| As I write this in late August 2007, the financial markets are finally calming down. The Dow has recovered about 40 percent of its losses and lost much of its volatility. The emerging-markets stocks I've been touting for so long are rebounding from their sharp correction. Deals for takeovers that had been thought of as dead are returning from the crypt. Money is flowing into the nooks and crannies of the financial world. Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve, has supplied liquidity when needed. He's said he won't allow the financial markets to seize up. The smart money never bets against the Fed, since the Fed can create a literally infinite amount of liquidity. Stay the Course (Again) In a word, as fast as the speculators and hedge funds and rumor mongers try to gum up the works, a really determined Fed chair can keep the machine well lubed. Still, in the last six weeks, we've had some harrowing moments. Even people close to me who are in the financial markets called me in a panic on a few occasions. Because I'm an old guy now (62) and have lived through a lot of these crises, I was able to dispense some halfway-decent advice: Stay calm, keep invested, and keep buying. The time to buy is almost always when everyone else is selling, and it will be this time, too. But I have more specific advice about the markets and retirement. A True Correction Someday, and perhaps soon, there will be a stock market correction that's -- so to speak -- correct. It won't be based on fear and rumors and short sales. It'll be caused by something fundamental like a wild overvaluation of stocks or a dollar crisis -- which definitely could happen -- or an outburst of inflation requiring rises in the interest rate, which are almost always poisonous for stocks. For the young or middle-aged investor (especially those in early middle age), these won't be a problem. Youth and time will allow for the losses to be made up for, and then some. But for the person nearing retirement or actually in retirement, these can be perilous times. If you've retired and are planning to withdraw, say, 5 percent of your savings each year on which to live, you'll be fine if the markets stay fine. (This assumes that your savings are mostly in stocks.) You'll also be fine if the market crashes or corrects sharply late in your life. But if by some horrible fate the market moves down sharply right after you retire, you could be in real trouble. Your nest egg might shrink by so much that your regular 5 percent withdrawals would leave you short later in retirement. This is a genuine hazard, and not one that the Federal Reserve can readily answer. Annuities to the Rescue That's where annuities come in. There are now variable annuities (VAs, which are basically pools in which your money is invested in securities and compounds free of tax) where you're guaranteed a certain monthly withdrawal amount for life -- no matter what happens in the stock market. That is, the insurer who sells you the VA assumes the risk that the market will fall sharply. The insurer buys hedges of various kinds, and may also risk their own capital to protect your guaranteed withdrawal amounts. (Of course, all kinds of annuities have the feature of guaranteeing payments for as long as you live or longer. But the guaranteed-withdrawal-amount VAs give you that benefit plus the possibility of substantial gains from your investments within the VA.) Needless to say, these VAs come at a price. It's not cheap for the insurers to buy the swaps and other hedges that allow them to guarantee your payments will never fall from a prescribed amount, but that they could rise substantially instead. They pass that cost onto you to the extent that they can. A Safe Pillow But as we've seen in the stomach-churning weeks this summer, there's always risk in stocks. If this risk can be insured against at a price that's reasonable, it's a huge weight off the mind of the retiree or pre-retiree. So you should definitely talk to your financial planner about these new VAs. (I do not, however, recommend them for people who are significantly above age 70.) At least think about some form of fixed annuities in your accounts when you retire. This is suitable for people of almost any age so long as there's a payment built in geared to life-expectancy tables; that way, if you die early, your heirs will continue to get payments for what would've been your full life span. It's a comfort to be able to count on a stream of money pouring in whether you're tragically sick or startlingly healthy -- to know that no matter how the market fluctuates, you'll get a set return on at least a part of your money that will last for as long as you and your spouse do. I love following the stock market. In the very long run it's a beautiful thing, at least in the postwar world, and I hope it doesn't turn around and bite my head off the way it did in the tech crash. But to have most investments in fluctuating stocks with a solid amount in VAs and fixed annuities represents a nice pillow on which to lay your head. "Safe" is a happy word.
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