The ageless phrase is conveniently forgotten at times we need it most. Rudyard Kipling wrote in 1891 about a developing trend in taverns to attract drinking customers. “It was the institution of the ‘free lunch’ I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts.” Writers and economists use the term to describe trade-offs. The concept is core to economics – to get something you give something. There is no free lunch.
The aging and retirement of Boomers, the most affluent generation, bring tides of economic, political and social change to America. We’re a big target for advertisers and sales – representing more than $8.5 trillion of retirement assets and possibly inheriting another $7 trillion. And despite investor alerts by regulators and industry associations, seniors are victims of financial abuse to the average tune of $140,500 (CFP Board of Standards survey 2012). One of the most common is “free lunch” seminars.
We’re inclined to believe “bad things don’t happen to me… they happen to the other guy.” Just in case, I’ll share a recent example. I’m not out to embarrass or get sued. I’ll use some pretty broad strokes.
I got a call from retired couple living in a sunny retirement community – very smart, successful and comfortable. They had attended a scrumptious luncheon at a beautiful country club. She was contemplating a significant investment to help them pass their IRA monies tax free to their grandkids and asked me to check things out. Here are some ‘red flags:’
• Free lunch seminar… Bring your spouse… Nothing will be sold – If I ask my spouse to another “free lunch” she’ll call me George Costanza. Why don’t I take her to another Rotary lunch? At least she’ll get to visit with people she knows.
• Multi-Generational IRA – A better mousetrap? Or is it merely a rebranding of the classic ‘stretch IRAs?’
• Please: No stockbrokers, financial planners, or insurance agents – Aren’t seminars to learn and share? We live in an idea society, seek illusive silver bullets, and no one has a monopoly on good ideas. Shouldn’t my trusted advisors (including tax and legal experts) be engaged? What about the current tax bill converting to a Roth IRA (for future tax-free withdrawals)?
The alleged solution included a fixed index annuity (FIA). These are generally contracts between you and an insurance company that pay a fixed annuity linked to the performance of a stock market index (e.g. S&P); offer a guaranteed minimum return (by the insurance company, not the FDIC); and provide the potential for upside market gain (limited by the policy’s stated caps). They aren’t designed to beat the stock market, but may outperform other fixed income investments.
Americans hunger for greater certainty in their financial futures, and the hint of guaranteed returns is attractive. I’d love a guaranteed solution. However, life’s rich with trade-offs – risk and return (need more than a risk-free return to retire and stay retired?), liquidity and flexibility (surrender penalties or lock ups), and solvency (future promise fulfillment). What are other options to build, protect and transfer wealth? Perhaps, FIAs do make sense for a part of the portfolio.
Life would be so much easier if people talked straight and delivered what they promised. We know there’s no free lunch. But sometimes we forget, or become forgetful. And no amount of regulation or good intentions will always protect me and my loved ones. I’ll continue to keep smart and caring people in my inner circle. Big decisions? May I always sleep on them.