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Completely Different Skill Set

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While many older Americans find themselves looking at a longer lifespan than prior generations, they should also anticipate additional costs — in living expenses, health care and other financial outlays. Concern over retirement income far outweighs investors’ interest in growth today.  This, coupled with expectations of longer life expectancy in the U.S, underscores the need for more flexible retirement solutions that take into consideration life’s unpredictability.

Americans are saying their retirement savings strategy must include products and choices that offer guarantees, even though equity markets have performed well this year.  Concerns about covering basic expenses and outliving money in retirement are clearly driving more interest in solutions that can address these topics while still protecting against market losses.

The combination of high yields and low risk is an oxymoron. Fatter yields and higher returns always come with greater risk, even if that risk isn’t apparent. The “investments” bought and sold take many shapes and sizes from shares of individual stocks, mutual funds, options and more with each offering a dazzling array of choices.  When it comes to the portion of your savings that you must have ready access to and don’t want to put at risk, you need to play it safe.

Stocks are less risky for young investors, who have years to overcome bear markets, than they are for retirees, who depend on their investments for much of their income. There will always be volatility in the investment world. As you are accumulating retirement assets, volatility can work to your advantage when properly understood and managed.

But, when you decide it’s time to retire and become responsible for creating your own paycheck from your savings, volatility can be one of your biggest challenges.  Investing for accumulation takes a certain skill set, as well as a great amount of patience and time.

Investing for retirement income requires a different level of understanding and a completely different skill set. If you believe the market is not potentially hazardous to your retirement well-being, please study the American stock market movements over the past 20 years.

Diversification may help reduce, but cannot eliminate the risk of investment losses. There is no assurance that by assuming more risk, you are guaranteed to achieve better results. Some believe an effective retirement strategy called the “Age-In-Bonds” formula is a great guide.

The strategy reduces your equity allocation by one percentage point a year. A 25-year-old, for example, holds 25% in bonds, and thus 75% in stocks, whereas an 80-year-old holds 80% bonds and 20% stocks.

The theory behind this rule is simple and intuitive: Stocks are less risky for young investors, who have years to overcome bear markets, than they are for retirees, who depend on their investments for much of their income.

Many in the financial press create the impression that putting more money into dividend stocks is an acceptable way to generate extra income now that bond yields are so low. Granted, bond yields are anemic. But none of that means that dividend-paying stocks are less risky than bonds. Stocks that pay dividends are still stocks, and thus far more volatile than bonds.

But the point is that dividends or no, stocks have a much bigger downside potential than bonds. So by all means include dividend stocks as part of the stock allocation in your portfolio. But don’t let anyone sell you on the idea that dividend stocks can be a substitute for bonds.

As a starting point, the safest approach is for an investor to build a portfolio that throws off enough principal and income to cover the investor’s expenses. One way to do that, for those who have enough assets, is to buy an inflation-adjusted annuity with payouts that match projected spending.  This provides a safe portfolio dedicated to essential living expenses from a risky one.

For retirement peace of mind, buy yourself guaranteed income. There’s actually a lot of truth to this statement. Research shows that retirees who get a monthly check for life from a traditional pension are more content than those who have the same level of wealth but only a 401(k).

With defined pension plans becoming increasingly rare, a fixed index annuity with a lifetime income rider for consumers who want to start building retirement income that is protected from market losses and has the potential to grow before and after withdrawals begin.

If you would like more guaranteed lifetime income than Social Security alone will provide, consider putting a portion of your savings into an annuity. Then invest the remainder of your nest egg in a mix of stocks and bonds that can provide additional income, plus long-term growth.

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Tuesday, December 2nd, 2014 Wealth Management

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