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Golden Years Financial Security

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People want three things from retirement; income that grows with inflation, security of income till death and protection from stockmarket fluctuations.  To plan your retirement, the retiree needs to know three main things when allocating their money. How long will they live? What will be the impact of inflation? What will be the returns from “risky” assets such as equities or property?

The financial realities of our world are changing. More and more people need to rely on their own investments for income during retirement. The assets from which you expect to create a vital stream of income during your retirement face risk from economic turmoil, interest rate uncertainty and market volatility.

Americans are anxious about their ability to live out their Golden Years with a measure of financial security. Those fears, unfortunately, are more than justified.  In years past, middle class Americans maintained their standard of living in retirement through three major sources of income: Social Security, defined benefit pension plans and defined contribution individual savings accounts such 401(k) plans.

These days, however, a large portion of the workforce lacks access to, or is not participating in, retirement plans, making future retirement security prospects “challenging at best.  And as time goes on, people will become more dependent on their Defined Contribution (401) pots and thus the impact of making the wrong decision will be all the greater.

Total portfolio value does not pay one bill nor can it be eaten. A monthly statement with nice total portfolio gains does not and never will pay the bills without selling the very assets that are continuing to pay you on a regular basis like clockwork, period.

With about 10,000 Americans retiring each day, a growing number are leaving the workforce without pensions, with modest Social Security benefits or inadequate individual account balances. Factor in skyrocketing health care costs and the picture becomes even more alarming.

If you’re wondering whether you’ll have the money you need when you’re ready to retire consider this.  For an upper-middle-class couple age 65 today, there’s a 43% chance that one or both will reach at least age 95.  Living longer is a good thing, of course. But there’s a downside—increasing longevity may mean the end of retirement as we know it.

Problem is, a long lifetime in retirement is a huge financial challenge. Most people can’t save enough in 40 years of working to support themselves for 30 or more years of not working.  To afford a longer life, Americans will have to rethink their savings and withdrawal methods.

Even if people understand the rules of the system, they may still be misled into thinking they can beat the risk-free rate (what the annuity represents) without risk. Many income seekers were failing to diversify away from equities, which would create problems if the stock market should suffer a correction.

Doubtless, there will be retirees who end up investing in worthless Canadian silver mines or Bolivian condominiums that offer 20% a year. But many more may end up paying annual expenses of 2% of more on funds that may not even beat annuity rates.  They may also fail to understand the impact of those charges.

While annuities remain the only investment product to guarantee a fixed income for the life of the investor.  We suggest using only a portion of your portfolio to buy an annuity—you might aim to cover your essential expenses with a guaranteed income stream, which would include Social Security.

Match your essential retirement expenses with your guaranteed income sources, and you’ve gone a long way toward building a more secure draw-down strategy—without relying on any rules of thumb. A secure financial future is about more than just reaching a destination.  Longevity investing raises the appeal of guaranteed streams of income, and annuity payouts will become more attractive as boomers retire and face a 30 plus retirement.

Often, people may be thinking about annuities framed in terms as a gamble on the possibility of a long life, rather than as a risk reduction measure aimed at improving that possible long life.  With your income guaranteed forever you can rest assured that your retirement will be safe and secure. If you invest in a way that, no matter what, your basic income needs are covered you never have to worry about the markets ups and downs ever again

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Wednesday, March 4th, 2015 Wealth Management

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