The World’s Worst Investments – Gold and other precious metals, and Index Annuities

In past blogs, we have offered you some insight into the very temporary nature of a bear market as well as the illusion that equities are a dangerous place to invest. With these two blogs as a foundation, we would like to warn about certain types of investments that could do serious damage to your retirement. These investments not only have horrendous track records, but they are almost exclusively purchased as a result of an emotional reaction to a short-term downturn of the stock market or as an emotional reaction to the mere possibility that the stock market will decline. As we have seen again and again, when emotions and investing combine, there is seldom a good outcome.

In our estimation the worst types of investments you can buy are precious metals and index annuities. You may be very familiar with these products because these industries are the predominate advertisers on the cable news networks. One can surmise, from the sheer volume of these industry’s advertisements, that they must be very successful. First, they are successful in convincing the unwary public of the virtues of fleeing the stock market and also in duping the public into buying their perennially underperforming products.

The argument against buying Gold and Precious Metals

The thinking is that if, for whatever reason, countries and their currencies cease to exist, then precious metals will be one of the few items that will hold value and preserve purchasing power. The question is, “To purchase what?”

If all the currencies of the world had no value, the world would be in utter chaos. Anarchy and revolution would rule. This has never happened on a large scale in the history of our world, so nobody has a credible idea of what a world without currency would look like. There would be no manufacturing, no food production, and no police or armies to protect us. There would be no commerce—that’s right, stores would be shuttered. Why would anybody choose to work if there was not a way to be paid for labor rendered?

So, even if your ounce of gold held its value, what could you buy with it? Where? How? In our estimation, a homemade meal would be worth more than an ounce of gold, if you were fortunate enough to locate the food and a willing cook to put it together for you.

Doomsday predictions and conspiracy theories have never been a friend of the disciplined investor and at Peterson Wealth Advisors, we simply refuse to fan that flame. If, however, you are one of those who thinks that chaos and revolution are the destiny of our society, you might as well step away from the computer and get back to building your bunker. But before you go, we would like to share with you one important thought. The richest men in the world, from every generation, did not get that way by betting against the ingenuity and indomitable spirit of the human race to create a better life for itself. Successful investors have always been richly rewarded for their willingness to invest in the future. This generation is no exception. Today’s optimists, or those willing to invest in a better tomorrow, are thriving.

For those of you who are not planning on living in a bunker, but are considering owning some gold, perhaps as an inflation hedge, let us share with you some facts.

First, although touted as an inflation beater, gold does not keep up with inflation. In 1980, the price of gold was $850 an ounce. The price started a decline over the next twenty years and bottomed out at less than $300 per ounce at the start of the new millennia. It then shot up during the first decade of the century, peaking at over $1,800 per ounce in 2018, and now has settled back to about $1,300 per ounce.

With all its volatility, gold has gone from $850 an ounce to $1,300 an ounce over thirty-seven years. That works out to be a rate of return of less than 1% per year. Meanwhile, the cost of goods and services, or inflation, grew by 3.1% annually. The price of gold does not keep up with inflation and no matter how many times the lie that “gold is an inflation fighter” is repeated on your cable news network doesn’t make the lie anymore true.

Precious metals are advertised as safe havens from the turmoil of the stock market, yet they are neither safe nor dependable. The price of gold, and other precious metals is extremely volatile. In fact, the price of precious metals has historically been more volatile than the stock market. It is hard to understand why anyone would want to own any investment that fluctuates wildly in price, never pays a dividend, has a dismal track record and can’t keep up with the inflation.

So, when well-known actors advertise that they buy gold because they are “good Americans concerned about the future,” please try to see through the deception. They tell you to buy gold because they are actors who get paid to tell you to buy gold.

Index Annuities are insurance products

They advertise that you can participate in some of the returns of the stock market in the good years but that you will not lose money in the years when the stock market retreats.

The sales pitch of these products is enticing, but the devil is in the details.  First, these products have caps or limits on how much they will pay when the stock market goes up. So, when the stock market goes up, earnings within these products are limited to the prevailing cap of the product. If the stock market goes up 10, 15, or even 30% in a given year, these products will pay to you only the prevailing market cap. In most instances, these caps can be changed by the insurance companies without warning. The consumer has no say. The prevailing market cap currently is 5%.

Second, these products have severe penalties if you liquidate your investment before the surrender period expires. Surrender periods are imposed because the insurance companies that create these products pay a large upfront commission to the insurance agent who sell these products. If an index annuity owner cancels their annuity before the surrender period expires, the insurance company can recoup the commission paid to the agent from the surrender charge assessed to the annuity owner. The surrender periods typically last seven to ten years. Surrender charges can run as high as 10% of the value of the annuity.

Third, index annuities don’t participate in the dividends of the underlying indexes they follow. This is significant. Almost half of the returns of the S&P 500 can be attributed to the dividends of the companies that make up the S&P 500 index. So, if you choose to invest into the stock market via an equity index annuity, you automatically cut your profits in half by foregoing future dividend payments.

To better illustrate the absurdity of these products, let’s apply the same investment criteria used in an index annuity to a real-estate transaction.

The deal would go something like this: “We will take your money and invest it into a rental property. Your investment is guaranteed to never lose money, as long as you leave the money with us for at least ten years. If you liquidate prior to ten years, you will be subject to a surrender charge as high as 10% of your initial investment. Additionally, you will not receive any rental income stemming from your investment, but we will pay you a portion of the annual increase of the value of your property each year, and the amount we will pay you will be completely up to our discretion. Oh, and by the way, thank you for paying us an upfront commission of 7% of your purchase. It’s been a pleasure doing business with you.”

Of course, nobody would agree to a real-estate deal like this! Why would we agree to similar terms with our other investments? There are hundreds of index annuities to choose from, and they all have variations on how they credit earnings and apply surrender charges. Even though all index annuities are different, they share a common trait. Index annuities are complicated products. Few owners of index annuities really understand how their annuities really work. People buy these products because they know that there is some type of guarantee associated with them. However, it is our belief that if the consumer really understood index annuities, they would never purchase one.

Before investing any money into an equity index annuity, do your homework and understand how these products are structured. The Securities and Exchange Commission has issued alerts to the public regarding the potential pitfalls of index annuities. The only advocates of index annuities that we come across are those companies that create them and the insurance agents who sell them.

What About the Guarantees?

The draw to these products is their guarantees. The only positive guarantee is that index annuities offer is that you won’t lose money when the stock market goes down. Since every market downturn is temporary, that isn’t much of a guarantee when you consider all that you lose by owning these products.

Owning an index annuity will certainly provide additional guarantees—undesirable guarantees.

Owning an Index Annuity Guarantees:

  • That you will never get stock market–like returns. Market caps ensure this will never happen.
  • That you will never be paid a dividend. Dividends historically account for almost half of the growth of the stock market.
  • That you will never be able to beat inflation over the long run by investing into their annuity, again thanks to market caps and no dividend payments.
  • That you just paid one of the highest commissions in the investment universe to the insurance salesman who sold you the annuity.
  • That the bulk of your money will be locked up inside one of these products for as long as a decade. Certainly, lump-sum distributions are available to you if you are willing to forfeit as much as 10% of your principal to access your money earlier than what is allowed by the annuity contract.

So, why are index annuities so prevalent? Unfortunately, they pay some of the highest commission of any product in the investment industry. Need we say more? Index annuities are sold by insurance agents, and for many agents, index annuities are the only product in their quiver that could loosely be called an “investment.”

Frightened, unwary investors purchase precious metals and index annuities because they fail to distinguish the difference between volatility and risk. Those who purchase these products have been duped by the emissaries of gloom that promote an irrational fear of equities, and fear is a powerful tool. A tool so powerful that the impressive weight of historical evidence manifesting the inflation-fighting power of equities is ignored and traded for the false promise that your money can “safely and dependably grow and beat inflation” while invested in precious metals and index annuities. Thankfully, knowledge is likewise a powerful tool and as you continue to investigate, you will become increasingly aware of the foolishness of owning precious metals and index annuities.

Scott M. Peterson is the founder and principal investment advisor of Peterson Wealth Advisors. Scott has specialized in financial management for retirees for over 30 years. Scott is a regular presenter at BYU’s Education Week and speaks often at other seminars regarding financial decision making at retirement. He also literally wrote the book on retirement income, Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.

If you are getting close to retirement and will have at least $500,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

What role will Social Security play in my retirement income plan?

Social Security is the anchor of a retirement income plan

Past generations took little thought regarding how they would maximize their Social Security benefits. After all, it really didn’t matter how and when benefits were claimed if the retiree lived only a short time after retiring. Today, with the real possibility of living three decades without a job or paycheck, retirees need to do all they can to squeeze the most out of Social Security.

Over its almost eighty years of existence, Social Security has evolved. It now consists of hundreds of codes, and tens of thousands of pages of rules and regulations. Because of this, most eligible recipients do not understand the benefits they are entitled to receive. Consequently, there are millions of dollars of Social Security benefits left on the table each year.

While Social Security is complicated, it is essential to make informed choices regarding both when and how to apply. This will ensure you will get the most from the system. After all, you and your employers have contributed to this future source of monthly income since the day you started working. Understanding how the system works and creating an individualized plan to maximize this valuable benefit could mean the difference in hundreds of thousands of dollars of retirement income.

Five important benefits of Social Security:

1. Predetermined amount of income

By the time you come to the end of a career, your Social Security income amount is pretty well known. The benefit amount is based on both your earnings history and when you decide to apply for benefits. The accuracy of the benefit estimation makes it easy to build the rest of your retirement income plan around a reliable number.

2. Reliable income

Once you start getting Social Security benefits, the amount of income you will receive is set. It is highly unlikely that reforms to the system will cause benefit cuts.

3. Income that lasts for a lifetime

Social Security is one of the few sources of income that can be relied upon for a lifetime. It is an especially valuable benefit considering the long life expectancies of today’s retirees.

4. Inflation-adjusted income

Social Security benefits are increased each year based on the previous year’s inflation rate, which is measured by the consumer price index. These cost-of-living adjustments help retirees keep up with the ever-increasing cost of goods and services.

5. Survivor benefits

Although Social Security checks stop at the death of the recipient, monthly benefits can continue to be paid to surviving spouses and minor dependents.

The Sustainability of Social Security

There is a lot of misinformation that surrounds the sustainability of Social Security, but the boring truth is that Social Security is not going away anytime soon. Each year, the Congressional Budget Office (CBO) reports to Congress the fiscal status of Social Security. The latest report states that if no changes are made to the system, the Social Security Trust Fund, along with income collected from our taxes, will allow Social Security to pay all its obligations until the year 2034. If no adjustments are made to the Social Security system between now and 2034, there will only be enough money in the system to pay 79% of the promised obligations after 2034.

Minor adjustments to the system now could extend the viability of Social Security for years into the future. Raising the age requirements of future claimants, changing how the cost of living adjustment is calculated, or raising the maximum earnings subject to the Social Security tax are all viable measures that should be considered to strengthen Social Security. To date, these common-sense solutions have not been implemented because anytime a politician has suggested a change to Social Security it has proven to be a political boondoggle. Like any financial problem, the sooner the future projected shortfall is addressed, the easier it will be to manage. Making decisions about claiming Social Security benefits based on the false assumption that these benefits are disappearing is both dangerous and irresponsible.

With the ever-changing rules and regulations of Social Security, a list of commonly asked questions such as how much you can expect to receive, spousal benefits, and when to apply can be found here. The answers to these questions will frequently be updated to help you navigate the minor changes to the current Social Security system.

You can also visit the government Social Security website and select the ‘Retirement’ tab to receive assistance on things such as estimating your benefits, requesting a Social Security Statement, and applying for benefits online.

Social Security is responsible for 42% of today’s retirees’ income. While it does not provide enough income to retire on, it does provide a solid foundation upon which a sound retirement income plan can be built. A little time and effort can pay significant dividends when deciding when, and how, to receive Social Security benefits.

Scott M. Peterson is the founder and principal investment advisor of Peterson Wealth Advisors. Scott has specialized in financial management for retirees for over 30 years. Scott is a regular presenter at BYU’s Education Week and speaks often at other seminars regarding financial decision making at retirement. He also literally wrote the book on retirement income, Plan on Living: The Retiree’s Guide to Lasting Income & Enduring Wealth.

If you are getting close to retirement and will have at least $500,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

Best Tax-Friendly Places to Live for Retirees

If you’re approaching retirement age, you may be considering a move to a more retirement-friendly state, particularly if your current state of residence imposes numerous taxes on social security, pensions, and other retirement income. While making the decision to relocate is not something that can be done lightly, there are a variety of options available nationwide that may allow you to retain more of your retirement income.

Of course, taxes alone are not the only reason to relocate; climate, proximity to health care, cost of housing, and property taxes all need to be taken into consideration.

States that offer a tax-friendly environment to retirees:

Alaska – While it may not be the first choice of retirees, Alaska offers an excellent environment for retirees with neither Social Security nor pensions taxed. Another advantage is the lack of state income tax and sales tax.

New Hampshire – Retirees residing in New Hampshire are exempt from state taxes on Social Security and pay no taxes at all on pensions or distributions from their retirement plans. As an added bonus, there is no state sales tax either. Homeowners, however, need to take into account that property taxes are higher than most other states.

Nevada – There’s a reason why so many retirees gravitate to Nevada, and it isn’t for the slot machines. Nevada has no state income tax, so Social Security and other retirement income are tax-free. There is a sales tax in Nevada, though food and prescription drugs are currently exempt. Property taxes are reasonable, however, there are no breaks given to those over the age of 65.

Florida – Florida remains popular with retirees for a lot of very good reasons. With no state income tax, residents are able to retain more of their Social Security and retirement income. One downside is the state’s sales tax rates that can go upwards of 7% in some areas. However, property taxes are slightly below the national average, with some counties offering homestead exemptions to homeowners over 65.

Wyoming – While Wyoming may not be on anyone’s radar when it comes to retirement, the state offers a lot of benefits to retirees, including no state income tax. Sales taxes are also relatively low in Wyoming, and property taxes are minimal.

Mississippi – Social Security and other retirement income, including retirement plan withdrawals, and public and private pensions are exempt from state income tax in Mississippi. The state sales tax rate is high at 7%, and the state also imposes sales tax on groceries though other items such as prescription drugs and utilities are exempt. Property taxes are also some of the lowest in the U.S.

Other states with no state income tax include Texas, Washington, South Dakota, and Tennessee. While a lot of factors need to be taken into consideration when looking to relocate, these states make it just a little easier on your wallet, so you can enjoy your retirement stress-free.

Resources

https://www.kiplinger.com/slideshow/retirement/T006-S001-most-friendly-states-for-retirees-taxes/index.html