by John Ruocco
This is the first in a series of articles by John Ruocco, a Connecticut-based financial advisor.
Retirement havens like Florida are a paradise for financial advisors. The investment industry has designed many programs to assure people, especially retired people, that they won't lose their money. Investment professionals know that fear is a great motivator, and retirees fear running out of money. And because financial advisors are looking for an audience and most people are looking for a free lunch, advisors touting guarantees that you won't lose your money are everywhere retirees are. But are "guarantees" really a financial paradise for older investors?
Safest: U.S. Government Guarantees
The U.S. government borrows money by issuing treasury notes, bills and bonds. These are just names of loans with different maturities. We now have some 17 trillion dollars in these treasury debt securities outstanding. The repayment of the principal and interest to lenders of this debt (individuals, institutions and foreign governments) is backed by the full faith and credit of the U.S. government (aka you and me, U.S. taxpayers). Since the U.S. government has never defaulted on its debt, U.S. Treasury debt is the most trusted and secure form
Mostly Safe: Bank Guarantees
A certificate of deposit (CD) issued by an FDIC insured bank is the second safest investment for the average investor, but the reality is that there are some limits. One is simply the amount of money in the insurance fund backing these bank deposits. This fund was never fully drained but we came extremely close in 2008. At that time there was some discussion as to whether or not the Federal Government would back the banks after the FDIC ran out of money. Fortunately, we didn't get that far. Another consideration is that investors must
CD rates compare favorable with U.S. Treasury yields, but not by much. The recent 1-year yields were around 1% and the 10-year rate was just over 3%.
Taking on Risk
Anything other than a U.S. Treasury debt or an FDIC certificate of deposit carries some element of risk. A corporate bond from IBM or General Motors is only as good as the corporation issuing it. An insurance product such as an annuity is only as good as the insurance company backing it. Anyone who tells you his investment is guaranteed is forgetting something.
