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Decumulation Roadblock Removal


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Retirement is a new and potentially long chapter of your life.   As 401(k) plans have evolved from a supplemental retirement or capital accumulation plan to the sole retirement vehicle offered by most plan sponsors, sponsors and participants alike are increasingly focused on the decumulation phase—practically speaking, how to make the money last a lifetime.

That means ensuring that this income has the potential to last for your lifetime and to weather rising health care expenses, inflation, and market ups and downs.  First and foremost, you’ll want to make sure your day-to-day expenses are covered and that your income and assets will last for what could be a 30-year—or longer—retirement period.  There are many roadblocks to accomplishing that goal.

Federal Reserve Roadblock.  Retirees and their nest eggs have been hammered by the Fed’s policy. The Fed has said that low rates help the economic recovery. So it argues, in effect, that investors should enjoy the solid stock market returns and that savers should display a stiff upper lip.

Beyond savings and CD rates, the Federal Reserve’s policy is changing fundamentals of key senior financial products.  There is little new to say about the way non-existent interest rates on savings accounts, certificates of deposit, and U.S. Treasury securities have hurt all savers, particularly risk-averse investors.

Market Volatility Roadblock.  The impact of bad markets on a portfolio while you’re saving and investing during your working years may slow down your plans and delay your future retirement date.  Many investors feel that the stock market remains the most attractive place for investors over the long term – beating out bonds and other low-risk investments. However, to earn those higher returns, investors face more volatility.

After you enter retirement, down markets can be devastating, because your ability to recover is limited.  Many older investors simply don’t have enough time before retirement to risk a big loss. Even investors who are confident they can earn superior returns from stocks may reach a point where they want to lock in some of their gains in case markets turn fickle.

Many retirees learned the hard way that it’s dangerous to rely on outcomes that are merely a “best estimate” of the future. Instead, they need to rely on “scenario planning,” where you see if you can survive worst-case possibilities. It also helps to see what might happen if the future turns out to be better than your best estimate.

It might be smart to get some income from annuities that protect you if economic conditions are unfavorable and then other sources of income in the market that would do well if economic conditions turn out better than expected. Guaranteed products — annuities — provide higher retirement income under unfavorable conditions than products that rely on investing retirement assets.

Why do we suggest including a fixed-income annuity as part of a diversified income strategy? It’s straightforward: Fixed annuities, along with Social Security and/or pensions, provide guaranteed income to help meet essential expenses.  In many respects, Social Security payments are like an annuity, although one that has very attractive cost-of-living increases.

A lot of folks would like to have more retirement income that is that safe.  Often, one spouse wants to make sure that annuity payments continue for his life and, should he die, for the remaining life of his spouse as well. Lots of annuity contracts include that provision.

How can you achieve higher interest earnings without putting your hard-earned principal at risk? With a product that offers a minimum rate of return, ties its interest earnings to a stock market index and guarantees that the principal deposit and any interest earnings credited will always be protected – an equity indexed annuity, also called a fixed indexed annuity.

Fixed Indexed Annuities are tied to major stock market indexes and not to the performance of individual stocks or mutual funds, providing complete safety of principal.  Fixed index annuities allow you to share in stock market gains without risking your principal when the stock market takes a downturn.

Since annuities are based on external indexes like the S&P 500, when the markets go up you have the opportunity to share in gains.  If the stock market falls, your contract value will not decrease. Not only is there “zero market-risk” associated with fixed indexed annuities, but when the market goes up and you have a gain in your account, it is locked-in each year and yours to keep! It cannot be taken away, you cannot lose your gain.

What’s more important is that you now have the protection of lifetime income to ensure that your essential expenses are covered throughout retirement. Even in a 0% return market, although their investment portfolio may run out of money, their annuities continue to pay income for their lifetime

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Monday, August 18th, 2014 Wealth Management

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