Here’s Why Your Retirement May Be at Risk

Depending on who you ask, a fixed annuity is either a pragmatic retirement tool or a black hole. Many economists and financial planners stand behind the idea that a well-designed annuity is the best way for many people to manage their retirement. Others suggest that the short-term interests of those who design annuity programs and the long-term interests of would-be policy holders are misaligned.

There are any number of annuities, but at a glance people use the fixed vehicle to secure a steady stream of cash during retirement. Individuals will give some or all of their retirement portfolio to a financial institution that will (theoretically) grow the investment, and kick back a fixed amount to the policyholder. Anything above and beyond that, the institution keeps as payment for a job well done.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

The obvious risk here is that the designers of the annuity package are in a position where they only stand to make money if they outperform the payment to the policyholder. In today’s economy, that means creative investing strategies — i.e. tolerating higher and higher risk. And junk bonds are just the beginning.

A growing concern right now is the involvement of private firms in an annuity industry previously dominated by life insurance companies. As it stands, as much as 15 percent of the fixed annuity market is controlled by Wall Street-backed insurers.

What this does is create an opportunity for risky investment gamesmanship. A private equity company that buys an insurer can funnel retirement nest eggs to the parent company, which can invest the money however it pleases. Usually, the way that pleases them most is whatever can generate the greatest returns the fastest.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

In general, that strategy conflicts with the security that is necessary to continue paying a fixed annuity over a long period of time. Regulation of the market is largely handled by state governments, who have had a hard time staying on top of the Wall Street players. Money managers could be investing funds in much riskier securities than policyholders were originally expecting. This, in turn, could jeopardize incoming payments.

Don’t Miss: How Optimistic Are Americans About Their Finances?