Eight guarantees retirees can count on

Investors do all sorts of foolish things in search of “guaranteed” returns. But the bigger fools are those who fail to take advantage (in some cases) and beware of (in other cases) things that really are guaranteed.

I’ve made a list of eight for you to think about.

By “guarantee,” I mean a promise or assurance that something will happen, that the outcome is certain. Of course I know that nothing in life is absolutely certain (although death and taxes come pretty close), but I believe the following guarantees are 99.9% reliable.

One

I guarantee you will get more money from a bank certificate of deposit that pays a higher rate than one paying a lower rate. As obvious as this is, millions of investors ignore it.

Washington Federal pays 1.5% on five-year standard (non-jumbo) CDs; at Bank of America, the rate is 0.35%. Both CDs are covered by the FDIC guarantee. A $25,000 account will pay nearly $1,500 more in five years at Washington Federal. So why do retirees keep their money at Bank of America? Other than laziness, it beats me.

For the 50 or 60 minutes it might take to find and deal with the higher-paying bank, you could earn almost $1,500. Where else can you make that much money per hour?

The same is true of interest-bearing checking accounts, savings accounts and money-market funds.

Two

I guarantee that nobody knows the future. So why do so many retirees squander their savings and their common sense following salespeople or gurus (or neighbors for that matter) who claim to know what’s ahead?

The next time somebody assures you that you “can’t miss” on some investment, remember the sad story of a man I know who, based on that “guarantee,” put his life savings, and those of his wife and their kids, into stock of an individual company. A few weeks later that company declared bankruptcy.

Three

Wall Street doesn’t want you to know this, but if you have any money invested in equities, I guarantee that you will lose money at some point.

The good news is that it’s relatively easy to build a portfolio that includes equity funds and is still likely to limit your losses. The bad news is that if you don’t do that, you may engage in panic selling, locking in those losses forever.

Four

If you use index funds, you’re guaranteed to get above-average returns. This seems to defy logic, but most of the time, the majority of active managers underperform their benchmark indexes.

Over long periods of time—10 to 20 years—index funds’ returns are almost always in the top 10% in their respective asset classes.

Five

Within any asset class, a diversified portfolio is guaranteed to have less risk than a concentrated portfolio.

Own a handful of stocks and there’s a reasonable chance one will get into serious trouble. Own 1,000 stocks and it’s almost impossible for one or two to drag down the rest.

Six

If you pay a load or sales commission to buy a mutual fund, you are guaranteed to have lower returns than if you bought the same fund on a no-load basis.

If you invest $10,000 and pay a 5% front-end load, your account is worth only $9,500 on day one. After 25 years at 10% annual growth, that difference costs you $5,417—more than half your original investment.

Seven

Whether or not you pay a sales commission, if two funds have identical portfolios and management, the one with lower expenses is guaranteed to have a higher return.

For example, over the 10 years ended March 31, 2013, the Vanguard 500 Index Fund returned 8.42%, while a higher-cost competitor returned 8.15%. The difference was almost entirely due to expenses.

Eight

Inflation is guaranteed over time to erode the spending power of every dollar you have when you retire.

Over the past half century, U.S. inflation averaged about 4%. What cost $100 fifty years ago costs about $700 today. For retirees with 25 years ahead, that $100 becomes $266.

Richard Buck contributed to this article.