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Safe Place For Your Retirement Nest Egg


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When the stock market goes up one day, and then goes down for the next five, then up again, and then down again, that’s what you call stock market volatility. In layman’s terms, volatility is like car insurance premiums that go up along with the likelihood of risky situations, such as if you have a poor driving record or if you keep the car in a high-theft area.

Market volatility makes it hard for people in the real economy to plan ahead. There are some concerns about how the U.S. economy will fare now that the Fed is no longer going to be adding billions of dollars in liquidity to the markets every month through the purchase of Treasury bonds and mortgage-backed securities. So the Fed’s next challenge will be to figure out how to raise interest rates gradually so it does not jeopardize the economic recovery — or freak out the financial markets.

Recent market swings have many retirees and pre-retirees seeking safe places to put away what’s left of their nest egg. Because double-digit losses can take a serious toll on retirees’ assets, the financial security many people anticipated enjoying in retirement may be compromised.

Unfortunately, because of this weeks recent economic turbulence, most equity-based investments have experienced a significant drop in value. For most investors, market volatility is a fact of life. Stock prices fluctuate from day to day, and markets ebb and flow over time along with the economy and business cycle.

Those saving for long-term goals can usually overlook temporary volatility in the interest of long-term gain. But for retirees, who increasingly rely on their investments to fund their living costs, market volatility can mean the difference between living comfortably and just scraping by.

In fact, retirees are particularly vulnerable to market downturns, especially in the early years of retirement, because of their dependence on portfolio income, their limited investment horizon, and their need to make sure their savings last throughout their retirement.

Positive returns early on can mean a lifetime of financial comfort, while early losses can mean running out of money in the midst of retirement. Unfortunately, the timing of market losses and gains is something that we cannot control.

During the great depression a few years ago, many investors lost a significant portion of their retirement savings. Those who were unlucky enough to be on the brink of retirement — or worse, those who were recently retired — found themselves making radical adjustments to their retirement plans in order to get by.

As a result, many retirees are looking for the safety net provided by annuities.  No matter how the financial markets perform in the coming years, a retiree can have peace of mind from knowing his/her lifestyle is financially secure because of the income provided by a Guaranteed Lifetime Income Annuity.  In addition, since the payout is guaranteed, a retirees’ retirement income is safe from future stock market swings and can never be exhausted.

When investors research current annuities today, what they are likely to find is that there are a large number of optional features that are now available as additional features on the annuity product. These options, often referred to as riders, allow annuity holders to access some additional benefits that are not offered within the main annuity product.

The riders are usually known as Lifetime Income Benefit Riders. These riders can be added to a Fixed Indexed Annuity for a small annual cost of approximately 0.45% of your Contract Value.  An income rider is an optional add-on income benefit for a fixed indexed annuity that (once started) provides a guaranteed lifetime income stream…even if your account balance falls to zero.

And you earn an enhanced rate each year you don’t take any distributions and defer commencement of the guaranteed lifetime income benefit. This enhanced rate is most often called the ‘roll-up rate’. Roll-up rates can range from 5% to 8% per year for a compound accumulation, or 10% per year for a simple accumulation. These roll-up rates only apply to a separate and hypothetical income account value.

The income account value is not real money. You can’t access it, and it only exists until such time as you terminate the annuity or rider, or start your lifetime income benefit. With deferred annuities like indexed annuities that have income riders attached to the policy, the accumulation value and rider value are typically a separate calculation. The difference between the two is that the income rider calculation can only be used for income.

You can’t peel off the interest, transfer that amount, or get to the total in a lump sum. An easy way to remember how this works is to draw a line down the middle of a blank sheet of paper. The left hand side of the ledger is the accumulation value. This would be the index option value for indexed annuities. The right hand side of the ledger is the income rider calculation that is for income only. Two separate calculations with two separate contractual rules.

Fluctuations in the market may cause your asset mix to become too heavy in stocks — which could expose your retirement nest egg to damaging, even irreversible, setbacks when you are on the verge of retirement.  Although market volatility is a normal part of investing, it can pose serious challenges to investors, especially those entering or already in retirement. Market declines in the early years of retirement can dramatically increase the probability of running out of money in later years. Income riders do have their place when planning for future income or what I call “income later.”

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Wednesday, December 17th, 2014 Wealth Management

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