Are Investors Who Seek Income Creating a Bigger Problem?

Dear Subscribers,

Today I’m sending you an interview with an old friend and colleague of mine, from my days at Casey Research.

Since retiring, Dennis Miller has never worked harder. He’s made it his mission in life to help fellow retirees and investors planning for retirement in their quest to earn income on their savings. His passion and energy for finding practical solutions has helped many retirees get their investment strategy back on track.

In his years as editor of Miller’s Money for Life, Dennis proved to be one of our most sought after editors. His no-nonsense style and thorough research provides you with real solutions to the challenges we all face in this low interest rate world.

After the sale of Casey Research, Dennis started a weekly blog where he continues his mission. I find his approach and advice refreshing and always truthful.

Olivier Garret, CEO
Hard Assets Alliance


OG: Dennis, you have spent the last several years looking for ways to help retirees manage, protect, and grow their hard earned nest eggs. It’s becoming a real challenge. Why is that?

DM: Olivier, thanks for inviting me.

The game changed for retirement investors in 2008 with the bank bailouts. Historically, investors put the bulk of their retirement money into safe, good yielding investments. Today, 30-year Treasuries pay around 2.5%. Factor in taxes and inflation, and you have a guaranteed loser.

Investors must find ways to replace that safe, solid income floor. Retirees need “Income Certainty”; meaning no matter what happens, you know you can count on a certain amount of income every month.        

Most people had a “day of reckoning”; realizing they needed to get serious about saving for retirement. They ran projections, set savings goals, and saved their money. Now, we have a “day of RE-reckoning.” The income they thought they could count on disappeared. I cringe when friends tell me they are tapping into the principal and worried about running out of money.

OG: What are some ways people are safely picking up the slack? 

DM: Junk bonds pay less than FDIC insured CDs did in 2007; and defaults are rising. If you want default safety, you have two choices. Short term with negative net yield or long term fraught with inflation risk.

The next alternative became dividend-paying stocks. Individual and institutional investors alike are scrambling for yield. The stock market is picked over like a grocery store the day before a hurricane. The market is at an all-time high and ripe for a big correction. Keep your stop losses current. 

Investors are forced to look beyond our normal comfort zone. Here is one example.

Readers were continually asking me, “what about annuities?” Reluctantly, I decided to look at them. I spent several months researching and writing a Miller On the Money Annuity Guide. Our Guide is educational research and probably the only information about annuities that is not written by someone who sells them for a living.

A properly structured, guaranteed annuity could help solve one problem by providing much needed “income certainty”; however, it creates another—inflation risk. I fear a lot of people with annuities might end up in their 80s and discover their annuity and Social Security checks no longer cover their bills because of inflation.

Anyone with an annuity MUST own some gold.

OG: Many investment advisors discourage their clients from investing in precious metals because they do not earn income. What do you say to those investment advisors?

DM: Let’s tie the last two questions together. Retirees are not trying to get rich quick; they are trying to avoid getting poor quick. Their life savings must last for the duration.

When investment advisors tell clients gold/silver is too risky, they are overlooking a catastrophic risk. I ask them what they recommend for true inflation protection. I have yet to get a satisfactory answer.  

I looked for a way to make inflation real and understandable for my readers. Baby Boomers were alive and can remember the high inflation Carter years.

We took an example of an investor putting $100,000 into 5-year, 6% CDs on 1/1/77. Factoring in inflation and taxes, the CD would have lost approximately 40% of its buying power—in just five years. If a car cost $20,000 in 1977, 5 years later, that same car cost $31,984.

We then looked at a 10% allocation to Treasury Inflation Protected Securities (TIPS). Only the amount invested in TIPS is inflation protected. The total buying power dropped around 33%.

We then calculated a 10% allocation in gold. Here are the actual gold prices during that time period:

Date Price per oz.
12/31/76 $133.77
12/31/77 $161.10
12/31/78 $208.10
12/31/79 $459.00
12/31/80 $594.90
12/31/81 $400.00

A 10% allocation in gold created an umbrella effect, offsetting some of the inflation loss from the CDs. The net inflation loss would have been 30%. Understanding that gold prices are generally based on anticipation of an event, had the investor sold one year earlier, he would have reduced his inflation loss by another 11%.

While we can’t guarantee the future, gold has a proven history record. You can see why I say anyone owning an annuity or long-term fixed income investment MUST own some gold for inflation protection.

If a financial advisor recommends against gold, I would quote from the study, "Inflation and Returns of Asset Classes."

Gold is seen as a safe haven of assets, and evidence of this research indicates that it is the only asset which can offer hedge against high inflation. Bonds are the worst assets against inflation.

Can any financial advisor guarantee their client that Carter-type inflation will not happen for the rest of their life? Readers have thanked me and fired their financial advisors when they realized how unprotected they were.

As an aside, if anyone thinks gold is overpriced, check the US Debt Clock dollar to gold ratio. It’s currently a bit over $8600/oz.  

OG: While I realize you can’t be precise, the goal is to have a realistic inflation hedge. Are we talking about a 5% to 10% metals allocation or something more meaningful like 15% to 25%?

DM: The old guideline was 10% for core holdings. At the time, you could ladder quality fixed income investments with 5-year maturities. The shorter the maturities, the lower the inflation risk. Longer maturities = much higher inflation risk.

This is a good example of how investors are forced to choose between risky alternatives. If you want yield, you must go long term—adding significant inflation risk. Diversification is holding inversely correlated assets, one goes down; another rises. Today’s norm requires much different allocations, and each investor is different.  

It’s a tough choice trade-off. Your 15%–25% number may be more meaningful than people realize.  

OG: One final question. Many annuities promote their growth and inflation protection. You said investors should surround an annuity with gold and other assets to protect for inflation. Can you explain that?

DM: I spent three months researching this. Here is a quote from a recognized industry expert: “There is not an annuity type on the planet that legitimately addresses inflation.”

Variable annuities are high commission fee monsters, many times charging as much as 3%. Agents are highly incentivized to sell those products. Annuities are a transfer of risk. Don’t look at annuities as investments. If you are looking for yield and market participation, don’t buy an annuity, buy a good mutual fund.  

My goal was to educate readers so they don’t get ripped off. Done right, an annuity can pick up a lot of that “income certainty” void that was taken away by the government; but annuities don’t offer adequate inflation protection.

On a personal note, readers are probably unaware that you were one of my good mentors when I started my encore career. I am forever grateful. Here is a LINK to our Annuity Guide. If your readers enter “HAA” under the coupon code, they’ll receive a 20% discount.

I don’t sell annuities, but if readers own one—or are thinking about buying one—they better also be looking at the gold holdings.

OG: I encourage our readers to check out your website, even if they are not concerned about annuities. I look forward to your weekly articles and your unique insights. On behalf of our readers, thank you for your time.

DM: My pleasure, anytime.