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Retirement Risk Management

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The main thing to understand with retirement planning is that there are many risks that present problems for retirees,  Risk management is the buzz word for today’s retirees and near retirees including;  Stock Market Risk, Inflation Risk, and Longevity Risk.

No one will be able to tell you precisely how much you can safely withdraw from your nest egg. There are just too many things that can happen over the course of a long retirement—markets can crash, inflation can spike, your spending could rise or fall dramatically in some years.

Stock Market Risk – Retirement is nice in many ways, especially when the stock market has been strong. When we’re making money with little effort, financial success can seem simple.  Our emotions (and Wall Street’s marketing machine) may tell us that recent performance is a good guide to what’s ahead.

The Standard and Poor’s 500 stock index has surged more than 170 percent since bottoming in March 2009. The Standard & Poor’s 500 Index reached the 2,000 mark this week for the first time.  It brings back memories that for a whole decade, the S&P 500 compounded at 18.2% a year, about twice its long-term average. Many people decided that investing was easy — just buy big, popular stocks.

The S&P 500 actually lost about 1% a year from 2000 through 2009, including the reinvestment of dividends.

The real path to stock market success is buying assets and corporations when they are on sale and holding them until they come back into favor and selling them for many times what you originally paid. However, by attempting to time the market, investors often increase their losses rather than avoid them.  Market timing is more speculative in nature and brings on additional risks that may be greater than those it is attempting to avoid. The financial tide can turn swiftly and unexpectedly; momentum can vanish in a heartbeat.

If you panic in a downturn and sell, you will lose. And if you’re retired, it’s harder to recover from that. The value of a stock or bond may rise or fall depending on a myriad of factors.The stock market is a bit like riding a rollercoaster in the amusement park; you may know that the coaster is the biggest, best ride, but plenty of people simply can’t buckle themselves in and take the ups and downs.

Even though Americans feel like they are wealthier today because of the rise in the stock market, please bear in mind that the top 20 percent of American income earners own 90 percent of the market.  The objective is to create a “wealth effect” that will make those who invest in stocks feel wealthier and then decide to spend money and invest in new projects.

However, almost everything seen on TV or read in the financial media is focused on short-term success in trading stocks.  Much of today’s action comes from large institutions and individuals without substantial retirement funds may have not benefited from the recent market rally.

Inflation Risk – Inflation hurts retirees.  You need to realize that inflation will erode the purchasing power of the funds you put aside toward retirement. Inflation averages 3.5% every year which means prices double about every 20 years. The real-world value of $100 has receded over the years, thanks to the steady drip of inflation eating away at the value of a dollar, and that costs consumers at the checkout line, when paying bills.

Longevity Risk – the many medical advances being made every day, we are living longer, and no one wants to run out of money late in retirement.  If you’re a retiree or near-retiree, how can you draw enough savings from your nest egg to live on, yet not so much you run out of money too soon?  The need for lifetime income is huge and growing as life expectancies continue to increase and traditional sources of guaranteed income disappear.

The 4-per-cent rule is as close to a universal law as there is in financial planning for taking income from your investment portfolio. However, it now says that retirees who don’t want to run out of money and are planning for 30 years of life after work should restrict themselves to withdrawing no more than an inflation-adjusted 3 per cent a year of their original portfolio.

If you’re like most people, an initial withdrawal rate of 3% won’t come close to giving you the income you’ll need.  It also falls far short of the aspirations of many avid investors who figure their portfolios can be counted on to produce returns that will be much higher than the measly withdrawals.

Keep in mind that achieving a given rate of return may be tougher than you think.   your chance of running out of money rises.  The question is how much you want to bet on that “probably.

If you’d like to have more income that you can count on no matter how long you live and regardless of how the markets fare, then you may want to at least think about an annuity that guarantees you (and your spouse, if you wish) a payment for life. Because they don’t have to worry about losing principal, little panic-selling is expected.

Overall, Fixed Indexed Annuities are not designed to beat the stock market even though many have from 1999 through 2010. They are basically designed to outperform the fixed markets such as CDs, money markets and bonds.  Investors in Fixed Indexed Annuities face little volatility, even in the bear market for stocks, because of guaranteed minimum return.

All fixed index annuities are tax-deferred with no income tax requirement until withdrawal. This is a definite advantage over many investments like CDs, mutual funds, stocks and bonds when considering a long term retirement investment. A long term fixed index annuity acquisition may consistently outperform CDs, bonds and treasuries.

Reinvesting money that would otherwise be paid out in tax over an extended period of years is always an advantage. In addition, fixed index annuities have several benefits that can be important for retirement planning.

The nice thing is that percentage gains are based on the anniversary reset. So if the market was down 25%, your crediting would start at the new market low. Any percentage gains from that low point would be credited to your account up to a specified amount, usually half or more of the market gains for the new year with no risk of loss to accumulation or principal. This works especially well with flat or declining markets over long periods of time.

When the distribution phase of your annuity starts, you can receive periodic (usually monthly) income payments.  Annuities allow you to hedge the risk that you might inadvertently live too long. An annuity guarantees you a set amount of income for life — or for your and your spouse’s life. It is similar to a pension-type income stream.  By adding a lifetime withdrawal benefit to an annuity, you’ll get income for life—with the potential to benefit from market gains—without giving up control of your assets.


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Thursday, August 28th, 2014 Wealth Distribution, Wealth Management

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