Stop Playing Roulette with Your Retirement

Relying on the stock market as your retirement investment tool of choice is a lot like using Las Vegas as your financial advisor. Unfortunately, most people have retirement portfolios that are invested solely in stocks, mutual funds and similar securities. Even worse, the average American doesn’t know how heavily invested their retirement portfolios are in the stock market -- then they wonder why their retirement accounts fluctuate so drastically.

First, here are a few facts about the stock market and its performance over the years. In 1999, Congress was under pressure to invest Social Security funds in the stock market because of the extreme upward trajectory of the stock markets during this decade. Before doing so, Congress asked the Brookings Institute to report on the performance of the stock market’s 121-year history (from 1871 to 1999).

Here’s what researchers found in the report, “Risk and Returns of Stock Market Investments Held in Individual Retirement Accounts”:

• The average annual stock market return on investment has only been 6.3 percent, not the 10-plus percent some brokers and financial advisors claim.

• The stock market has been subject to wide variations with long and unpredictable periods of gains and losses.

• For approximately 60 years, the annual rate of return was less than 6.3 percent.

• For approximately six years, the stock market showed a negative rate of return.

• On several occasions, the stock market gains of the previous 10 to 12 years were completely wiped out during several down periods of 2 to 3 years, and it took years to recover from the losses.

• More recently, from Sept. 25, 2001, to Sept. 25, 2002, the Standard & Porr’s 500-stock index dropped from 1003.45 to 819.29 -- a loss of 18.3 percent in one year.

• On October 17, 1987, better known as “Black Monday,” the stock market lost more than 18 percent of its value in a single day. It was the largest loss in American stock market history.

As a result of this report, Congress concluded that no Social Security funds should be invested in the stock market, as much of the time (or about half, according to the Brookings Institute report) the market lost asset value. If Congress decided that the stock market was not a good investment choice for retirement funds, then the average American should take heed too.

But if the stock market is as risky as the report says, why don’t more financial planners and advisors steer their clients away from heavily focused stock portfolios? Well, here’s another fact few people realize: Most professionals who do financial advising and/or planning have a securities license, which means they can sell stocks. They also typically work under broker or dealers, who make money only when those who work under them sell or trade stocks. Even if an individual financial planner wants to offer a non-stock market related product, he or she has to get approval from the broker or dealer to sell it. But most brokers and dealers only want to sell securities items, as that’s when they make the most money.

If you’re tired of gambling with your retirement funds, consider the following suggestions:

Follow the Money. Most people have little knowledge of where their retirement funds are invested. When they receive their regular portfolio statements and documents, they look at the dollar figures (or the current market value) and little else. But if you really want to plan for your future, you have to take an active role and figure out what you’re investing in. Take out your portfolio documents and look at your investments. Is all or most of your money in stock market items? If you can’t identify any of your holdings, ask your financial planner.

Investigate Other Options. Despite what some financial planners might tell you, there are many other retirement investment options that are not contingent on stock-market performance. Some to consider include:

Life Settlements. A life settlement is the sale of a life-insurance policy covering a person who has a limited life expectancy, normally 10 years or less. The person selling the policy receives a lump sum of money (rather than letting the policy lapse or sell it to the issuing company for its cash surrender value), and the firm or individual who buys the policy receives returns based on the insured’s life and not the market trends. While past performance is not a predictor of future performance, it is a good indicator: In the last 25 years, the average annual return on investment for life settlements has been 15 percent to 16 percent.

Whole Life Insurance. Considered “old fashioned” and often forgotten, whole life insurance has many advantages that can help people plan for retirement. This is one investment where -- as long as you choose an insurance company that’s financially strong -- you can’t lose. As your policy builds cash value, you can write loans to yourself and then pay yourself back. You also get a reasonable rate of interest that enables you to build more cash into your policy. And unlike an individual retirement account, whole life insurance investments grow tax free -- meaning you’re not taxed when you take the money out.

Fixed Index Annuities. Also referred to as an equity indexed annuity, a fixed index annuity is a life insurance product that pays gains based on the stock market. However, unlike most securities or mutual funds where your account balance can fluctuate due to market performance, premiums deposited into a fixed index annuity are guaranteed to never go down due to market downturns. In other words, you can participate in market-indexed interest without market-type loss. With this option, you pick which stock market index you want to be tied to and then you choose a cap, such as 70 percent. When the market goes up, you get 70 percent of the gain rather than the full 100 percent. But when the market goes down, you’re guaranteed not to lose money -- no matter how low it goes.

Choose an Unbiased Financial Advisor. If you’re being advised by someone who makes money from stock-market transactions, what kind of unbiased advice do you think that person will give you regarding other retirement investment options? Ideally, your advisor should suggest you diversify your portfolio across such things as cash, bonds, stocks, alternative strategies, commodities, and precious metals.

If you have some money you want to gamble and don’t foresee a trip to Las Vegas in your future, then by all means buy some stocks. If you pick the right ones, you could come out ahead. When it comes to your future, however, you simply can’t rely on the stock market to fund your retirement years. The risk of loss is too great for most people to endure. Ultimately, the more carefully you plan your retirement today, the more enjoyable your golden years will be.

R.E. Branch, MD, heads Branch Retirement Plan Investments in Dallas. He advises clients on how to better manage their financial affairs as they travel through the life experience and helps them to be in a better financial position to enjoy their years of retirement. Call Branch for your complementary analysis and evaluation at (214) 686-5877 or email him at rbranchmd@msn.com to set up your free and complimentary financial consultative review.