Three Retirement Planning Mistake You Should Avoid
By Boyd Casselman
I meet with people aged 60 and older every day to help them plan for their retirement years. Most have two main retirement concerns—they don’t want to run out of money and they want to be prepared for potential major health concerns. As I meet with these people, what disturbs me the most is how many of them have received misguided retirement planning advice. The bad advice and misinformation their financial advisors offered can, and many times does, have a devastating effect on the security of their futures. The following are five crucial mistakes I see many of these seniors make when working with their financial advisors.
Mistake #1—Purchasing Variable Annuities
Variable annuities are probably the most popular “retirement” product sold by financial advisors or stock brokers. On the surface, they look great! The problem is that they are not what they appear to be, nor do they fully work as they are presented by sellers. Here are a couple of examples of how these products may be misrepresented.
Claim #1: Your money is guaranteed.
FALSE. In a variable annuity, your money is NOT guaranteed and is subject to market risk and very high fees, many times ranging from 2% to 4% annually—a fact that is many times not disclosed to the unsuspecting purchaser.
Claim # 2: Regardless of what happens in the market, your money is guaranteed to grow at a predetermined interest or growth rate.
FALSE. There is a guaranteed rate associated with many variable annuities; however, the growth of your actual money is anything but guaranteed. Why, you may ask? Because the guaranteed “interest rate or growth rate” is really a roll up rate calculation—one used to determine how much of your own money will be paid to you over your lifetime. The problem is that this roll up account (commonly called a GMWB) is not a cash value account and consequently is not guaranteed to be completely paid to you or anyone else should you pass away before the entire rollup base is paid.
Claim # 3: Your money is also guaranteed by a death benefit account.
NOT COMPLETELY TRUE. The problem here is that if your account goes backwards due to downturns in the market and you withdraw money from your variable annuity, the reduction taken from your death benefit for those withdrawals may not be dollar for dollar. In other words, your “guaranteed” death benefit may shrink by more than the amount you withdraw. This is known as a prorate reduction to the death benefit account—another fact usually not disclosed by those who sell variable annuities.
Mistake #2—Thinking That Your Money Is Safe Because It Is Diversified
Let me address this by posing a question. Say you went to Las Vegas to gamble. Instead of playing one game, you decided to play a variety of speculative games—slot machines, the roulette wheel, Keno, the Craps table, and Black Jack. With this strategy, would your chances of winning really improve much? I think not. Why? Because it’s all gambling. The same thing holds true with playing the market. Yes, you have more options, but do any of those options really provide the safety you want for your retirement nest egg? Not really. I meet people every day who lost money in 2000, 2001, 2002, and 2008, even though their investments were “diversified” at that time.
Here’s another thought. One thing advisors tell their clients is that based on historical data, in the long run, they will do better in the stock market than any other place. Well, that may have been true up through the year 1999, but things have changed. I believe using historical data to make future investment decisions is dangerous for risk-averse seniors—especially with the history of the past 12 years, the impeding “fiscal cliff,” and massive national debt.
Mistake #3—Not Addressing the Cost of Long-Term Care
In the past, many of us chose not to purchase long-term care because of its inherent problem, including high cost, rising premiums, and the worry of paying a bunch of money into an insurance policy that may never be used. I agree with those concerns and was not a huge fan of traditional long- term care insurance for many years—until 2010.
In 2010, a whole new breed of long-term care products were introduced via a piece of legislation called the Pension Protection Act of 2006. Because of this Act, beginning in 2010, long-term care became a much more appealing purchase. Why, you may ask? Simply, the premiums paid remain as your own money, premiums never increase, and best of all, the “use it or lose it” problem goes away. {are we running an ad for a PPA workshop? This paragraph ends too abruptly and doesn’t have the complete feeling the others do. If we are, maybe we could end the paragraph by saying, “To learn more, consider attending a Pension Protection Act workshop/seminar in your area.”}
An Invitation
Those who have met with me know of the value of those meetings. They are both informative and pleasant. At no point in those meetings do they turn into a sales pitch nor a pressured sales presentation. So, if you’d like to get the real scoop about appropriate retirement strategies, give me a call at 801-628-1032 and schedule a time to meet with me in my office or in the comfort of your home. You’ll be glad you did.
In the next issue of the Senior Review, I will address three more retirement planning mistakes that seniors commonly make before or during their retirement years.