"But fees can be quite high," says Holtzman. "Annuities usually sell with a 6-percent commission, and you're getting a huge surrender cost at the back end. Figuring out your return after expenses, it might not be worth it in light of other risks. If the issuer is Citigroup, you don't know whether it will be around next week, let alone for say the eight years of a variable annuity."
Marketers of variable annuities are playing to people's emotions, Houlihan says. "People want the highest return they can get without risk," she says. "That's an oxymoron."
She says one of her clients is very conservative and was told by the institution selling her an annuity that she was guaranteed a certain rate of return. "But 100 percent of the annuity was in aggressive mutual funds," hardly a guarantee of any rate of return.
Finding safetySo how do you achieve safety? Evensky says, "There is no such thing as a safe investment. You need a safe portfolio through balancing." Treasury Inflation Protected Securities, or TIPS, make sense now, he says.
TIPS are government securities with interest rates that are linked to inflation. When inflation rises, so do your interest payments. With the budget deficit exploding, inflation will probably rise, Evensky says. "The price of TIPS can be quite volatile, but they are paying about the same as Treasuries now, so their cost is low."
Evensky also recommends high-quality corporate bonds, perhaps in a laddered portfolio, where you have a range of different maturities.
Legend Financial has its clients in two Ginnie Mae bond funds. Those are the only mortgage bonds officially backed by the government. The firm also likes short-term bond funds.
"Normally, if you're uncertain, you would put your money in a money-market fund for safety and yield," Holtzman says. "The problem is that yields are basically nothing now. Using short-term bond funds, you're getting a better yield than money markets, and you can reinvest at higher yields if rates rise."
Chris Wheaton, managing partner of Litman/Gregory Asset Management in Larkspur, Calif., says diversification for his firm starts with stocks and bonds. As a temporary substitute for stocks, "we've got about a 15 percent allocation to high-yield bonds," he says.
You might not think of those as very safe, but "there's a lot more cushion on the downside because the price of high-yield bonds is so out of line [undervalued] in the aftermath of the financial collapse," Wheaton says. "And even if you get a capital loss from the asset going down, you have a high yield to offset the risk."
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