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Preserving Financial Resources

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As traditional pension plans become extremely rare and life expectancy increases, one of the biggest sources of retirement insecurity is outliving your money. Statistically, an average 65-year-old male will live to be 84, while the average female will reach 86. These are average statistics. That means one half will live even longer so you have to cover for roughly 20 to 30 years after retirement.

Retirement planning is probably the only aspect of life in which longevity is considered a risk, and in this context, the risk is that you get the timing wrong by spending your last dollar long before you die. You can reasonably budget for living expenses, but longevity and health care costs are wild cards.

No matter how well you invest up until the point that you retire, you can still have a less than satisfactory retirement if you don’t handle your money well.   Those who live a long time after going broke may very well regret pursuing a strategy designed to destroy — rather than build — their wealth.

Most retirement planning strategies are centered on trying to preserve financial resources for as long as possible.  One of the problems with spending all your resources before you die is that you don’t know how long you are going to have to live with the decision.

That’s where deferred income annuities come in. They’re a valuable tool for creating an income distribution program that is very similar to now-scarce defined benefit pensions, traditional plans that paid you a fixed amount based on your salary. With a deferred income annuity you can preserve your investment capital and make sure that you have a steady income for the rest of your life — no matter how long you live.

As bond yields, savings account rates, CD rates and other traditional sources of income have plunged toward zero, retirees have seen the ability of their assets to generate income all but disappear. This exacerbates the risk of spending your money too quickly, because with low bank rates it will take more savings to generate the returns you need.

While investment in the stock market is considered to be a capital investment in our productive economy, it very seldom is. If you are able to purchase new stock directly from a corporation that will use that money to expand their productive capacity, then you are investing capital in our economy.

But when a stock is sold the second, third and so on… times, the new owner is not investing in that corporation. The vast majority of stock trades are done between one investor-speculator and another, trading places between would-be owners and those who would rather not be owners.

As far as our productive economy is concerned, these dollars serve no useful purpose. They create no jobs, build no factories, nor do they feed or shelter anyone, except stockbrokers and speculators. The taxes paid on gains are offset by the deductions taken on losses.

The following generation will be too small in population and earning capacity to bid up prices and produce a profit for the boomers to retire on.  The generations following the Boomers are going to have their income taxed heavily to pay the Social Security and Medicare for the Boomers and thereby will not have the pocket money to buy into IRA’s and 401K’s; causing those markets to fall catastrophically in value and bankrupt many Boomers.

Consider also that most 401K plans are not invested in industrial stocks and bonds; rather they are only speculating on the profitability of a mutual fund company, i.e., the stock you own and will need to sell at a higher price to have retirement income is your investment firm’s stock, and no other. Since your fund managers must buy and sell stocks and bonds, etc. to make a profit, similar to all other mutual funds, you can only come out a winner if other 401K speculators come out losers.

The Boomers will either suffer losses that will destroy the value of their retirement investments, or they may be forced to keep their capital tied up in owning stocks and bonds and only receive relatively small dividends, without ever being able to recover and spend their invested capital.

The cover-your-basics retirement income approach aims to match your fixed expenses with fixed sources of income. Retirees should use an income annuity to cover any gap. Purchasing an annuity’s fixed income option gives you peace of mind, knowing your lifestyle will be relatively stable and not depend on the whims of an inherently volatile market. Life annuities remove the uncertainty of living a very long time (longevity risk).

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Thursday, February 19th, 2015 Wealth Preservation

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