Monthly archives: April 2012

Gambling With Your Retirement

Posted by Annuity Reserve on April 27, 2012

Legislation creating the 401k plan went into effect January 1st 1980. This legislation allowed employees to have a salary reduction from their paycheck and direct deposit the funds into their 401k investment account.  Viewed as a way to reduce current taxes and supplement savings and social security for retirement the 401k plan experienced widespread adoption and popularity. Through the 1980’s and 1990’s most investors were generally happy as the U.S. stock market experienced one of the greatest bull runs ever experienced. The new demand from buyers in 401k plans helped drive the value of stocks and bonds into bubble valuations in 2000. Then the bottom fell out.  The S&P 500 fell nearly 50% over the next three years and the NASDAQ crashed 80%.  Through 2011 the S&P 500 is still struggling to return to the levels of the year 2000 and the NASDAQ is still worth less than half of its year 2000 valuation. As boomers have begun retiring through the 2000’s they’ve been wondering whatever happened to happily ever after. Is the market a casino?  Is it the best way to grow my money? Is it the best way to provide an income in retirement?

The stock market has proven a difficult arena for individuals to prepare for retirement. The daily ups and downs have given many an ulcer or two, and most investors haven’t been rewarded for the mental anguish.  Studies have indicated for the 20-year period ending in December 31, 2010, average equity (stocks) mutual fund investors have returned a paltry 3.89% compounding return. The results of the average bond fund investor have been even worse at a 1.01% compounding rate. The factors contributing to the poor performance is attributable to factors such as the fear/greed cycle causing investors to jump in and out of the market at the wrong time, and the associated fees.

While it is difficult enough for the average investor to grow their assets and prepare for retirement, distributing a sustainable stream of income in retirement has proven even more treacherous. Studies by T. Rowe Price have indicated if an individual in a 60% stock and 40% bond portfolio begins taking a 5% withdrawal rate and increases the withdrawal 3% annually to adjust for cost of living, the individual has a 68% chance of having money after 30 years. That means 32% of individuals would be broke after implementing the same strategy.  Income distribution in retirement is a trickier proposition because money needs to go out every year to pay for expenses whether or not the market is up or down.  Withdrawals during down market years exacerbate losses and the greater the loss the more difficult it is to catch back up.  If one loses 50% a 50% gain does not get you back to even.  A 50% loss must be followed by a 100% gain to get back to even.

If you’re lucky enough to grow your money in the market, is a one-third chance of running out of money in retirement a bet worth taking? Don’t gamble with your financial security.


*Guarantees and Safety are subject to the claims paying ability and financial soundness of the insurance company contracted with.

The Babe, The Great Depression, and Annuities.

Posted by Annuity Reserve on April 27, 2012

Babe Ruth is arguably the greatest major league baseball player of all time.  Babe was such a draw for the New York Yankees that the Yankees made Babe the highest paid player in baseball in 1922, at a salary of $52,000 per year. The Babe spent the early part of the roaring 20’s blowing through his prodigious salary.  Babe was well on his way to going down in history as one of the many athletes who lived lavishly but spent their retirement in bankruptcy.  The history of sport is littered with former greats losing it all such as Johnny Unitas, Scottie Pippen, Dorthy Hamill, Evander Holyfield, and most famously Mike Tyson who squandered away earnings in excess of $300,000,000.  At the urging of his business manager Babe met with future Hall of Famer, Harry Heilman, of the Detroit Tigers in October of 1923.  Harry Heilman worked in the off-season as an insurance agent for The Equitable.  Babe purchased a deferred annuity from Harry with his World Series winnings and a portion of his annual salary.  Babe continued to make additional annuity purchases through 1930.

When Babe began making his annuity purchases, he had no idea the roaring 20’s would come to a crashing halt with The Great Depression taking hold in 1929.  Babe was forced to retire from baseball during the 1935 season as he was no longer able to physically withstand the toll the game took on his body.  Once the highest paid player in baseball, Babe was now unemployed during the heart of The Great Depression.  Due to the planning Babe and Harry Heilman had done previously, Babe was able to begin receiving payments starting in 1934 of over  $17,500 a year in annuity payments.  $17,500 a year in 1934 is the inflation adjusted equivalent of $290,578.22 in today’s dollars.  While other athletes and celebrities of the time found themselves in bread lines and destitute, The Babe lived comfortably in retirement never having to worry of running out of money. The Babe was so impressed with the power of annuities in creating financial security that he directed his estate to purchase a lifetime payment annuity for his wife at his death so she would always be taken care of also.

While the Babe can’t teach any of us to hit home runs in the manner he did, he left behind a lesson that all can benefit from.  With wise planning and using the safety of annuities, one can retire with security no matter what happens in stock markets.