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Steady Flow of Income in Retirement


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Your retirement is more important than just trying to gain as much in the stock market. You need to protect your “nest egg” and annuities should be a big part of your retirement.   As the economic environment changes, so should your retirement account.  Some financial advisors will recommend that you have enough regular income in retirement between social security, pensions and annuities to cover all your basic needs.

The key issue for a retiree or near retiree is having a steady flow of income in retirement and being confident that this contract would meet your income needs throughout your entire life.  The basic idea behind annuity insurance is to substitute cost for security.  With the volatility in the stock market retirees want to know where to park your money if you’re concerned about losing your retirement nest egg in a market meltdown.

Who insures you home, car, health, life, business, children, household goods, jewelry and every other assets you covet? That’s right, an insurance company.  They also manage the money of hard working people who are retirement-minded and want the opportunity to earn a good rate of interest without exposing their money to the ups and downs of the market.

In recent years, and in response to an aging population, insurance companies have developed new products to guarantee you a lifetime income you can’t outlive. In addition you are entitled to a rate of interest linked to a stock/bond market index: if the market rises you have the opportunity to earn an above-market interest rate but if the market falls you get a guaranteed rate of interest that is greater than zero. In other words, you get upside potential with no downside risk.

The worse you can do is get zero interest if the market falls – slightly or drastically – in any given year. If the market heads south and continues going in that direction for the entire term of your insurance-company managed money, the worse you can do is some very low, but positive rate of interest guaranteed by the insurance company. These safe money places are called fixed annuities or index-linked fixed annuities

The simple truth is they are not good for everyone but if you’re tired of risking your money to the whims of the market and are scared stiff that you just might outlive your money in retirement, you need to at least investigate the feasibility of annuities for some of your retirement money.

Besides wanting a steady flow of income during retirement, as we’ve already pointed out, retirees also want the safety net that an annuity provides when investing in volatile markets.   Annuities can be used as wonderful retirement tools and income planning more today than ever before. With all of the crazy economic news in the world, annuities can prove to be valuable in uncertain times.

For example:  The energy sector as a whole just took a hit and the slide in value is uncertain as oil prices fall to levels not seen since the worst of global financial crisis.  This plunge in stocks across the energy sector has sparked heavy selling of energy-related.  Imagine if your retirement was invested in energy, you would be extremely uncomfortable right now.  That’s how the market works, there are no guarantees. What I mean by this is that as I continue to invest in the market, of course, with the market comes risk.

What an annuity will do, is it allow you to sleep better at night, because you now know that no matter how bad the markets get, you will always have the cash flow peace of mind in retirement that comes with owning an annuity.  In baseball terms, you can feel like you’ve hit a solid double with an annuity, and you’re hoping you can now hit a home run or two with the riskier investments outside of your annuity.

Sometimes opportunities presents themselves in ways that don’t require a whole lot of complexity nor hours of research.  An insured annuity is one of those very simple, easy to understand products that complement the fixed income portion of one’s portfolio.

What is Opportunity Cost?  According to Investopedia, opportunity cost is defined as the following: “The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.”

Be mindful of the opportunity cost of trying to time the market.  If you sit for long periods of time in securities that provide negative real rates of return, because you think the future path of interest rates is higher, by the time you finally buy those “real” yields so desired, you may discover that it wasn’t worth the wait.

After all, if you forgo, say, 5% yields for an extended period of time, because you’re waiting for 6% yields, and, in the meantime, you sit in cash earning near 0%, the eventual 6% yield you capture may never be enough to compensate for missing months or years of 5% interest.

When investing for income, annuities are an excellent choice. The income is guaranteed because there is no market exposure. Annuities also offer a higher income rate than many other guaranteed income products, and tax advantages for non-qualified funds.  An Income Annuity option provides you with principal protection by ensuring the money invested will always be received as income to you or as a legacy for beneficiaries.

All annuities have a death benefit just like an insurance policy. If you have invested in an annuity and the annuitant (those that will/are receiving the annuity pay) has an untimely death, the assets will be transferred to the beneficiary that was listed on the annuity. This is ideal for estate planning since the proceeds with pass directly to the beneficiary without delay, expense, and probate!

Income Annuities will provide you with guaranteed, regular income for life. They can be purchased as a single life, based on one person’s life, or as a joint and survivor, based on the lives of two people.  You can choose a payment guarantee to ensure a minimum amount of income is paid from the investment to you or your beneficiaries in the event you die earlier than expected.

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Saturday, November 29th, 2014 Wealth Management

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