Long-term contracts

If someone offered you a guaranteed 6% return for the next 20 years, with the condition that your money was locked up for the entire time period, would you take it? Call me crazy, but I wouldn’t do it. In fact, I avoid as many long-term contracts as possible because it gives me the flexibility to adjust things as the world changes (and as I change).

Long-term contracts can turn out to be very one-sided. Look at blockbuster sports contracts for instance. Some look very dumb after a player gets hurt or his skills diminish. What went wrong? The future is too unpredictable.

Financial markets are equally unpredictable. As such you should approach any long-term contracts with caution. Those include variable annuities, indexed annuities, and permanent life insurance products. That’s not to say that you should never buy one of those, but put a lot of thought into it before you do. Most of these contracts are not favorable to our clients, but we have seen a select few get lucky.

So, seriously, would I pass up a guaranteed 6% for the next 20 years? Yes! In part because I’m sure it would come with a 300-page contract designed to favor the investment company.

Here’s an example for you. They can throw all sorts of adjustments and exceptions in there. They might offer you 6% return, but only if you leave the money there for 20 years and annuitize in the end. Did I mention that they get to set the annuity rates? They can offer you a poor return from that point forward and there’s nothing you can do about it. I’ll pass.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.