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Financial Prosperity For Retirees


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After people retire, running out of money is a constant worry particularly for those who may have been greatly affected by the market swings in the last few years. It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.

The problem with equity investing is that the long-term average, which is higher than the return from bank deposits and saving certificates, masks the ups and downs along the way. It is the nature of equity markets that a few good years are followed by a few bad years.

Retirement investing is a key to your financial prosperity, and 401(k) plans can help you realize your retirement dreams. But many complain about the lack of investment options in some 401(k) plans. The devil is in the details, we are told, and the details are often buried in an appendix or footnote.

It is the unseen things in well-intentioned policies that will have small, incremental, but finally significant effects upon the whole economic body.  There are many different types of investments. Whether you are playing the stock market or you are purchasing a tax-deferrable annuity, you are building a comfortable nest egg that can assist in sustaining your retirement.

The requirement of the typical retired investor is not complex. The need is for an inflation-adjusted income that will grow year after year, without putting the capital at risk. A simple bank deposit or saving certificate would provide the income, but offer no protection from inflation. An equity mutual fund would enable protection against inflation, but provide no income stream. It would also expose the capital to risk.

There are obstacles that retirees are the least prepared for.  Many retirees are ratcheting it down as they get closer to retirement.  Participating in the stock market can give an individual’s retirement savings and income the potential to keep pace with inflation; however, volatility in investment markets can significantly affect retirement income and savings.

A retired person, or for that matter, any equity investor, seeking to benefit only from the good years by cleverly avoiding the bad years is being unrealistic. There is no magical formula that can tell you when you should get in or out of the equity markets. The lack of such precise definition of benefits, year after year, spooks the retired investor.

Americans are living longer and the possibility exists that they could outlive their resources. The cost of care for an unexpected event, or long-term illness not covered by private insurance or Medicare is requiring more Americans to prematurely deplete their assets.

As baby boomers approach retirement, many may find themselves in different economic circumstances than they planned. Recent economic events have taught us the downside of risk, yet careful planning can help soften the impact.  So when it comes to retirement planning, creating a reliable income stream in retirement individuals need both a map and directions.

In the 4½ years since the Great Recession ended, millions of Americans who have gone without jobs or raises have found themselves wondering something about the economic recovery:  Two straight weak job reports have raised doubts about economists’ predictions of breakout growth in 2014.

By the CBO’s reckoning, the economy will soon slam into a demographic wall: The vast baby boom generation will retire. Their exodus will shrink the share of Americans who are working, which will hamper the economy’s ability to accelerate.  There are no documented examples of an economy that had to emerge from a financial crisis while simultaneously absorbing the effects of an aging population.

At the same time, the government may have to borrow more, raise taxes or cut spending to support Social Security and Medicare for those retirees. The economy is trapped by “secular stagnation.” By that, it means a prolonged period of weak demand and slow growth.

History suggests that economies that seem doomed can sometimes enjoy sudden turnarounds and unexpected bursts of energy.  Financial crises do not last forever.  A decade is a long time. But a long time is not the same as forever, unless of course if you are retired during that period.

Social Security and pensions are great sources of dependable income, but most people will need additional stable, lifelong income. Start protecting your future income by the purchase an income annuity when you retire to cover any remaining expense gaps. Through annuitization, these products can provide a guaranteed income stream during retirement that will help supplement Social Security and pensions.

A lifetime annuity remains the mainstay of the retirement income market in the US. It is after all the only product that guarantees an income for the rest of the retiree’s life. Indeed, over 90 per cent of retirees buy a lifetime annuity on the premise of its lifetime guarantees.

In the era of final salary schemes, a lifetime annuity provided the continuation of a salary-related benefit into retirement, and delivered a promise made to the employee while they were still working. It also acted as an insurance product, as benefits could continue to be paid to your spouse no matter how long they lived. An asset allocation between equity and guarantees is required to solve this problem.

A Fixed-indexed annuity, or FIA for short, is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500). EIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

While it’s a lot like investing directly in the stock market, you don’t get the full boost of a rising market. With equity-indexed annuities, the money put down by you, as a purchaser, isn’t invested directly in the stock market. Instead, you are offered a percentage of how much the index gains over a period of time, and a guaranteed minimum return if the stock market declines.

Benefits of the Fixed / Equity-Indexed Annuity

No-Loss Provision: The first and possibly most attractive provision of an fixed-indexed annuity is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the S&P 500.

Interest Guarantees: The next benefit of an fixed-indexed annuity with wide appeal is interest guarantees. Most policies have a cap (the maximum interest rate that can be credited to a policy in a policy year) and a floor (the minimum interest rate that can be credited in a policy year). The cap rate can vary from no cap to a fixed percentage, but the floor is generally zero. This allows the policyholder to benefit from potentially high returns and be guaranteed at the same time that no money will be lost.

Competitive Rates of Return: With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the equity market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.

A good portfolio is well-balanced. It’s looking at things that are market related and things that are not market related. If you cannot stomach the ups and downs, find your investments elsewhere; that’s the secret. It doesn’t have to be in annuities necessarily; CD’s, money markets, life settlements, whatever that other bucket may be.

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Tuesday, February 11th, 2014 Wealth Management, Wealth Preservation

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