The Illusion of Safe Investing
By Dennis Miller, Editor, Money Forever
In today’s financial landscape, retirees often prioritize the preservation of their capital over the potential for investment growth. This concern is completely valid: as we transition out of our peak earning years, the ability to recover from investment losses diminishes, making financial stability a crucial focus.
After attending my high school’s 50th reunion in 2008, I’ve observed many of my friends losing their spouses, typically after fifty or more years of marriage. As expected, the number of widows is increasing more rapidly than that of widowers. This trend is largely due to the fact that women often choose to marry older men.
Losing a spouse is a profound challenge, but when the more financially astute partner passes away, the surviving individual often feels an overwhelming sense of vulnerability. They frequently find themselves faced with responsibilities that their spouse previously managed.
A recently widowed friend shared with my wife that her banker contacted her about the maturity of one of her CDs and sought instructions on what to do next. With assurances from the banker about its safety, she decided to roll it into another five-year CD. After all, CDs are FDIC-insured, and she wanted to ensure her principal was safeguarded. The banker assured her it was a competitive rate as well, and when she consulted her child for advice, she received the same reassurance—a CD is a prudent choice.
What Bankers Really Say
Let’s be honest—what would one expect a banker to say? It’s unlikely he would admit, “Our interest rates are dismally low, failing to keep pace with inflation, and if you were my parent, I’d suggest you consider alternative options.” Such honesty likely wouldn’t sustain his career.
Thus, he simply conveyed a couple of truths and comforted her with the idea that her money was safe. However, it’s important to notice the omission in his statements: while the rate offered on five-year CDs at his bank may have seemed appealing, chances are it hovered around a mere 1.6 percent. This figure doesn’t even keep up with inflation, ultimately eroding purchasing power.
At the beginning of the year, I conducted an informal inflation survey among my regular readers. The responses sparked some healthy debate, but one prevalent theme was clear: 98.4 percent of participants believed the government is significantly underreporting inflation rates as per the Consumer Price Index. Ultimately, what truly impacts retirees is the speed at which their personal cost of living is rising.
If renewing low-interest CDs isn’t the right approach, then what should retirees consider instead?
Understanding True Financial Safety
Unfortunately, there is no simple fix to this dilemma. Both partners in a relationship should develop a solid understanding of financial management. It is crucial for both spouses to be informed about their finances, as it’s improbable they will pass away simultaneously. Knowledge of where accounts are held, their balances, and the ability to research stocks, balance portfolios, minimize fees, and generate income is essential. Knowing when to seek help and who to trust for reliable advice is equally important.
Managing a retirement portfolio isn’t a one-off task. While it shouldn’t dominate your life, it does require a commitment of time and energy for research, planning, and education. A well-balanced portfolio typically includes a range of assets, with cash making up approximately one-third of its total value.
The remaining investments should be diversified across various sectors, potentially including dividend-paying stocks and exchange-traded funds (ETFs). Including precious metals or investments not denominated in U.S. dollars can also serve as a hedge against inflation. The earlier couples work together on these aspects, the better equipped they will be for the future.
There is no singular method or universal solution in investing. However, one principle rings true for all retirees: safety encompasses more than just the return of your capital; it also signifies the preservation of your purchasing power. Investments with low yields, like CDs, or any vehicle that anchors money without keeping up with inflation, fall short of this essential safety standard.
Sincerely,
Dennis Miller
for Economic Prism
[Editor’s Note: Throughout his career, Dennis Miller has consulted for numerous Fortune 500 companies, guiding hundreds of executives on how to effectively communicate their products’ value to customers. On Thursday, September 5th, I will be hosting an event showcasing experts who will share insights on optimizing retirement finances. Featured speakers include John Stossel, formerly of ABC’s 20/20 and currently with Fox Business News, and David Walker, former Comptroller General of the United States. Click here for more details and to register (Given the anticipated interest, we encourage you to secure your reservation promptly).
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