Ok, it's not that catchy a slogan but I had to drive home to my readers and viewers, that while everyone in a recession or down market typically stresses the importance of cash and trimming down debt, I feel strongly that we are now in a new era where fixed predictable income is of the highest importance, more so than simply holding cash assets out of fear.
Obviously given the financial market upheaval, plunging real estate values, massive lay offs and contraction of lending options, cash takes a greater level of priority than at any time in the last 50 years. People simply can't afford anymore losses and are afraid of the potential defaults of other businesses, cities, states or governments, making bonds other then US Treasuries a riskier bet. As I reported last week, US corporations and banks are holding more cash now then any time since records started being kept.
However, as we are almost 18 months post crash and looking at historically low interest rates, it is abundantly clear to me that many people have been, and will continue to, draw down their cash and savings in order to produce "income" each month to cover bills, over head and expenses. The collapse of interest rates, the disintegration of real estate equity to tap and the drop in equity portfolios has caused most sources of income to disappear. What we are left with typically is people on pensions, Social Security or some other form of secured income that is usually not adequate to cover their lifestyle costs.
Lets face it, what happens when a person or family has money in cash, savings and short term accounts and that cash doesn't generate enough income to pay their bills? They spend it down in a haphazard, ad hoc fashion, further depleting their resources and making it impossible long term to catch up or grow their income as rates rise, due to the systematic shrinking of their asset pool. I see it happen constantly now and the end result is predictable, particularly with people who are retired, out of work or unable to return to work due to illness, age or injury. They burn through the very cash that was designed to produce the income necessary to support them and with each dollar of savings spent to replace income they erode their ability to generate income in the future, even if markets and rates improve.
So, what to do?
As I see it, we can recommend a couple of options for our clients:
1. Keep your funds in cash and cut living expenses to the lowest level possible, secure in the knowledge that most of them will systematically deplete their funds to cover their budget and living expenses over the next 18 to 24 months as rates stay low. You cannot, at less than 1% rates of return, generate enough income in almost every case to cover living expenses unless you have a huge amount of money, so it is almost impossible unless the person is still working or can return to work, to create enough income to not deplete savings.
2. Reach for yield and move into long term US Treasuries or corporate bonds, gaining another 2% of yield, but at the same time dramatically increasing their risk of loss due to default, credit down grade or in the case of the Treasuries, spikes in interest rates at some point that will devastate the value of their bond holdings. I have been predicting, and continue to predict, that we will eventually see inflation and interest rate spikes due to the massive amount of federal debt and concerns about the monetization of the US debt during the crisis. However, I will say I under estimated the will of Congress and the President to pour literally trillions into stimulus and payments to prop up the economy and also how desperate the situation is in other nations such as Greece, Spain and Hungary and how the fear of default of those nations is keeping US rates low as investors flee to dollars and US Treasury's. This situation can't hold forever, but will hold longer then we first thought, so we need this bridge financial strategy knowing full well that rates will eventually have to spike.
3. Use the unique and creative annuity and insurance products available in our tool box to provide a safe, guaranteed income but also hold aside a substantial portion of their funds for reinvestment or accumulation for the inevitable, but currently delayed, rise in interest rates. In my next broadcast I will outline how Life income annuities, period certain annuities and several different types of savings or deferred annuity products can be combined to provide guaranteed income now, plus hedge against future interest rate spikes as well.
In conclusion, as I state in this weeks video, we have got to shift our clients into orderly income plans or they are at huge risk of depleting their retirement funds, settlement funds or cash assets build up over decades of savings. Just sitting and waiting for rates to go up, or pushing people into what we know are higher risk assets, just isn't an option anymore for them or for us. I will show you in my next edition how you can use the "25% model" of providing lifetime income that is fully guaranteed, while holding 75% of your assets for reinvestment or accumulation, free of market risk and fully able to participate in interest rate jumps and minimize tax impact moving forward.
There are ways to get this done, it just requires some creativity, courage and conviction. Watch for our next installment, " Life income and the 25% solution."