Broker's Use of "Income" is often Misleading
“You keep using that word. I do not think it means what you think it means.” Inigo Montoya, The Princess Bride
Today I saw an ad in our local paper targeting retirees with a product that apparently pays “6% Income.”
I’ve written about this in the comments of past blogs. The word income in some parts of the financial services world doesn’t necessarily mean what it does to their sales targets.
Consider a few common definitions of the word:
Dictionary.com: the monetary payment received for goods or services, or from other sources, as rents or investments.
American Heritage Dictionary: The amount of money or its equivalent received during a period of time in exchange for labor or services, from the sale of goods or property, or as profit from financial investments.
So, income is gain. A profit. Rent for use of capital.
What income is not is a return of your own money.
Safe yields are currently between 0.08% (1 month Treasury bill) and 3.09% (30 year Treasury Bond). What does it take to offer 6%?
For the most part these individuals are recommending investments that provide a partial return of your own principal. Variable annuity guaranteed minimum withdrawal benefits (GMWB) riders are exactly what they say – a guarantee you can withdraw your money (note: they use the correct term inside the acronym – this is a withdrawal, not income). Real estate and other private investment offers do the same.
Most lock-up your investment for many years, and subject your funds to exorbitant costs in the meantime, so if you do want out, it will come at a cost.
If something sounds too good to be true, it is. Make sure to read the prospectus of any investment to understand exactly what you are getting for your investment.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/