The Wealthy Retiree Part 7 – Be Wary of Guarantees

Quaero could not believe where he was. He wished he was back in the ’56 Corvette Will had taken him for a ride in not too long ago. This Tuesday Quaero would not partake in such delights. Quaero, the handyman at a local senior living complex was getting yet another lesson in retirement success from the wealthy retiree, Will Pecunious, a resident of the complex where he worked. This Tuesday, however, was very different than most.

Will had taken Quaero to a small fair that was a few blocks from the complex they both spent most of their time. Will stopped briefly at the first shack of a booth he had seen to buy himself cotton candy. After being handed the blue confection and with an impish grin, Will was off again with Quaero in tow until they came to a colorful booth loaded with various stuffed animals and cheap prizes. The name on the sign read “Blast an Alien”.

The game was simple, cheap cardboard aliens danced mechanically across the stage as the contestant manned a metal gun that shot ping pong balls at the scene. The more aliens you hit, the better your score. The game was very cheap and poorly designed.

“What are we doing here?” Quaero asked.

“You’re playing.” Will replied.

“Alright” Quaero had learned not to question the old man.

Quaero handed the attendant two dollars and off the aliens went. Bouncing up and down, dodging in and out. Quaero awkwardly fired his ping pong balls, hitting nothing as the aliens danced safely across the landscape. After 30 short seconds, the buzzer sounded, and Quaero was defeated.

“Congratulations, sir. You win. Here’s your prize.” The attendant said as he handed Quaero a cheap inflatable plastic guitar.

Quaero looked puzzled. “I don’t get it. I missed everything. How did I get a prize?”

Will, still munching on his cotton candy pointed to a small sign in the corner of the game booth “Winner Every Time, GUARANTEED!!”

“Ah” Quaero shrugged as he looked down at his guitar.

“Even if you’re terrible, you get something.” Will replied with a large smile.

Quaero laughed, letting the comment fly by unassailed, “Something tells me I was supposed to learn a lesson from that game.”

“You know me too well.”

“Wait, don’t tell me. Let me guess. I shouldn’t blow my money in retirement or I could end up pawning off cheap prizes at a local carnival?” Quaero laughed.

“Good guess, but no. Do you want another shot Mr. Comedian or should I tell you?”

“Just tell me. There’s no telling how long it will take or how many bad jokes you’ll be subject to if you wait.” Quaero joked as he pretended to strum his inflatable guitar.

“Blast an Alien guarantees success. Pay your two dollars and you can’t lose. But, here is the lesson, what have you really won? What have you accomplished? Was it your goal to spend $2 to win a cheap inflatable guitar worth $.25? I sure hope not. I assume your objective is to walk away with a prize of greater value than $2 and of course have some fun in the process.”

“So, what’s your point?” Quaero asked puzzled.

“The point is, be wary of guarantees. Are they really going to help you accomplish what you want in your retirement?”

“How do you mean?”

“Many people turn to guaranteed investment products such as annuities, CD’s, or FDIC insured cash deposits because they think their objective is to keep what they have. They have a dire need to protect what they have worked so hard for. The truth is, it is probably more accurate to say that their objective in retirement is something like: ‘maintain my current lifestyle’ or ‘maximize what I have’.

“Let’s face it, Quaero. If you run out of money before you run out of time, was ‘protect what you have’ really the right objective? Of course not. The problem with guaranteed investments is they are expensive. In order to get the “guarantee”, someone has to ensure nothing will ever happen to your nest egg. That insurance is expensive.”

“Are you telling me that a bank CD is expensive?” Quaero asked.

“That’s right, I am. When investments that do not hold a guarantee are paying an interest rate of 4-5% and your bank CD is paying just under 1%, that’s expensive.”

“Interesting.” Quaero said.

“What is probably even worse is that these investments almost never keep pace with inflation. So, as the cost of the everyday things increase in your life over time, your income will not. Sooner or later, you will have to cut much of your wants, just to keep pace with the spending on your needs. I imagine you wouldn’t call that prudent retirement planning.”

“Certainly not.” Quaero agreed.

“Don’t get me wrong,” Will continued as he slid another handful of cotton candy in his mouth “I am not saying you shouldn’t have any money in guaranteed investments. Far from it. They are a very important part of your asset allocation and retirement plan. I am simply saying the more guaranteed money you have, the higher price you will pay. Risk is a part of everything we do. There is no such thing as “risk free”. If you don’t understand the risks you are taking when you invest in “guaranteed” investments, you are just as likely to run out of money as if you invested way too aggressively.”

“Alright, so how much “guaranteed” money is enough?” Quaero asked.

“This is another place where a good financial planner can help, but after you’ve figured out how much you will need to draw from your portfolio to live comfortably, you will need one to three year’s worth of those expenses in liquid guaranteed investments. Then, another eight to ten year’s worth of bonds, then the rest should be equities of some kind. This will help you keep pace with inflation and grow the portfolio. Investing this way will provide you with your best opportunity to avoid running out of money while accomplishing your goals.”

“That’s great. When Maria and I hire our financial planner, I will discuss this with him. I agree, it’s important.” Quaero observed.

“It sure is. Enough financial talk, let’s go on the Ferris wheel.” Will said as he took off towards the giant ride, Quaero trying to keep up.

Next Issue: Lesson #7: “Security?”