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Addressing Retirement Risks


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Life is full of unexpected events that sometimes leaves us feeling uneasy, especially when choosing a retirement program.  Creating a retirement strategy includes where you are going to place investments and for what period of time, and how you address the risks of retirement.  The major risks facing seniors today are:

  • Market risk – the ongoing volatility in the stock market.
  • Inflation risk – the erosion of one’s purchasing power.
  • Longevity risk – the increase in life expectancy.
  • The majority of seniors feel that outliving one’s assets is the greatest risk they face.

I once read that retiring without contemplating how long you might live is like taking a trip across the desert.  If it’s going to take a day, you might need a gallon of water.  If it is going to be a week, you had better have several gallons.

  • Do you have longevity protection and your retirement income guaranteed to last the rest of your life?
  • Does your retirement income plan have the potential to grow so you can keep up with inflation?
  • Can you withdraw your savings in case of emergencies or for special spending needs?
  • When you pass away are any unused funds available for a legacy to your children?
  • Is your income protected from stock market crashes or increases in long-term interest rates affecting your bonds portfolio?

Most people want to maximize the amount of retirement income and satisfy as many of these goals as possible.  Unfortunately, you get what you pay for when it comes to addressing these goals.  The more goals you want to meet, the lower your initial retirement income will be. Before long they’ll open their eyes to fingers pointed in all directions—the class attempting to find true north. And that’s when the ice will begin to melt.

If you start withdrawing retirement income too early, withdraw too high of percentage, or don’t invest with principal protection in mind, you may spend down your initial retirement income too soon.  As you are aware, interest rates have been trending downwards even as the market is gaining ground, all these forces – demographic and economic – pose an interesting challenge to retirees.

The dramatic shift from the wealth management phase (gathering and growing assets to the income management phase (preserving and distributing assets) it is important to recognize that if you want a guaranteed retirement you have to have a guaranteed account.  Many retirees’ now need to draw down assets to generate a reliable, secure income stream that will allow them to maintain the lifestyle they so desire during their retirement years.

To maintain a lifestyle that we have come accustomed to, we must consider a solution that should not only be conservative in nature, but also designed to maintain a good rate of return to provide an income stream that one cannot outlive.

Risk-averse investors may look for safe havens like CDs, annuities or guaranteed income products during times of financial upheaval. Withdrawing income, of course, is a different matter.  You should be emotionally prepared for volatility and the occasional crash in advance. Even if your personal financial circumstances shouldn’t compel you to sell at a bad time, you still don’t want to make poor decisions out of fear.

You’ll need to establish what is most important to you about your income stream before choosing your retirement option. If you still want to retain some control over your retirement income, consider both an annuity and investments in the market. This way you’ll have the best of both worlds—a simple source of regular income and a portion of your portfolio over which you have greater control.

If you’re looking for a steady stream of income later in life, then you should invest in an annuity.  An annuity is a financial product that’s sold by financial institutions to individuals. You make an investment into the annuity, then the annuity pays out a stream of payments to the individual at a specified amount of time, whether that be weeks, months, years, or a different amount of fixed time.

Annuity Products are built for those looking for balance and peace of mind in their investment strategy and offers tax deferred growth like 401k’s, IRA’s and other tax deferred plans.  The benefits, some of which include taking advantage of market gains but you’re not affected by market losses.  Since the interest earned is “locked in” annually and the index value is “reset” at the end of each year, future decreases in the index will not affect the interest you have already earned.

One of the most powerful benefits of an indexed annuity is the annual reset feature. This is valuable whether the indexed market goes up or it goes down. If the index market goes up, the client’s account value receives the market linked growth as interest credited to their account value.

If the indexed market goes down, the client receives zero interest that year. While this may appear to be a bad thing, the annuity client lost no money compared to a person invested in the market who may have lost money. In this situation, the value of an annual reset is two-fold: 1) the clients account value is protected and does not decrease and 2) the beginning index value for the following year is the lower deflated market point. This lower beginning index point will be valuable if the index increases the following year.

While everyone wants to increase their retirement savings from year to year, having a no growth year can actually be a win-win because you receive the value of the primary reason you probably chose the fixed indexed annuity in the first place…the contractual guaranty of protection from loss of account value in a down market.

An indexed annuity can be a valuable resource to have as part of your retirement savings plan. Having the powerful benefits of Fixed Indexed Annuities with the annual reset interest crediting design and linking the annuity appreciation rate of the annuity account balance to a stock market index.

Your downside is protected, yet you are open to some upside participation,  The Index does exactly what it is supposed to do… gives the Contract Owner the opportunity to accumulate value based on the appreciation of the S&P 500® Index, without the risk of loss of Premium in years when the S&P 500® is negative.

If you had bought an equity-indexed annuity just before the collapse of the stock market instead of investing in the stock market itself, you would be very happy right now!

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Monday, October 14th, 2013 Wealth Management, Wealth Preservation

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