25 TheCircleofSafety

Transcription

1 25 TheCircleofSafety WhenwemeetwithretireesandpeopleplanningforretirementwediscusswhatwecalltheCircleof Safety(Figure 25-1). In seminars and workshops, the topic has always stirred interest. We have come totheconclusionthatpeopleareinterestedinthecircleofsafetyaftertheylearnwhattheconcept entails but that they actually initially have a gut reaction to the name phrase. Doesn t the phrase the CircleofSafety justsoundgood?doesn titjustfeelright?doesn titjustfeel safe?wefindthat when people hear the phrase the Circle of Safety having no idea whatsoever what it actually means; itjustsoundsgoodtothem. Figure 25-1 Wethoughtaboutitandcameupwithsomementalimagesrepresentingbothsafetyandrisk,and then described them to people. We asked retirees and soon-to-be retirees(stbrs), even though they didn tknowwhatthecircleofsafetywasallaboutyet,iftheywouldratherstandinsidethecircleof SafetyoroutsidetheCircleofSafety.Guesswhat100%alwayssay?Theyliketheideaofstanding insidethecircleofsafety;itmakesthemfeelsafer,moreprotected.wethinkthisisakeytothe financial psychology of these retirees and STBRs. 156

2 Ask yourself, would you rather stand inside the Circle of Safety or outside? You are probably inside as shown in Figure 25-2! Figure 25-2 InsidetheCircleofSafety,youaresafe;outsidetheCircleofSafety,youarenot(Figure25-3). Figure

3 IfyouareoutsidetheCircleofSafety,yourexperiencemightverywellfeel likebeinginthepitof doom as depicted in Figure Figure 25-4 As humans, we are hardwired to protect ourselves, our loved ones, and our stuff. Survival is dependent on this. Too much risk in our lives in any category, while potentially exciting and bloodpumping, can substantially decrease our ability to create security. Think about it: If you drive too fast in yourcar,youmaygetintoanaccident.goingfastisfun,butyoumightnotmakeittoyourultimate destination. defines Volatilityas theamountofuncertaintyorriskaboutthesizeofchangesinasecurity'svalue.a higher volatility means that a security's value can potentially be spread out over a larger rangeofvalues.thismeansthatthepriceofthesecuritycanchangedramaticallyovera short time period in either direction. A lower volatility means that a security's value doesnotfluctuatedramatically,butchangesinvalueatasteadypaceoveraperiodof time. 158

4 Itisimportanttounderstandthatvolatilitydoesnotjustapplytostocksbutappliestoallassetsthat haveavaluethatcangoupanddownatanygiventime.thetypicaltypeofvolatilitydiscussedbymost peopleandmostadvisorsisprincipalvolatility.principalvolatilityreferstotheabilityofyourassetsto goupanddowninvalueatanymoment,regardlessofyourdesires,needs,actions,orbestinterests. Figure25-5showsthetypesofassetswithprincipalvolatilitythatwehaveseenretireesown.Itis pretty safe to say that most people, definitely most retirees, do not like principal volatility. There are alwaysafewmoredaringindividualswhohaveiceintheirveinsandstrongstomachsthatseem oblivioustotheupsanddownsofthevaluesoftheirassets,butthesedays,suchpeoplearefewand far between. Figure

5 We have been asked many times why retirees and STBRs accept principal volatility in their portfolios. Wethinkthereareafewgoodanswersforthis. 1. Advisors recommend assets that have principal volatility. The financial services industry is reported to be the largest industry in the world. A large percentage of the financial service products sold to the public have principal volatility. 2. Retirees and STBRs follow the old adage that risk equals return, and people want returns. The conceptisthatthehigherriskyoutake,whichalsomeansthehigheramountofprincipal volatility you endure, the higher potential for return you receive. This doesn t mean you will receivethehighestrateofreturnifyoutakethemostrisk,asthereareanextremenumberof variables that determine your ultimate rate of return; it simply means that you have the potentialtoreceivethehighestrateofreturnforthemostrisk. 3. Retirees, STBRs, and advisors are stuck in asset-accumulation mode, which typically includes investing for growth, with the inherent principal volatility. 4. Retirees and STBRs, and the advisors servicing them, have not switched over to retirement income-distribution mode, which requires minimum Principal Volatility for maximum guaranteed lifetime income success. 5. Retirees and STBRs think that accepting principal volatility is what they have to do, that they have no other choice; they just don t know their options. Although we understand all of these reasons, we don t agree with any of them. We strongly believe that RetireesandSTBRsshouldnotacceptprincipalvolatilityintheassetstheyplantouseto generate maximum guaranteed lifetime income. AdvisorsshouldnotmakerecommendationstoretireesandSTBRsthathaveprincipal volatilityintheassetsthattheretireesandstbrsplantousetogeneratemaximum guaranteed lifetime income. RetireesandSTBRsshouldnotcontinuetomanagetheassetstheyplantousefor retirement income based on the asset-accumulation phase of retirement planning. They must transition into the retirement income-distribution phase as soon as possible. AdvisorsshouldnotmakerecommendationstoretireesandSTBRsontheassetstheyplan to use for retirement income based on the asset-accumulation phase of retirement planning. Retirees and STBRs must transition into the retirement income-distribution phase as soon as possible. 160

6 Nowlet stalkaboutthecircleofsafety.it sverysimplebutyeteye-opening,maybeeveneyepopping!thecircleofsafetyisaconceptthatusesassetsthatyouplantousetogeneratemaximum retirement income and provides guaranteed lifetime income and principal protection, all while eliminating both principal volatility and income volatility(figure 25-6). Figure 25-6 AsaretireeorSTBR,afterreviewingFigure25-6,doyouprefertostandinsidetheCircleofSafetyor outside the Circle of Safety? Mostpeoplewillrespondthattheyprefertobeinsidelookingout.Theynolongerwanttobeaffectedbythe ups and downs of the markets, and they no longer want to have an unacceptable and/or inconsistent retirement income flow. WehavebeenaskedbythousandsofretireesandSTBRs HowdoIprotectmyself,myspouse,andmy family? Anannuityistheonlyfinancialinstrumentthatcanpayaguaranteedlifetimeincometoyouand your spouse, provide principal protection, and eliminate both principal volatility and income volatility. Nothingelsecandothis.Nothingisasimportantasthesefactstoamajorityofretirees. 161

7 You have probably heard good things about annuities, and you have probably heard bad things about annuities.youmayownannuities,andyoumayhavecashedoutannuities.wecannotfocusonwhat youhavedone,whoyouhavedoneitwith,whatyouhavelearned,orwhomyouhavelearneditfrom uptothispoint.allwecanfocusonistotrytoprovideyouthebestpossibledatasoyoucanmakethe best possible decisions regarding your retirement income-distribution plan. Now,asyourhighschoolteachersaid,takeoutyournotebooks,it stimetotakeatest.thistesthas18 questions. 1. CanaCDpayaguaranteedlifetimeincometoyouandyour 2. Canamoneymarketaccountpayaguaranteedlifetimeincometoyouandyour 3. Canasavingsaccountpayaguaranteedlifetimeincometoyouandyour 4. Canastockpayaguaranteedlifetimeincometoyouandyour 5. Canastockmutualfundpayaguaranteedlifetimeincometoyouandyour 6. Canabondpayaguaranteedlifetimeincometoyouandyour 7. Canabondmutualfundpayaguaranteedlifetimeincometoyouandyour 8. Canabalancedmutualfundpayaguaranteedlifetimeincometoyouandyour 9. Can a specialized mutual fund pay a guaranteed lifetime income to you and your 10.Canrealestatepayaguaranteedlifetimeincometoyouandyour 11.Canarealestatemutualfundpayaguaranteedlifetimeincometoyouandyour 12.CanaREIT(realestateinvestmenttrust)payaguaranteedlifetimeincometoyouandyour 13.Can precious metals pay a guaranteed lifetime income to you and your 14.Canapreciousmetalsmutualfundpayaguaranteedlifetimeincometoyouandyour 15.Can stock options pay a guaranteed lifetime income to you and your 16.Candeedsoftrustpayaguaranteedlifetimeincometoyouandyour 17.Can natural resource investments pay a guaranteed lifetime income to you and your 18.Canlendingmoneytofamilymemberspayaguaranteedlifetimeincometoyouandyour Theanswertoall18questionsisaresoundingno! The only financial instrument that can pay a guaranteed lifetime income to you and your spouse, provide principal protection, and eliminate principal volatility and income volatility is a fixed annuity. Basic disclosure is provided in Disclosure, Annuity Disclosure: Risks, Recommendations, and Things to Remember. 162