Tuesday, July 1, 2008

Retirement Planning: The Annuity as a New Idea?

When the new ideas seem complicated, they are not workable for the average investor/employee. Pensions were simple. You worked and when that long career was over, you were rewarded. The advent of the 401(k), a Wall Street invention unlike any other profit generating idea ever created, was offered to the most captive group of investors, add a little fear of the future and you have the perfect income producing vehicle.

And then, say it could be better. Say it needs to be improved. Say it is not really our fault – we are smart enough just not as logical as previously thought. There are far too many of us not using these tools and far too many potentially profitable fees left uncollected.

Which gives folks like Professor Merton, the John and Natty McArthur University Professor at Harvard Business School and a winner of the 1997 Nobel Memorial Prize in Economic Sciences an opportunity.

Its just too bad Prof. Merton mentioned annuities. He actually had my attention until that point. Perhaps I should begin with the thinking about retirement allocation that he so deftly describes as" "But that knowledge won't qualify you to decide how much mid-cap European stock you should have in your portfolio, any more than it would enable you to perform surgery on yourself." True enough, but removing a splinter is simple surgery; transplanting a heart on the other hand is not.

If knowledge and time truly are the only obstacles - although I believe that the ever complicated financial products that are available are designed to make us feel less than qualified to remove even a simple splinter, then Wall Street should demystify the process.

If annuities were truly the solution, then businesses could once again create a pension with guarantees. Why they don't is quite easy to answer: They do like the cost structure.

Retirement, as we have come to dream about, is a time in life when we can rely on an income that we worked hard for and the time to enjoy it. Granted, this has been redefined with every passing day - each uptick in inflation, each economic downturn and each political misstep with taxes and spending, keep that dream from fully developing.

But I should emphasize that the single biggest drag on any retirement savings is the cost of getting there. We can play "minimum/maximum needed income" games all day but the simplest solution would be to give the employee a financial review on the same day businesses take the time to give them appraisals. Having the employee opt for channeling their next pay raise or bonus into a long-term plan might be all the incentive they need to continue to work harder all while giving the employee a sense that the company is more than just a "gatekeeper" and closer to the good old days of pensions, when the company seemed to actually care about loyalty and rewarded it with a defined benefit.

Now I fully realize that we will never be able to go back to those days, but annuities - an investment/insurance hybrid of dubious nature and questionable need is not the answer.

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