little nervous and are heading for the sidelines again. But for those Americans who are playing it ultra safe, my question is, "Why aren’t you using other safe money tools?”
And, their answer may be that they just don’t know where to turn. So, let’s take a look at what's available and compare that to the so-called “ultra safe" products.
I don’t think many would argue that one of the safest places to put your nest egg is in a bank instrument. What could be safer than FDIC? But the average one-year CD at this moment is well below 1 percent. According to www.bankrate.com, the average five-year CD is currently below 1.5 percent. So, if you apply taxes and inflation, you have probably lost a lot of purchasing power.
Inflation? I thought the Consumer Price Index was very low and inflation was not a problem. Well, inflation isn’t a problem if you don’t buy gasoline, food or prescriptions. The bottom line, however, is that these types of “safe money” vehicles provide virtually no upside potential.
Your next question might be, "Is there a safe money vehicle that can guarantee my principal, give me some upside potential, possibly provide a guaranteed interest rate, and guarantee no losses?" Again, as with all safe money options, as long as you follow the rules, the answer is "yes!"
So what is this product? It is a fixed indexed annuity. This annuity, like all of them, is backed up by the claims-paying ability of the insurance company you choose. Many of these products also provide an enhanced death benefit to your beneficiary. You see, the indexed annuity is a financial vehicle that is linked to various stock market indices. No, you can’t hit a “home run” as you could if you are investing directly in the market, but you can’t sustain losses as you could if you are an equity investor.
Many interest-crediting strategies are available when using an index annuity for a portion of your safe money. Many of these annuities have guaranteed lifetime withdrawal benefits that guarantee you a pot of retirement money for income payments, regardless of what happens to the market. Many increase those retirement payments if you suffer a chronic illness, need home health care or are forced to reside in a nursing home.
We have a lot to talk about regarding indexed annuities. I believe that comparisons with other safe money products might just win the day. It's a lot more fun and a lot more profitable to "play it safe and win" than lose!
Raymond J. Ohlson, CLU, is president & CEO of The Ohlson Group, www.ohlsongroup.com.
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