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A Retirement Shield Safety Net


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Retirement investing today isn’t the way it used to be–at least the way it used to be in the near past. Let me ask a very simple question. When you predict the future are you right more often than when you analyze the way things are today?

With the market becoming increasingly more volatile who can predict where it’s going to go?  Shockwaves from collapsing oil prices continued to reverberate through markets Tuesday, hitting stocks and currencies closely linked to commodity prices.

In fact, this market has become pure lunacy. It would make more sense for the S&P 500 futures to go higher as price down, not lower.  It’s just funny how convoluted and upside down we can get things sometimes. If you have been viewing this as oil prices are coming down, more money in the consumer’s pockets around the world… this is a good phenomenon.

You have to be beyond stupid to wonder how something that puts so much money into peoples’ pockets could take so many stocks down with it when it occurs.  Investors will have to wait until stocks are so low that they are no longer impacted, and then the sanity will return.

I don’t know about you, but I’m certainly right more times when I take a shot at the way I see things now as opposed to the way I think they should be. When investing your retirement funds isn’t it better to have more accurate trades than guessing which stock SHOULD be going up, or IF the market SHOULD go up tomorrow?

One of biggest mistakes individual investors make is that they invest based on what they think should be happening versus what is. For instance, based on what is currently going on in Europe, few can understand why the stock market in the U.S. is going up.  Investing can sometimes feel like gambling at a Las Vegas Casino. You buy the hot fund, it goes up, then crashes down, causing you to lose money.

Many of you have learned to trade based on hopes and expectations, the way we think things should act in the future. It might be a stock that SHOULD be going up based on someone’s interpretation that the value of that company is far greater than the current stock price. Or maybe we think that the company has some technology that might be the answer to cancer, or some other great breakthrough.

Investing based on what you think will happen in the future puts you “at risk”.

The 24-hour news channels are great at coming up with simplified conclusions that explain why the market went up or down on any given day, but the truth is there’s no way to know for sure. Financial markets are very complex. They are globally integrated. There are times they may trade on fundamentals and days when it is all based on what is going on globally.

An indexed annuity investments are designed to mirror the performance of a financial index, such as the S&P 500. Investors can chose how closely their annuity follows the index’s performance, by selecting a participation rate for the annuity.

The value of your annuity will rise and fall according to the movements in the market. What makes the S&P 500 index s unique is that it doesn’t presume to have greater wisdom than the collective market, but instead tries to channel the markets’ wisdom to your advantage.

Contrast that to the many mutual, hedge and other types of actively managed funds which are run by money managers, whose sole aim is to beat the general market’s yearly performance. They do so by buying and selling individual stocks or other investments in their own unique combinations they decide upon.  What you don’t hear about is that nearly all fund managers will fail horribly at consistently beating the market.

The reason why we save money to use when we retire is simply to maintain our financial independence when we cannot work anymore. When we have money saved for our retirement, we do not have to depend on others to support us and help us meet our needs. When we get an annuity, we assure ourselves that we will have something to live on for as long as we need it. A true safety net for retirees.

With an index annuity, the interest rate fluctuates depending on the index it is linked to. An index annuity may not guarantee you the kind of returns that you could get by trading in the stock market. But then again, it shields you from the volatile nature of the stock market which has destroyed many a people’s lives because of its uncertainties.

Another concern is being able to lock in interest credits. You had success in the market in the past years, however, you don’t want to go backwards due to a market downturn.  However, the insurance company guarantees you a minimum rate of interest and has a no loss provision, thereby eliminating the risk of the stock market.

The annuity will usually track the index in a bull market; however, the issuers of the annuity also guarantee a minimum annual interest rate to avoid losses when the index is in a downturn.  The basic insurance feature embedded into annuities offers a measure of protection for investors against market downturns.

A popular kind of index that the annuities are linked to by most insurance companies is S & P 500. The rate of interest payable to the customer is calculated by taking into account the value of the concerned index on a day to day basis.

The fixed index annuity (FIA) allows for multiple options to accumulate retirement money – then offers a couple more ways to access that money to spend. New benefits focus on protecting your principle, while allowing for higher interest credits than traditional fixed annuities.

Think of this process as two phases working at the same time. The ‘collection’ phase and the ‘payout’ phase. During the collection phase, your principal deposit earns either a fixed rate or an indexed rate. The rates are reset every 12 months and guaranteed for one year.

You need two Guarantees for your retirement income. Your monthly income checks must stay the same every month never decreasing, when interest rates decline. Your monthly income check must keep coming to you for your entire life, no matter how long you live. Most financial vehicles you have looked at, or have money in, cannot give you these guarantees.

Only annuities can guarantee your monthly income check, could be the same every month depending on the settlement or income option selected. Your income cannot decrease if interest rates fall. Your monthly income check keeps coming to you as long as you live.

Your annuity income cannot run out. Also, if you die prematurely, your annuity can be guaranteed to continue at the same monthly amount to a named beneficiary if a specified period is chosen.  If you want an investment that can offer you safety of premium, flexibility, tax advantage, accessibility when you need it and a chance to have a lifetime income, an indexed annuity can provide that service.

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Tuesday, December 16th, 2014 Wealth Management Comments Off on A Retirement Shield Safety Net

Steady Flow of Income in Retirement

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

Preretirement Standard of Living – Guaranteed

Most retirement plan goals are designed around maintaining your preretirement standard of living — already a big challenge.  There are many difficult challenges faced by people every day — growth is uneven, security can sometimes be a dream, and hopes aren’t always fulfilled.

Most people feel more pain from unexpected economic losses than they feel pleasure from unexpected economic gains (a phenomenon behavioral scientists call “loss aversion”). That means that you may want to place more emphasis on the unfavorable scenarios than on the favorable scenarios to make sure your income would be sufficient even during bad economic times.

Some people mistakenly think that once they stop working their only choice is to draw down on their savings until they run out of money. But pre-retirees and retirees can still make changes that can help their savings last longer.  This occurs through the peace of mind you will experience knowing that you’re putting a plan in place to maintain the financial, emotional, and your physical well-being.

Lifetime Guaranteed Income is a major void in many pre-retiree and retiree’s retirement income plans.  People are living longer,  and with life expectancy increasing, retirees should plan on having their savings last another 25 to 30 years, so they need more.  Because rates of returns have fallen, they need a bigger pile.

In retirement, your money needs to continue to grow in order to fund what could be a 30-year retirement. Investments come in all shapes and sizes; stocks, bonds, mutual funds, ETFs, real estate and other alternative investments such as gold or other commodities.  Some of these investment vehicles come with more risk than others.  The key when structuring your investments for retirement is to ensure your investing based on your risk tolerance.

Which approach is best: relying on guaranteed, fixed income like Social Security, counting on the interest and dividends off bonds and stocks, harvesting the hoped for growth in the stock market or guessing correctly a safe withdrawal rate, or using some of your money to buy a guaranteed income annuity?

What does investment risk really mean in retirement?  These days a popular method of income production involves a calculated guess at how much one can safely withdraw monthly from a balanced portfolio of stocks and bonds. The balancing act comes when trying to be consistent and safe, while providing adequate income.

With safe government bonds now producing pitifully small yields, the overall return you can expect from a balanced portfolio of both bonds and stocks has shrunk accordingly.  As a result the 4-per-cent rule should be replaced by a 3-per-cent rule.  Most experts these days say withdrawing about 3 percent annually is about right. Much more and you run the risk of running out of money during retirement.

Stock index funds are performing superbly as the bull charges ahead.  Contributing to the rush into index funds has been the unusually strong performance of Standard & Poor’s 500-stock index recently.  The S&P 500 crossed above the psychological 2,000 line for the first time.

However, let’s look at the actual numbers. The S&P 500 over the last 15 years has yielded an average annual return of only 4.5%.  Add in the effects of inflation and that 4.5% translates to only a 2.2% increase in real purchasing power.  But don’t look for them to protect you when the market stumbles.  Index funds are designed to give you all the upside of bull markets and every bit of the downside of bear markets.

The scale and speed of the rally has raised questions about market valuation and some worry stocks will get hit once the Fed winds down its ‘quantitative easing’ bond-buying program.  In our view, the market is getting close to the top and we would perhaps expect growth for another 12-18 months, but certainly not at the rate we’ve been seeing.

Markets have been able to reach the target in part due to the Federal Reserve’s policy of injecting liquidity into the market through its bond-purchase program to keep interest rates low in recent years. After supplying huge amounts of liquidity to the economy during the Great Recession, the Fed is now cutting back on its purchases of securities, and it is at least beginning to consider when it will start pushing interest rates above the near-zero level where they have been for the past few years.

Social security is more like a government annuity. A certain amount of income over and above what you can count on from Social Security would be nice. So to create additional monthly income that will last as long as either of you are alive, secure a guaranteed income annuity. For a specified lump sum of money, an insurance company will guarantee a specific monthly income amount as long as either spouse lives, even past 100. The upside is that you can never outlive your income.

Insurance can provide two main benefits in retirement. Insurance products such as fixed annuities can be used to turn your lump sum savings into a reliable income stream in retirement for life.  The other important function of insurance is it works to protect the money you do have saved from the high-costs associated with injury, sickness or death.

Lifetime Guaranteed income. The inflation-adjusted annuity, along with an immediate fixed income annuity, provides the highest amount of income at 30 years. The reason is that the amounts of retirement income generated by these two annuities aren’t impacted by investment performance.

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Tuesday, August 26th, 2014 Wealth Management Comments Off on Preretirement Standard of Living – Guaranteed

Retirement Income Certainty

One-fifth of the U.S. workforce has passed or is nearing retirement age, according to the Bureau of Labor Statistics. The biggest question they have is, ‘Will I run out of money?’ and ‘What can I do so I don’t run out of money?’ It’s not only getting to retirement, it’s living through retirement. Retirement income management is all about making sure your retirement savings provide enough income for your needs, and that you don’t outlive your assets.

Retirees need a snapshot, usually for a specific need or purpose.  At its core, the components needed to plan for retirement are fairly clear: what are your guaranteed income sources during retirement and what are your variable sources? Similarly, what will your fixed expenses be and what will vary?

Longevity is a big factor, indeed, health care advancements have increased life expectancy dramatically over the years. The longer you live in retirement, the greater the likelihood that you will need to use health insurance or arrange for long-term care. With increased life expectancy, there comes more time spent in retirement. You have to be calculating the numbers with an expectancy that men will live until they’re 90 and women until they’re 95.

People want to feel less intimidated about planning for retirement. However, according to a recent TIAA-CREF survey, more Americans spend less time planning for an IRA or 401(k) investment than choosing a restaurant, flat-screen TV or tablet computer.  Investment returns also have a big impact on retirement capital needs. The higher your expected or potential rate of return, the less you need to retire. Likewise, a conservative investor needs a much bigger retirement nest-egg than a balanced or aggressive investor.

Many people who are approaching retirement or have recently retired turn to a professional to seek help planning for that event and managing their income. If you’re looking for that kind of help, you need to shop around to find someone you like and trust. Be aware that each advisor and firm has a different approach when it comes to how they plan for retirement and how they help clients in retirement ensure that they have adequate income to last the rest of their lives.

Advisors can be a problem in that retirees or the near-retiree usually presumes this person is honest and competent and has integrity and character. However, mis-representation can occur when a broker purposefully makes untrue representations of material facts or omits material information. This can happen in any security in any account, but this problem is commonly found with low-priced, speculative securities because of their increased risk.

In theory, everybody’s supposed to read everything right to the bottom line and you take all the risks associated with it if you don’t.  We also have our jobs to perform. We can’t sit there and read prospectuses all day. Ambiguous wording means some fail to adequately explain that banks can bet against the very notes they’re selling or suspend new offerings or take other actions that can affect their value.

If you rely on your broker, make sure the investment meets your objectives; and make sure you understand and are comfortable with the risk, costs and liquidity of the investment. Never invest in a product you don’t understand.  Discuss fees with your investment professional. These may include sales commissions, mark ups or mark downs, administrative and management charges, and costs associated with the sale or redemption of an investment.

All mutual funds charge fees. The higher the fees you pay while owning a mutual fund, the lower the return generated by your fund shares. Even a small percentage difference in the fees among funds can add up to a big difference in the dollars you can make. It’s important to be aware of all the fees associated with a mutual fund investment. A 1% difference in investment returns doesn’t seem like much, but it could mean a retirement fund that is almost one-quarter larger over the course of a typical retirement.

Tax-deferred retirement plans—including employer-sponsored retirement plans such as 401(k)s, 403(b)s, individual retirement accounts (IRAs) and annuities—provide income based on the amounts you put in them, the investment choices you made and the way those investments performed.

We don’t think the markets are necessarily going to crash, but the current high valuation makes it more likely that normal returns over the coming years may be lower than what they have been in the past.  While taking on that additional equity risk may cause your portfolio some added volatility, many believe that step is necessary for those unwilling or unable to save dramatically more just before retirement.

Our view is to encourage people to pool their longevity risk, which is sensible given that it is cheaper to hedge risk collectively.  Essentially, many advisors seem to have forgotten that annuities are pensions. They are the principal source of the retirement income certainty that most retirees crave.  Fortunately, with ordinary fixed annuities, you can provide level income for your maximum lifespan for about 40% less than it would take to provide the same level of lifetime income security using noninsurance vehicles.

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Thursday, April 24th, 2014 Wealth Management Comments Off on Retirement Income Certainty

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