Boomers are increasingly cautious investors. With all that's happening, who can blame them? But overly-cautious investors can do just as much damage to their portfolio as those that are not cautious enough. In either case, what does it matter if retirement security is compromised, and retirement dreams are unfulfilled?
Fidelity Investments Life Insurance Company surveyed consumers ages 55 to 70 with investable assets of at least $100,000. The most important findings concern new information about how cautious pre-retirees and retirees are. This provides direction on how to meet their combined need for conservatism with a chance for solid returns.
The caution is obvious. Indeed, 89 percent described themselves as "cautious investors" (and the survey was conducted in September, prior to the downturn). When asked how important it is for advisors to provide each of several attributes, the answer with the most respondents was "protecting assets against market volatility." Seventy percent said this was very important.
By contrast, only 21 percent said it was very important for advisors to "offer products that have the potential for high performance, though they may incur investment risk." It's clear that today's older investor is willing to trade return for protection.
Another finding underscores this point. When asked to pick one of two choices that an advisor should focus on for retired clients, a strong majority - 83 percent - selected "generate guaranteed income," while only 17 percent chose "seek above average returns."
The key question that emerges is how to help conservative and cautious investors remain comfortable while retaining a sufficient amount of money in equities. There are various ways of dealing with this situation. I would bring forward one designed for retirees: Get the fixed portion of the portfolio to work harder and produce more income. If the fixed portion of the allocation can produce more income for less money, some money can be moved to the equity portion. The way to get the fixed portion of the portfolio to work harder is to use life annuities (which provide guaranteed payouts for life).
For example: A husband and wife are both age 65, have $200,000 in a five-year corporate bond, now paying 2.7 percent. Their total annual income from this source is $5,400. Suppose you suggested the following re-deployment:
- A reduction to $60,000 in the corporate bond.
- The purchase of a $60,000 life annuity paying as long as at least one member of the couple lives.
- The investment of $80,000 in equities.
If this were done, the investment amount would remain the same and the following would occur: their fixed income (from the bond and the life annuity) would go from $5,400 to about $5,700 (a 5.5 percent increase in income) and they would have $80,000 in equities that they would not have to touch in down markets. In other words, they could afford the extra exposure because they were able to make the fixed portion of their portfolio produce more income for less of an investment.
I am well aware that there is resistance to life annuities and the loss of liquidity entailed. But many people are currently caught between two unhappy alternatives: fixed investments returns they feel are too low, or equities they feel are too risky. Life annuities, if presented well, can help people put less in low-paying fixed investments, get more income and feel more comfortable with equities.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.
