Inflation risk

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Retirement Opportunity and Optimism

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2014 is called the “Year of the Boomer” as the last of the baby boomer generation will be turning 50 (those born in 1964). Known as the generation of opportunity and optimism, many boomers are worried over retirement—and for good reason. Retirement planning is an essential part of financial planning.

While millions of people strive to achieve their own vision of retirement, the chaotic investment markets of the past 20 years left many more tired than retired.

A horse in the wild is a preyed-upon animal — that’s why its eyes are placed on the side of its head. With its excellent peripheral vision, the horse takes in a wide range of sights that can cause it to move erratically.  That’s why, in times like these, when things seem to be moving up and down at the same time, it’s important to put on those blinders.

The amazing run that stocks have had over the last several years has certainly been exciting and fun for those of us who own stocks.  In retirement, you need to plan for how much money you will need for every year you are alive – but just as you don’t know how long you will live, you cannot know what rate of return you will receive from your various investments.

Surprising economic news, war or terrorism, and other unexpected events disturb the markets sense of control and often send it in a tailspin.  Despite the Dow hitting pre-crash highs, companies reporting positive earnings, and the financial media saying we are looking at the “beginning of a new bull market,” the stock market is on the verge of another historic collapse.  This is definitely the biggest stock market bubble in modern history.

  • Stocks are currently very expensive compared to their 10-year average. While stocks typically have a price-to-earnings ratio of 15, they now sit at a ratio closer to 23. That means stocks are priced 53% higher than their 10-year average, which should worry any investor.
  • Investors are extremely bullish on the market right now. The reading is nearing a 10-year high, and most of us know from experience what happens when market sentiment is too far one way or the other; a snapback occurs. If the “herd” is this bullish, it’s generally a good idea to be very cautious.
  • As the markets have rebounded over the last few years, investors have become complacent. They have priced nearly all risk out of the market, and it will only take one scary event to send volatility higher and investors fleeing the markets.
  • The last two times the market climbed this high, a severe correction took place. The first two advances were over 100%, and then followed by a crash of roughly 50%. With the latest rally topping 100%, it is very likely that the market is setting up for another drastic correction.

Most investors know that current levels of share prices are unsustainable; They are aware that share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing (QE), not because of the strength of the underlying real economy.

It’s different this time,” are known as “the four most expensive words in the English language.” Because, too often, when investors and analysts try to justify high prices by arguing that “it’s different this time,” it turns out not to be different, and the investors and analysts end up losing their shirts.

However, stock market investors pretend to believe – or even have to pretend to believe – in those feeble and ephemeral stories because they need those stories to justify (to themselves and their clients) staying in the stock market, given the low returns everywhere else.

Stock market declines significantly affected the retirement plans of most of these individuals. In retirement, you need to plan for how much money you will need for every year you are alive – but just as you don’t know how long you will live, you cannot know what rate of return you will receive from your various investments.

Many retirees hope to gain income from their savings or keep pace with inflation by investing in financial vehicles that offer high rate of returns. The problem is that – as a general rule – investments that offer high rates of return are often the riskiest.

Boomers are creating a new life stage, post-retirement and are going to live another 30 years after they retire-they have to plan for that entire span. Modern medicine and technology have positively impacted American life expectancy rates.  People are now living longer and too many retirees are outliving their money—a problem we’ve only recently faced.”

Similar to life expectancy, the cost for health care has also seen a steady rise. Health care expenses, both foreseen and unexpected can wreak havoc on retirement savings.Some retirees find it difficult to keep up with the cost of medication, long-term care and various other entities they need to maintain their lifestyle. Additionally, simple miscalculation of either withdrawal rates or inflation can cause detrimental harm to retirement savings if used for payment purposes of health care costs.

Making “better decisions” is not as scary or as confusing as some people think it is.  The chance for a successful retirement depends on starting to save/invest early in life, being consistent, taking advantage of any employer matching plan, maxing out contributions when possible, eliminating debt, avoiding unnecessary risks with your nest egg and planning for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.).

My number one rule of investing is to do whatever is in my control to avoid the “big loss.Many emotional, irrational retirement investing decisions occur when you get close to your big loss point and the feelings of fear and regret sneak up on you.

Saving enough for retirement is not always the final solution. Creating ways to generate sustainable income when unexpected costs arise is just as important.To ensure that there would be a regular flow of income post retirement, you need to start your retirement planning early. They should look at how much they can prudently take from savings and investments every year, add it to known income such as Social Security, then create a realistic budget that stays within that amount.

It is difficult to find just the right way to allocate your assets. But, it is critical to understand that you should try to plan on having enough guaranteed income to cover your basic needs should something happen to make the financial markets collapse.

A pension plan, also known as a retirement plan, is an annuity with attributes of capital appreciation.  Historically, on retirement most people bought an annuity, which pays out a guaranteed income until you die.  We just need to be careful not to encourage people to take risks with their pension savings when they aren’t really in a position to take those risks.  It is important to remember that annuities do provide that security of a guaranteed income for life.

Given concerns about market volatility, rising retirement costs and longer life expectancies, many individuals are looking for a retirement savings vehicle that can help them grow and protect their assets, while also ensuring their retirement income will rise and last for life.  Income Annuities such as Single Premium Immediate Annuities (SPIAs) or Deferred Income Annuities (DIAs) are used to capture the benefit and value of longevity protection within a retirement strategy.

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Saturday, March 22nd, 2014 Wealth Management Comments Off on Retirement Opportunity and Optimism

Addressing Retirement Risks

Life is full of unexpected events that sometimes leaves us feeling uneasy, especially when choosing a retirement program.  Creating a retirement strategy includes where you are going to place investments and for what period of time, and how you address the risks of retirement.  The major risks facing seniors today are:

  • Market risk – the ongoing volatility in the stock market.
  • Inflation risk – the erosion of one’s purchasing power.
  • Longevity risk – the increase in life expectancy.
  • The majority of seniors feel that outliving one’s assets is the greatest risk they face.

I once read that retiring without contemplating how long you might live is like taking a trip across the desert.  If it’s going to take a day, you might need a gallon of water.  If it is going to be a week, you had better have several gallons.

  • Do you have longevity protection and your retirement income guaranteed to last the rest of your life?
  • Does your retirement income plan have the potential to grow so you can keep up with inflation?
  • Can you withdraw your savings in case of emergencies or for special spending needs?
  • When you pass away are any unused funds available for a legacy to your children?
  • Is your income protected from stock market crashes or increases in long-term interest rates affecting your bonds portfolio?

Most people want to maximize the amount of retirement income and satisfy as many of these goals as possible.  Unfortunately, you get what you pay for when it comes to addressing these goals.  The more goals you want to meet, the lower your initial retirement income will be. Before long they’ll open their eyes to fingers pointed in all directions—the class attempting to find true north. And that’s when the ice will begin to melt.

If you start withdrawing retirement income too early, withdraw too high of percentage, or don’t invest with principal protection in mind, you may spend down your initial retirement income too soon.  As you are aware, interest rates have been trending downwards even as the market is gaining ground, all these forces – demographic and economic – pose an interesting challenge to retirees.

The dramatic shift from the wealth management phase (gathering and growing assets to the income management phase (preserving and distributing assets) it is important to recognize that if you want a guaranteed retirement you have to have a guaranteed account.  Many retirees’ now need to draw down assets to generate a reliable, secure income stream that will allow them to maintain the lifestyle they so desire during their retirement years.

To maintain a lifestyle that we have come accustomed to, we must consider a solution that should not only be conservative in nature, but also designed to maintain a good rate of return to provide an income stream that one cannot outlive.

Risk-averse investors may look for safe havens like CDs, annuities or guaranteed income products during times of financial upheaval. Withdrawing income, of course, is a different matter.  You should be emotionally prepared for volatility and the occasional crash in advance. Even if your personal financial circumstances shouldn’t compel you to sell at a bad time, you still don’t want to make poor decisions out of fear.

You’ll need to establish what is most important to you about your income stream before choosing your retirement option. If you still want to retain some control over your retirement income, consider both an annuity and investments in the market. This way you’ll have the best of both worlds—a simple source of regular income and a portion of your portfolio over which you have greater control.

If you’re looking for a steady stream of income later in life, then you should invest in an annuity.  An annuity is a financial product that’s sold by financial institutions to individuals. You make an investment into the annuity, then the annuity pays out a stream of payments to the individual at a specified amount of time, whether that be weeks, months, years, or a different amount of fixed time.

Annuity Products are built for those looking for balance and peace of mind in their investment strategy and offers tax deferred growth like 401k’s, IRA’s and other tax deferred plans.  The benefits, some of which include taking advantage of market gains but you’re not affected by market losses.  Since the interest earned is “locked in” annually and the index value is “reset” at the end of each year, future decreases in the index will not affect the interest you have already earned.

One of the most powerful benefits of an indexed annuity is the annual reset feature. This is valuable whether the indexed market goes up or it goes down. If the index market goes up, the client’s account value receives the market linked growth as interest credited to their account value.

If the indexed market goes down, the client receives zero interest that year. While this may appear to be a bad thing, the annuity client lost no money compared to a person invested in the market who may have lost money. In this situation, the value of an annual reset is two-fold: 1) the clients account value is protected and does not decrease and 2) the beginning index value for the following year is the lower deflated market point. This lower beginning index point will be valuable if the index increases the following year.

While everyone wants to increase their retirement savings from year to year, having a no growth year can actually be a win-win because you receive the value of the primary reason you probably chose the fixed indexed annuity in the first place…the contractual guaranty of protection from loss of account value in a down market.

An indexed annuity can be a valuable resource to have as part of your retirement savings plan. Having the powerful benefits of Fixed Indexed Annuities with the annual reset interest crediting design and linking the annuity appreciation rate of the annuity account balance to a stock market index.

Your downside is protected, yet you are open to some upside participation,  The Index does exactly what it is supposed to do… gives the Contract Owner the opportunity to accumulate value based on the appreciation of the S&P 500® Index, without the risk of loss of Premium in years when the S&P 500® is negative.

If you had bought an equity-indexed annuity just before the collapse of the stock market instead of investing in the stock market itself, you would be very happy right now!

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Monday, October 14th, 2013 Wealth Management, Wealth Preservation Comments Off on Addressing Retirement Risks

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