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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 Comments Off on Steady Flow of Income in Retirement

Financial Prosperity For Retirees

After people retire, running out of money is a constant worry particularly for those who may have been greatly affected by the market swings in the last few years. It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.

The problem with equity investing is that the long-term average, which is higher than the return from bank deposits and saving certificates, masks the ups and downs along the way. It is the nature of equity markets that a few good years are followed by a few bad years.

Retirement investing is a key to your financial prosperity, and 401(k) plans can help you realize your retirement dreams. But many complain about the lack of investment options in some 401(k) plans. The devil is in the details, we are told, and the details are often buried in an appendix or footnote.

It is the unseen things in well-intentioned policies that will have small, incremental, but finally significant effects upon the whole economic body.  There are many different types of investments. Whether you are playing the stock market or you are purchasing a tax-deferrable annuity, you are building a comfortable nest egg that can assist in sustaining your retirement.

The requirement of the typical retired investor is not complex. The need is for an inflation-adjusted income that will grow year after year, without putting the capital at risk. A simple bank deposit or saving certificate would provide the income, but offer no protection from inflation. An equity mutual fund would enable protection against inflation, but provide no income stream. It would also expose the capital to risk.

There are obstacles that retirees are the least prepared for.  Many retirees are ratcheting it down as they get closer to retirement.  Participating in the stock market can give an individual’s retirement savings and income the potential to keep pace with inflation; however, volatility in investment markets can significantly affect retirement income and savings.

A retired person, or for that matter, any equity investor, seeking to benefit only from the good years by cleverly avoiding the bad years is being unrealistic. There is no magical formula that can tell you when you should get in or out of the equity markets. The lack of such precise definition of benefits, year after year, spooks the retired investor.

Americans are living longer and the possibility exists that they could outlive their resources. The cost of care for an unexpected event, or long-term illness not covered by private insurance or Medicare is requiring more Americans to prematurely deplete their assets.

As baby boomers approach retirement, many may find themselves in different economic circumstances than they planned. Recent economic events have taught us the downside of risk, yet careful planning can help soften the impact.  So when it comes to retirement planning, creating a reliable income stream in retirement individuals need both a map and directions.

In the 4½ years since the Great Recession ended, millions of Americans who have gone without jobs or raises have found themselves wondering something about the economic recovery:  Two straight weak job reports have raised doubts about economists’ predictions of breakout growth in 2014.

By the CBO’s reckoning, the economy will soon slam into a demographic wall: The vast baby boom generation will retire. Their exodus will shrink the share of Americans who are working, which will hamper the economy’s ability to accelerate.  There are no documented examples of an economy that had to emerge from a financial crisis while simultaneously absorbing the effects of an aging population.

At the same time, the government may have to borrow more, raise taxes or cut spending to support Social Security and Medicare for those retirees. The economy is trapped by “secular stagnation.” By that, it means a prolonged period of weak demand and slow growth.

History suggests that economies that seem doomed can sometimes enjoy sudden turnarounds and unexpected bursts of energy.  Financial crises do not last forever.  A decade is a long time. But a long time is not the same as forever, unless of course if you are retired during that period.

Social Security and pensions are great sources of dependable income, but most people will need additional stable, lifelong income. Start protecting your future income by the purchase an income annuity when you retire to cover any remaining expense gaps. Through annuitization, these products can provide a guaranteed income stream during retirement that will help supplement Social Security and pensions.

A lifetime annuity remains the mainstay of the retirement income market in the US. It is after all the only product that guarantees an income for the rest of the retiree’s life. Indeed, over 90 per cent of retirees buy a lifetime annuity on the premise of its lifetime guarantees.

In the era of final salary schemes, a lifetime annuity provided the continuation of a salary-related benefit into retirement, and delivered a promise made to the employee while they were still working. It also acted as an insurance product, as benefits could continue to be paid to your spouse no matter how long they lived. An asset allocation between equity and guarantees is required to solve this problem.

A Fixed-indexed annuity, or FIA for short, is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500). EIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

While it’s a lot like investing directly in the stock market, you don’t get the full boost of a rising market. With equity-indexed annuities, the money put down by you, as a purchaser, isn’t invested directly in the stock market. Instead, you are offered a percentage of how much the index gains over a period of time, and a guaranteed minimum return if the stock market declines.

Benefits of the Fixed / Equity-Indexed Annuity

No-Loss Provision: The first and possibly most attractive provision of an fixed-indexed annuity is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the S&P 500.

Interest Guarantees: The next benefit of an fixed-indexed annuity with wide appeal is interest guarantees. Most policies have a cap (the maximum interest rate that can be credited to a policy in a policy year) and a floor (the minimum interest rate that can be credited in a policy year). The cap rate can vary from no cap to a fixed percentage, but the floor is generally zero. This allows the policyholder to benefit from potentially high returns and be guaranteed at the same time that no money will be lost.

Competitive Rates of Return: With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the equity market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.

A good portfolio is well-balanced. It’s looking at things that are market related and things that are not market related. If you cannot stomach the ups and downs, find your investments elsewhere; that’s the secret. It doesn’t have to be in annuities necessarily; CD’s, money markets, life settlements, whatever that other bucket may be.

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Tuesday, February 11th, 2014 Wealth Management, Wealth Preservation Comments Off on Financial Prosperity For Retirees

Market Correction Concerns

The market has been on tenterhooks about when and how (mostly when) the Fed will begin to tighten its monetary policy. And the same people who screamed when the bond-buying began, saying that the Fed should let the economy try to stand on its own two feet, are now fretting the eventual loss of their crutches.

Concerns about an economic slowdown pressured markets.  People who bought a stock at too high a price are looking for greater fools to unload it on.

Market returns and portfolio performance usually involves taking calculated risks with your investment money. Investors that have experienced considerable losses and watched helplessly as their investment portfolios fell to pieces during the last stock market crash, are making much more cautious investment decisions today than ever before.

Common Wall Street myths:

  • Over the long run, the market always goes up. The biggest trick the devil ever played is convincing the world he does not exist. This is the same as the market always goes up. There are 20 to 30 year trends from 1900-2011 that the market was flat. Thus if that was your investment time, you lose.
  • Diversification and Asset Allocation are critical to retirement success – Warren Buffet calls it De-worsification. Being invested in the stock market in different sectors is not diversification.

Today, Wall Street freaked out as The Dow dropped nearly 320 points Friday. The S&P 500 closed down 2.5 percent, and the Nasdaq and the Dow both lost 2.3 percent — the biggest one-day drop in the Dow since November 2011.  The losses come at the end of the worst week for stocks in recent memory.

The stock market is a collection of countless transactions. The stock market doesn’t have an opinion. The stock market doesn’t have feelings. Sometimes stocks go up and sometimes stocks go down. When times are good, stocks as a whole tend to go up—bull markets. When times are bad, stocks as a whole tend to go down—bear markets.

According to Dr. Maslow, people have a hierarchy of needs. The most basic need is that of security. Money may not buy happiness but it does buy choices and with choices comes freedom. If you were scheduled to retire in 2014 then you see your 401K portfolio lose have of its value or more. Think about that impact for a moment. You spend 40 years working and saving your money and it takes all of three weeks to lose half of that savings.

Financial markets as well as the economy are in a correction. This correction will remain a part of the investing horizon for the foreseeable future.  We all know that markets go in cycles, and that eventually we will see other downturns, so maybe it’s time to revisit whether you need to transfer some portfolio risk you are currently shouldering. The recent downturn in the stock market has caused many investors to look “outside the box” at alternative investments.

The tougher explanation is that today’s stock declines came out of a hovering cloud of bad sentiment caused by several negative economic data points that arrived over the last few weeks. Every investor should understand that this is not to be considered empirical fact, and that the trajectory of the market often flies in the face of what one might expect, regardless of whatever opinions or data is out there.

Earnings continue to disappoint: News from Corporate America wasn’t helping either. After last year’s big rally, investors are looking for signs the economy will be strong enough to keep the bull market going but so far, this earnings season has been sluggish.

Swimmers that find themselves in trouble usually end up treading water to save themselves or conserve energy to survive. That same thought process can be applied to an investor navigating through raging markets and an unpredictable global economy.

The obvious goal should be for your investments to not “drown” and go down in value if the financial waters turn against you.  I can tell you from personal experience that the dot com crash and the 2008 Financial Meltdown did not affect my annuities yet some of my stock market investments went in the toilet. My guaranteed portion went unharmed.

Implementing an annuity treading-water strategy can provide the peace of mind, contractual guarantees and flexibility that you might be looking for while letting the economic dust clear. For a portion of your portfolio, treading water might make a lot of sense.   This is a great way for them to preserve their principle and lock in guarantees along with the option for life time income benefits which they are not currently able to do with their traditional investments.

Financial gurus who are in favor of mutual funds will pooh pooh this idea of annuities because the guaranteed returns may be lower than what the market returns in a CERTAIN year.  If you consistently tell people that annuities are poor value and that shopping around is difficult, you will find that they develop “analysis paralysis” and decide that the simplest choice is simply to stick with their present position. This is – of course – exactly the opposite of what people should do and reinforces the negative perception of the industry.

Once you have determined that you want to take some risk off of the table, then there are some basic steps that you can take to transfer that risk from your current portfolio. For example, you can determine how much income is needed to cover basic lifestyle expenses, and use the combination of current income streams and the possible addition on a lifetime income annuity to solve for a specific contractual number.

In essence, you are contractually solving for the foundational part of your portfolio like lifetime income or legacy so that you can spend all of your time on maximizing returns on the non-guaranteed part of your investment holdings.  This is a great way for you to preserve the principle and lock in guarantees along with the option for life time income benefits which you are not currently able to do with their traditional investments.

When the basics are contractually guaranteed regardless of how long you (and your spouse) live, your investment decisions won’t be clouded or distracted.  If you knew that an adequate lifetime income stream was in place regardless of how long you (and your spouse, if applicable) lived, would that sense of security make you a better overall investor? Maybe, and it’s at least worth considering.

A correctly placed fixed annuity strategy can solve for those lifetime income, legacy, or long term care transfer of risk situations. Knowing that these life events are contractually taken care of can free you up to focus solely on managing the part of the portfolio that still involves risk.

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Friday, January 24th, 2014 Wealth Management Comments Off on Market Correction Concerns

Black Swan Events – Annuities with a Twist

Clearly, Americans are anxious about their retirements — it’s almost like many see the handwriting on the wall and they don’t like the message it’s sending.  Low interest rates mean that fixed-income investments generate little return, while many investors are wary of volatility in equity markets. Will Rogers was quoted as saying, “The best way to double your money is to fold it over and put it back in your pocket.”

There is a term in the financial planning industry known as a “Black Swan”.  It refers to an unforeseen event, which causes instability, or lack of confidence in the market.  It could come in the form of a terrorist threat, the bankruptcy of a large company, an industry, or even an entire country.  Regardless, we try as an industry to foresee these events.  Try as we might, they can blindside us and set a well-planned retirement back on its heels.

As millions of baby boomers approach retirement, having a stable and secure retirement income will be a key issue for them.  Years ago, back when your folks were retiring (say, early 1990’s), we in the financial planning industry liked to do calculations that assumed you could reasonably plan on about an 8% rate of return.  We would plan on withdrawing no more than about 4%, and you would be fine!

The moment you begin to withdraw principal, you run the risk of outliving your money.  You can minimize this risk with your withdrawal and investment strategies, but there is always be a risk that your money will expire before you do.

The principle of “buyer beware” is a smart one to follow when seeking financial advice.  Successful investing has more to do with avoiding inappropriate investments and building a diversified, low-cost portfolio than trying to identify the next “hot” investment.  Traditional securities portfolios in retirement work well only if you receive positive returns during the first full 1/3 of retirement WITH NO SIGNIFICANT SETBACKS.

You may encounter financial advisors, experts, and analysts who may sound very convincing about their “save” withdrawal strategy.  They don’t really know for sure that it will work, however, and they can’t absolutely guarantee your money will last as long as you do.

The problems of high fees and conflicts of interest with which go hand in hand are rampant throughout the investment industry. The unfortunate reality is that these firms in the brokerage, banking and insurance industries have no legal fiduciary obligation to their clients that would require them to place the interests of those clients ahead of all others, including their own.

This is the same system that allows their representatives to sell high-commission, high-margin and inappropriate investments to unsuspecting and trusting investors. It is the responsibility of the investor to understand the distinction between the two and select the one who will better serve them.

The complexity of financial planning makes people look at simple strategies for investing and money management as lifesavers.  An overall financial strategy to help you avoid going broke in your retirement years: Don’t spend your retirement savings! Instead, you should think of your savings as “retirement income generators,” or RIGs, that deliver a monthly paycheck that lasts for the rest of your life. The goal then becomes to spend no more than the amount of your monthly paycheck.

There are essentially only three ways to generate a monthly paycheck from your retirement savings: These RIGS each have their advantages and disadvantages; there’s not one magic bullet that works best for everybody. Most important, each type of RIG generates a different amount of retirement income:

RIG #1 – Invest your savings and spend just the investment earnings, which typically consist of interest and dividends. You never touch the principal. Interest and dividends, typically pays an annual income ranging from 2 percent to 3.5 percent of your savings, depending on the specific investments you select and the allocation between stocks, bonds, cash and real estate investments.

RIG #2 – Invest your savings, and draw down the principal cautiously so you don’t outlive your assets. We call this method “systematic withdrawals.” The well-used “Four Percent Rule” is based on the assumption you’ll need income for 30 years and that you have substantial investments in stocks with an investment goal of outpacing inflation. Systematic withdrawals, typically pays an annual income from 3.5 percent to 5 percent of your savings, depending on your investments and how worried you are about exhausting your savings before you die.

Any withdrawal strategy is based on making assumptions about how long you will live and the investment returns you’ll experience during your retirement.

1. If your retirement investments are actively managed and incur investment expenses of more than 50 basis points (0.50 percent), over the long run you may fall short of the net rates of return that justify the 4 percent rule.  Today, extremely low bond yields and interests rates near “zero” are being problematic for new retirees.

2. If you’re married, both you and your spouse are healthy and you retire in your mid-60s, there’s a good chance that one of you will live for more than 30 years.

If you fall into one of the following two categories, you may want to consider withdrawing amounts of less than 4 percent: The clearest solution, though usually the hardest, is to reduce your withdrawal rate during bad markets. If either of these statements applies to you, you may want to consider payout rates on your retirement income of 2.8% or 3%. On the other hand, you may want to consider a higher withdrawal rate if you’re willing to accept the chance of running out of money before you die, or if you’re willing to curb your withdrawals down the road should your investments sour.

You would do well to recognize that systematic withdrawals require the most ongoing attention of the three different ways to generate retirement income.

RIG #3 – Buy an “immediate annuity” from an insurance company and live off the monthly benefit the insurance company pays you. Immediate annuities, can range from 4 percent to 6.5 percent of your savings, depending on the type of annuity you buy and your age, sex and whether you continue income to a beneficiary after your death.  Annuities function similarly to defined-benefit plans by paying set amounts in regular installments. The accumulation of annuity contracts would even out interest rate fluctuations.

New hybrid annuity products “annuities with a twist” combine the best features of systematic withdrawals with the guarantee of a lifetime retirement income.  With this type of annuity you have the guarantee of a fixed lifetime income with the upside potential for growth in both your retirement savings and your retirement income if the stock market does well.   You also have the guarantee that your savings or income will not decrease if the stock market crashes.

Unlike conventional immediate annuities, however, you can cancel the annuity and withdraw the remaining part of your retirement savings at any time after you’ve invested in the products, even after your retirement income starts.  Finally, any unused funds at your death can provide a financial legacy.

These features come with a cost, as there is approx ¾% charge, however, that is equal to or less than the fees in mutual funds and the stock market.  You get something with this feature in that it guarantees that you will never run out of money.  A big difference that can make all the difference!

We recommend dividing your retirement savings between RIG #2 (systematic withdrawals) and RIG #3 (annuities), you’ll realize the advantages of each while mitigating the disadvantages of both.  The annuity will provide you with a paycheck that’s guaranteed to last the rest of your life, and the systematic withdrawals method offer flexibility and access to a portion of your retirement savings.

These methods are all designed to generate a lifetime retirement income, no matter how long you live. Achieving this goal will help you relax and enjoy your retirement. These methods might also provide protection against inflation, another important goal for many people.

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Tuesday, July 9th, 2013 Wealth Distribution, Wealth Management Comments Off on Black Swan Events – Annuities with a Twist

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