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Retirement Crash Insurance

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In addition to the usual risks facing investors – inflation, market risk, economic risk, and so on – there is a new risk to confront.  Actually, it’s not new, but it has been given name: the longevity risk. When planning for retirement, you want to insure that you have enough money to cover your living expenses for every year you are alive.

The problem is that you have no way of knowing how long you will actually live. The longevity risk is the good news/bad news that modern health care has extended the average life span, which is the good news part. The bad news part is that many of us may outlive our retirement plan.

Baby Boomers in general are living longer. Thanks to modern health care, for a couple retiring in their early 60s, odds are that one of them will live 30 years. This means they likely will be spending more money in retirement and opens up the possibility they could outlive their money. The idea that we can work for 30 years and support ourselves for 40 – the arithmetic just doesn’t work.

Once folks get the notion that half of people will outlive the average life expectancy of their age group—they could die before 80 or after 80—they need to revisit their financial planning time horizon. Our longer life spans mean that we must have vastly more retirement assets than previous generations. The good news is that there are actions you can take and financial insurance products to help you insure you do not outlive your assets – no matter how long you live. Lifetime Annuities are a good way of guaranteeing your income.

Market risk is another huge concern of near retirees or retirees.  When the economy is struggling, it is a common remedy for the Fed to lower interest rates. Lower interest rates make it cheaper for consumers and companies to borrow the money needed for a new house or a new manufacturing plant. While that’s a good thing, it makes earning a decent return on your money difficult. Bond rates, bank accounts and other savings options typically pay low interest when money is cheap to borrow.

There are always better potential returns in any market, but you must be willing to take more risk. Taking more risk with your investments in an uncertain economy is, well, risky. The stock market is notoriously unpredictable. The one thing investors know for sure is that taking a nap during a bull run can be costly. When the market is on a strong bull run, many investors want to believe it will continue indefinitely in an upward direction.

They have no idea why the market is climbing or why it is destined to crash like the previous rallies did. So if they continue to blindly invest now, they will find the stock market a better place to lose a fortune than to make one.” Stocks go up and stocks go down, sometimes dramatically. You don’t want to have your retirement fund mainly in stocks when the market decides to tank.

Investing in stocks is like driving a car on a crowded road.  You learn that some conditions are more risky than others – bad weather, heavy traffic and so on. Your best bet is to slow down, unfortunately not all drivers learn this lesson and suffer the consequences. When you are near retirement, you cannot afford a catastrophic loss. An accident (big market reversal) can cause damage that the older investor may not have time to recover from.

Corrections, pullbacks, or whatever you want to call them are a natural part of the market cycle. If you are closing in on retirement or facing some other financial need, these market swells can be devastating. The market works on a rigid risk-reward basis. If there is little risk to the investor, there will be a lower potential reward. Investments that offer an extremely high potential reward invariably come with a high level of risk. For the investor, this means if you are after the big returns, you must be prepared to suffer more losses than rewards.

Active trading – is a guaranteed losing strategy for almost everyone who tries it. If you want to try your hand at active trading, plan to spend a lot of time studying the market and how it works. Also plan to lose a lot of money before you gain enough experience to profit. Active trading is really a full-time effort for most people, which leaves little room for other activities (like earning a living or enjoying retirement).

You might be wondering: Why not just invest in an S&P 500 fund? Well when the market swings, S&P 500 fund investors will be the first ones headed for the door, with the program traders that short the S&P chasing them out. We got our first clue with the “taper caper,” and we want to mitigate that risk.

When there is too much money in the stock market, it can be a warning sign that things are about to change. New money coming into the market means investors who have been holding cash investments (CDs, bonds, and so on) are jumping into equities. Like any market where there are more buyers than sellers, prices shoot up until professional investors began pulling their money out of the market and values crash.

One of the key issues facing every investor is to find the right balance of risk as opposed to gain. If you play it safe, you get back minimal returns, with some pre-specified interest. If you go for high profit margins, the risk factor is something that you learn to live with.

Don’t put all eggs in one basket.  Lots of volatility in the equities markets coupled with low credited rates and declining interest rate spreads on traditional fixed-rate products makes this is an ideal time for indexed annuities. Fixed Indexed Annuities are for consumers seeking to eliminate the risk of losing their principal or cumulative returns and [who] are focused on guaranteed income.

The stock market has posted record-breaking gains over the past several years, but now many are now beginning to doubt its sustainability, and are recommending you consider “Retirement Crash Insurance” before everything collapses. This little-known strategy will allow you to stay in the market, but in the event of a stock market collapse, you get the protection when you need it.

Faced with these opposing current, the insurance industry has come up an innovative solution in the form of fixed indexed annuities, which give an investor the best of both worlds – A percentage share in profits, if any, from investments in the stock market, coupled with the security of a guaranteed minimal amount.

While it’s a lot like investing directly in the stock market, you don’t get the full boost of a rising market. With fixed-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.

The returns from these annuities are based on the increase in the stock or equity index, such as the S&P 500. If stocks go up, you get a share of the profit. If the stocks fall, you won’t lose any money, since your contract assures you minimal returns of principal amount plus pre specified interest (usually 1% to 3%). In effect, you have a chance of making a profit, but you are not liable to bear any losses.

The risk of investments being wiped out at the stock market is taken entirely by the company.  The silver lining here is that you only have to worry about profit, and not the loss, unlike traditional stock market players.

Why FIAs? Because they can have the following characteristics:

  • 100% principal protection (your money will never go backwards due to negative returns in the stock market).
  • Positive gains in a stock index are locked in every year (minus dividends).
  • A guaranteed rate of return Indexed annuities come in many flavors. The annuity grows tax-free and generates a guaranteed minimum rate of return each year, often 2 or3%.
  • A guaranteed income for life you can never outlive (without having to annuitize). Indexed annuities with an annuity income riders are designed to provide safety of investment, predictable, guaranteed, lifetime income and peace of mind to people who are worried about running out of money in retirement.
  • A long-term care benefit – One way to avoid spending a lot of money directly on a long-term-care policy while still getting its benefits is to buy an annuity policy with a long-term-care rider, usually 200 percent or 300 percent of the face value of the annuity.

In conclusion: Cash flow is your life blood in retirement. It is what pays the bills. Not your net worth. Not the number on the top of your statement. Cash smooth’s out cash flow. The more uncertain your cash flow, the more cash you need to have. With more people entering retirement and the average life span of individuals getting longer, the focus of retirement planning is changing from merely accumulating wealth and managing assets to managing risk and creating a predictable income.

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Tuesday, March 11th, 2014 Wealth Management

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