Growing Money and Making It Last Through Retirement

A perfect storm has hit people planning for retirement. More people are living longer, expenses are higher, and there are fewer safe ways to invest for retirement. It is estimated that Boomers today have a $4.6 billion shortfall in money needed to live comfortably in retirement. Only 11% of Americans have pensions, Social Security probably won't make it through the baby boomer generation, and most 401(k) plans have been decimated the past decade due to the unpredictable stock market. But in addition to problems saving for retirement, how do you keep the money that you do save through retirement?

The following are some 'conventional wisdom' ideas on how to save and live through retirement:

* Savings Accounts. Some people still have a Depression-era mentality when it comes to saving money and like to have the safety and security of a bank account. The downside to how banks really work is the low interest rates they pay for this service. Banks are currently able to borrow money from the Fed almost interest free, therefore, they don't need to pay consumers a high interest rate for their deposits. As such, most interest rates for savings accounts and even Certificates of Deposit are below the level of inflation. And what little interest they do pay they are taking out in fees and charges. If you still want to put your money in banks, be thoughtful of FDIC Insurance and the maximums they pay out.

* Treasury Bills. The safest way to invest is through TBills as your investment is backed by the Federal Government. Unfortunately, with safe investments come very low returns. For example, as of the summer of 2010, a 10 year T Bill pays 2.61% interest. Using the rule of 72, your money would double in (72/2.61%=)27.5 years. Assuming an inflation rate of just 3% over the next 10 years, you're actually losing money on the investments. Finally, you'll be taxed on that 2.61%, so it really is a lose-lose situation.

* Stock Market. The stock market has been a roller coaster the past 10 years, with many people's 401(k)s on the bottom. While there is an unlimited potential for profit and the stock market does outperform mutual funds, their unpredictability and high fees associated with the market make it a very risky investment. Also, very few people know anything about most companies or their stocks, making investment decisions complicated. To combat this risk, many people feel that diversification is important. However, diversification in the market is still investing in the market, and if the market crashes, your portfolio crashes. It's like being on the Titanic; it didn't matter if you were in first class or cargo, when the ship went down, it took everyone with it.

* Annuities. With an annuity, you put money in an insurance contract that pays a fixed or variable rate of return and start receiving guaranteed payments. Many people like the guaranteed payments and the safety associated with earning a guaranteed interest rate. But the reality is that the fees associated with these plans and the fact that you lose your principal when the policy 'annuitizes' and you begin receiving payments make this a horrible solution. The Insurance Companies put together 170+ pages of information for consumers knowing that they will never read anything about all the fees and charges. As such, it becomes too complicated to understand. Plus, once you start receiving payments, you lose your principal. For example, my father contributed to an annuity for most of his life and had paid over $70,000 into this fund. When he began receiving his guaranteed $300 per month for the rest of his life, he no longer had any rights to the lump sum principal of $70,000. My father passed 3 months later and had essentially paid $70,000 for a $900 return. While safety and guaranteed interest rates are good, you will want to put your money someplace simple, watch the fees associated with these programs, and will want to find a vehicle that will allow you to keep your principal and receive interest payments.

Based on the conclusion above, common sense tells us that Americans want safe investments that are simple to understand and pay a guaranteed interest rate. When you have a guaranteed interest rate, you can accurately forecast the future value of your money and how much you will receive in payments without affecting your principal. Simple, accurate, and guaranteed growth of your money. This is how retirement investing should work.