MARK CORTAZZO: And people are looking at historical rates of return of a 50/50 mix, and I don't have that bond engine that's throwing off this cash flow, that's helping me recover that loss. And we have two very large bond issuances that have come to market in the past 30 days that were three-year bonds, corporate bonds, yielding one percent and less than one percent. So, that return you were expecting from the bond piece, to protect your equity piece, isn't there anymore. And it really needs to be readjusted. Those expectations need to be readjusted, because the bond engine isn't helping carry the rest of the freight.
MARY BETH FRANKLIN: And yet, you can see how confusing this is for the average investor, because they're trying to live by these golden rules of 50/50 mix in retirement is appropriate, a four percent withdrawal rate should be safe, and they're all falling apart. Now, people who have Mark or another financial advisor have their own personal GPS system along this road to retirement. The majority of Americans don't. And it's a scary wilderness out there. I think we're starting to see more and will see more going forward, of employers taking over this role in the 401(k) market. But still, when you leave that employer cocoon, and go out on your own, retirement's a scary place.
CONSUELO MACK: So, what are the new rules of the road, Mark? And it sounds like it's going to be a much more complicated, or at least complex, approach. But what are the new retirement rules of the road?
MARK CORTAZZO: Well, I think understanding how you're comfortable addressing risk is going to be an important decision in that. There's basically three things you can do when you're addressing risk. You can avoid risk. Sit in a money market, something safe. It's liquid. It's not going to earn you a lot, but you can sleep safe at night, and--
CONSUELO MACK: And basically lose your shirt, but aside from that fact--
MARK CORTAZZO: Well, if--
MARY BETH FRANKLIN: That would be the inflation risk.
MARK CORTAZZO: Well, but risk avoidance is very viable if you're 90 years old, if you need the money in a year for a wedding or for a house purchase. Risk avoidance is a very viable strategy for a bucket, a pool, of your money, so it should be part of someone's portfolio.
There's risk management, buying things that don't correlate with each other. The problem with that has been that modern portfolio theory, everyone's bought into this strategy. And when I put a dollar into my modern portfolio theory allocation, a little bit of that goes into each asset class, and they all move up a little bit. And, when I take a dollar out, they all go down a little bit. So the correlation between U.S. and international and large and small has really gapped up dramatically, because people want diversification, and their attempting to address it that way is causing them to move in tandem with each other.
MARY BETH FRANKLIN: And on that point, we've always preached this gospel of diversification, because you never know which parts are going to go up, or which are going to go down. As we saw during the market crash, everything except Treasuries went down. The other--
CONSUELO MACK: Managed futures, some international bonds. But ... go ahead.
MARK CORTAZZO: Managing risk is very effective for an event or an asset class specific risk. If you had all your money in tech stocks, you know, the rest of the stock market did well in 2000. If you had emerging markets in '98, the U.S. market did quite well. When you have a global crisis, the only thing that goes up is correlation. So there's risk avoidance, risk management, and there's risk transfer. And this is the foreign concept to most people. You know, Mary Beth said you can take four percent a year, adjusting for inflation, you have a 90% success rate. That means you have a 10% failure rate. And you have less than a 10% chance of your house burning down. You have a less than 10% chance of, you know, a lot of things occurring that you insure.
And, there are ways to insure income. There's ways to transfer risk using puts or buying index CDs, or things where you pay a fee for protection. And, we haven't needed that protection in the '80s and '90s. And so, this new education for people on transferring risk is, now, what am I getting for that? What am I paying for that? Is it a good value? And I still have people who will say to us, you know, "I won't buy an annuity," or "I'm not an annuity person." And, I'm agnostic. I don't love annuities or hate annuities. You have to look at, what are your other alternatives? What's your upside and your downside and your restrictions, versus what this is doing? And it's a tool.
MARY BETH FRANKLIN: And, I think people get hung up on this idea of, what am I paying for it? Oh, it's a fee. Because they've been used to, in the past, the market going up and relatively low fees on mutual funds and ETFs. But, there's no guarantee. And if you want a guarantee, you're going to have to pay for it. You've got to decide, is it worth it? Right?
MARK CORTAZZO: Most of your viewers, when they're paying their homeowner's insurance, it's a waste of their money. They'll never have a claim. They'll never need it. Their house isn't going to burn down. They're not going to have a flood. And, the--
MARY BETH FRANKLIN: Until they do.
MARK CORTAZZO: Their rate of return on their real estate investment would be better if they didn't have protection.
MARY BETH FRANKLIN: It's going back to the old rules of thumb, and people need to learn a new vernacular here. And that takes a while.
CONSUELO MACK: So, let me ask each of you about annuities. So when you're transferring risk, you're transferring risk to an insurance company with a pool of holders, right? And ...
MARY BETH FRANKLIN: And it's important to know--
CONSUELO MACK: So tell us about the annuity piece, and why this is part of the new retirement, is to have some sort of guaranteed income, in addition to social security.
MARY BETH FRANKLIN: First you have to define the terms. There are actually two kinds of annuities. One is an immediate payout annuity. A big chunk of money you give an insurance company, that will turn around and start paying you monthly payments for the rest of your life, no matter how long you live. Now, in most cases, these do not have any inflation protection. So, it's a great guarantee of income now, but depending how long you live, that buying power's going to disappear. This could be appropriate for a current retiree who is looking to fill in the gap between their other guaranteed sources of income, like social security and a pension, and their fixed costs.
I find the other type of annuity, which is a deferred annuity, meaning you put money in now and it pays out later, it often has an investment component, like a mutual fund that the money you gave the insurance company is invested in these accounts. What it does, it gives you the floor guarantee that, if all your investments go bust, you still are going to have a certain amount of return each year, and the upside potential of, it could go gangbusters. This would be appropriate, I think, for people in their 50s and beyond, who have accumulated a chunk of money, are afraid to lose what they have, but they know they still have to be growing their investments going forward.
CONSUELO MACK: And Mark, you actually agree with Mary Beth, and you use variable annuities--
