Retirement Expert: How Gold and Silver Can Solve the Annuity Dilemma

As one of the world’s most well known and trusted precious metals dealers, we get a LOT of questions about where gold fits in a portfolio.

Over the years we’ve published a lot of material to address that, in broad strokes. But I thought it important we start to get a little more specific on the nitty-gritty.

As a first step, I want to quickly touch on a subject often ignored. We regularly comment about how gold has long been a hedge to stock market volatility, rising when the markets fall, helping maintain wealth and soften losses.

But not all investors are heavily invested in the stock markets. For example, anyone over 60 years old that follows the dogma of financial planning should have less than half of their investments in the stock market, and instead be focused on bonds, annuities and fixed income investments.

According to a survey from retirement fund giant TIAA-CREF, 84% of near retirement age Americans would prefer to own an annuity. Yet, only about 14% end up buying one. They believe that’s largely because of a lack of education available on the subject.

So, we thought we’d do our part to address how gold and annuities fit together, as one of the first in a series about precious metals and your portfolio.

To tackle this particular topic, I turned to a good and trusted friend, Dennis Miller. Dennis is a widely read blogger, a self-professed ‘RetireMentor’ with regular pickup from MarketWatch to the Daily Pfennig. Dennis is an old school, common sense, tell it like it is kind of guy—who came out of his own retirement solely for the joy of helping others navigate the new and complicated retirement environment.

One of his recent columns, a follow-up to his popular annuity investing guide (Dennis is the one person I know of writing on annuities who isn’t also selling them) grabbed my attention with a simple assertion:

Anyone owning an annuity “MUST” also own gold. (His emphasis.)

I reached out to him because I wanted our readers to understand why…

ALEX:  Dennis, on behalf of our readers, thanks for giving us some of your time. First, can you quickly tell our readers how you came to provide retirement finance advice? You didn't spend your career as a financial adviser.

DENNIS:  My pleasure, Alex. I take great pride in telling readers I am not licensed or qualified to give professional, individual investment advice. A lot of my ideas are things they are not likely to hear from a licensed professional because they are things they can’t or won’t say.

Almost 30 years ago my wife and I were married in a nursing home. Her father was dying from Parkinson’s disease. About a month later I was in a conference room at a major brokerage firm. My mother-in-law was giving me power of attorney to look after her sizable nest egg. Talk about pressure. The looks from my wife and her family were clear, “Don’t you dare lose grandma’s money”.

I was very fortunate that the broker handling our account was my age and she was a terrific mentor. She was not only concerned about protecting grandma’s money; she also took on the challenge of educating me.

I started my company’s retirement plan with her help.

After I retired from a long career as a master sales trainer for some of America’s largest, best-known companies, I was coaxed into writing a newsletter specializing in growing a retirement nest egg safely. I got to work with some of the best analysts in the world—that’s where you and I met.

After many newsletters, a book, my column in MarketWatch… I started my own free website, Miller, On The Money, to try to reach as many of my peers and soon-to-be fellow retirees as possible.

ALEX:  I know one of your most popular subjects is annuities—a popular income tool for retirees, yet one barely mentioned by mainstream market commentators because of its own defining feature: it doesn’t change value day to day with the markets. If someone is relying on or considering an annuity for retirement income, whether bought or from a pension or even the lottery, what are the biggest risks?

DENNIS:  Retirees need a safe income floor each month. I call it “income certainty”. My parents had the bulk of their nest egg in CD’s, for example, and knew they could count on that income no matter what. When they bailed out the banks in 2008, that safe, predictable income floor was removed almost everywhere.

Immediately, individual investors, money managers and pension funds reallocated their capital in search of yield. Today, risky junk bonds pay less interest than short-term, insured CDs paid in 2007. The market price of quality assets with good yield has been bid so high, yields are now mediocre at best, and dangerous gambles at worst. 

I have spent the last 8 years searching outside the box for safe investments offering decent yields. It’s maddening!  They’re picked over like grocery shelves the day before a hurricane.

One of the new solid options I found was annuities.  A properly structured, contractually guaranteed annuity could fill that monthly income void easily, albeit with two huge caution flags.

First, a fixed monthly income check from an annuity may pay your bills today—but what about tomorrow?  Pity the person who bought an annuity in January 1977. Over the next five years total inflation was almost 60%. Their monthly check would buy a fraction of what it did five years earlier.

Second, to counter this, annuity carriers offer various flavors of inflation protection. When you look behind the curtain you’ll find they are fee monsters. A lot of people are getting ripped off. Agents push inflation riders due mainly to high commissions.  The idea of inflation protection is an illusion for most of these riders. Don’t look at an annuity as a growth investment; it’s a transfer of risk.

For many, annuities can do a good job of filling the income certainty void. But, you can’t stop there. They are one asset in your portfolio that does not offer adequate inflation protection.

You MUST surround your annuity with other assets that protect against inflation. If you don’t do that, you could wake up at 80 and realize once again you don’t have enough money to pay your bills.

ALEX:  I assume that’s where gold and silver fit in with an annuity?

DENNIS:  Yes. Last May I analyzed what would have happened to a CD, Treasury Inflation Protected Securities (TIPS), and gold during the high inflation Carter years.  

Fixed income CDs paying 6% interest were safe from default, but (after estimated taxes) the owner lost around 40% of their buying power over the five years.

TIPS, by design offer no inflation protection for your portfolio. They only inflation protect your investment in them, so that makes for a bad hedge.

Gold not only protected the investment in metals, it also appreciated well ahead of the inflation rate, inverse to the dollar. It picked up a good deal of the slack lost by the fixed income investments.

Using real numbers, gold appreciated 124% over 5 years, more than double the inflation rate.  At peak, it appreciated 233.5%.  The bottom line is gold moved inverse to and well ahead of inflation, serving as an excellent hedge.

Other investments like productive farmland and certain collectibles also do well through inflation. But, gold is much more liquid, and the price is easily discovered and relatively equal all over the world.  

Annuities transfer away risk of losing your capital or current income, like stock market risk, bond prices, dividend yields, and interest rates. They protect you from another 2000 or 2008. But, unlike stocks and other productive assets, they lose to inflation. So, surround your non-inflation protected assets, i.e. annuities, with those that historically grow ahead of inflation.

This is applicable not just to annuities, but also anyone with long term CDs, fixed rate bonds, or a fixed monthly income reverse mortgage—all popular income assets for retirees. Owning some gold (or silver) is a MUST in my opinion.

How much? For every 20% of your portfolio in fixed income assets, target another 5% or so for a good inflation hedge. But, the exact right amount depends on your net worth and many other factors.  Contact a competent, licensed professional advisor to build a plan for your situation.

A good portion of our Annuity Guide focuses on finding a competent, qualified professional (i.e. not getting ripped off). Many mainstream licensed professionals know their niche but can’t connect the dots... particularly when it comes to alternative assets like annuities or gold.     

ALEX:  That makes sense. Annuity providers are betting on inflation. You can place a counter bet, a hedge, with a reasonable allocation to gold and silver.

What if you aren't relying on an annuity? Does your advice change if you are using 401(k), IRA, or another self-managed account as your nest egg?

DENNIS:  Good question. Those who have a very large nest egg, or a guaranteed (inflation protected) pension are probably not candidates for an annuity.

But, if you’re planning to live off your 401(k)s and IRAs, the inflation advice does not change. Protecting the principal is the primary goal. You are not trying to get rich; but rather avoid getting poor. Investors seeking yield are piling into long and intermediate (5-7 year) fixed income investments. They may be safe from default, but they are high inflation risks. If you’re leaning on bonds, inflation protection type assets must be added accordingly.   

I really worry about boomers and retirees getting bad advice.  When I go to a money show I’ll stroll into the booths of the big name mutual fund firms. They are filled with young hotshots, leasing their starter BMW’s, and presenting their  “proven” formulas.

I ask them one question. How do you protect your client’s life savings from inflation?  Without hesitation they always say TIPS. Bad answer: TIPS don’t protect anything but themselves against inflation.

Annuity or not, every retirement nest egg better have significant inflation protection—lest you outlive your money’s usefulness. Gold should definitely be part of that insurance policy.

I shudder to think how many retirees are relying on “that nice young man” to manage their life savings right out of their obsolete manuals, which assume everything works out in the long run so long as you hold enough stocks.

Dennis Miller is the author of free retirement finance blog Miller On The Money.  He is a regular contributor to MarketWatch and various other financial publications. He lives in Arizona these days, but is a lifelong Cubs fan.

If you are considering an annuity, be sure to check out his Annuity Guide.