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Retirement Reward Without Risk

Retirement was a 20th-century invention, but it’s kind of gotten out of control.  The average American retires relatively early, at 64 for men and 62 for women.  Now, you can spend 40% of your adult life in retirement and are at risk of outliving their money.  Longevity risk: the risk of outliving your money…that is, the risk of running out of money before you do breath.  This is the number one fear of most retirees…and for good reason.

During the retirement journey you’ll be using the money you have previously saved, earnings from your investments, government or private pension, Social Security and maybe earned income, inheritance or gifts. As the years pass the same goods and services will cost more and more as inflation erodes purchasing power. Unexpected emergencies, deteriorating health, bad decisions, rotten luck and sorry investments are also possible. It’s easy to see why the greatest fear of retirement is “running out of money.

Retirement can last thirty years or longer, is the time of life when very expensive medical emergencies may strike or a sudden meltdown of the market could rob you of your financial resources.  If you have your retirement money in a risky place like the stock market and there is a meltdown, you’ll probably suffer a significant loss with no way and no time to make it up.  In fact, if you lose your retirement money because you gambled in the market and lost, there will be no second chance…

Investors track progress with a simple measure: The benchmark, be it S&P 500 or the Dow. If returns exceed the benchmark, you’re succeeding. If not, you’re failing. However, the truth is for an investor to earn the returns of the benchmark, they would have to own it continuously, for years on end, without touching shares and all dividends. They’d have to sit patiently when markets plunged, never selling out of fear, never needing the cash to fund retirement or a house, and never paying an advisor for advice.

How many investors actually behave that way????

For those whose wealth is tied up in the [equity] markets, it’s more like gambling than investing.  Interest income or cash flow on savings is virtually nonexistent, and capital-gains plays in the stock market are thwarted because stock prices are at record highs.  With stocks rebounding from their February lows — though poised for a weekly decline — it’s hard to say whether equities are in a bear market or a bull market.  Many believe the stock market’s major trend is down.

The first wave of baby boomers begin to hit 70 1/2 in 2016 and start taking required-by-law distributions from traditional individual retirement accounts and beginning to withdraw funds from the stock market.  A market meltdown could imperil those boomers’ retirement plans, taking a badly timed bite out of hard-earned balances in their retirement accounts. A loss of 10% in the first 5 years of retirement can shorten a portfolio’s life by 10 to 15 years.

Insurance products are used to complement and balance the risk of an investment portfolio.  Annuities are the new gold standard for investing and provides reward without risk.  There is no guessing; the markets are up, you share; markets are down, you thread water.  The initial fundamental advantage is you have no exposure to market loss.  Gains are locked in and you won’t go backwards from the point that you moved up.

Annuities, can serve a key purpose in a portfolio. Those products guarantee income streams upon retirement.  It can never be outlived, which is a solution to one of the most significant financial obstacles aging Americans face today.  The purpose for investing in insurance products should be to protect the individual from the risk in an investment portfolio – or life in general.

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Thursday, March 24th, 2016 Wealth Management Comments Off on Retirement Reward Without Risk

Retirement Risk Reduction

The stock market is presented as the most attractive place for investors over the long term – beating out bonds and other low-risk investments. However, to earn those higher returns, investors face more volatility.  Before 2015, the stock market rose for six years in a row, despite many hiccups. Even last year, market averages set highs before sliding, and stocks are still in the red so far in 2016.

Given the recent volatility, one can’t help wondering whether the stock market is crashing.  When stock bubbles come to a head, they tend to make wild swings in both directions. In other words, they don’t just suddenly burst — it’s more of a drawn-out, up-and-down process.

This crazy, market volatility is pretty similar to what we see in the middle of a stock market crash. It is extremely difficult for investors to tell whether the market is in a bubble and, if it is, whether that bubble is bursting.

Many older investors simply don’t have enough time before retirement to risk a big loss.  Even investors who are confident they can earn superior returns from stocks may reach a point where they want to lock in some of their gains in case markets turn fickle.

There can be silver linings to a bear market. It might be a good time to shift assets.  If a plummeting portfolio has you headed into the “retirement at risk” zone, “it could be reasonable to bail, to lock in your income and avoid the risk that maybe the market will fall another 10%.  This is a big concern because for the first time in about seven years, investors approaching retirement may be facing one of their biggest financial fears: retiring into a bear market.

Now, retirees have to think about “sequence of returns” risk: If they are forced to make withdrawals early in retirement from a portfolio that is declining precipitously, there will be fewer shares left over to benefit when the market eventually goes back up. That, in turn, raises the risk they could outlive their assets.

To avoid the risk of an ill-timed market downturn, retirement investors should consider using some of their nest egg to purchase an annuity.  By adding guaranteed lifetime income, investors can be protected from future market declines while securing income to cover essential retirement expenses.

A type of fixed annuity called a deferred income annuity has been growing in popularity. It offers predictable, guaranteed lifetime income beginning on a future date the investor selects. As part of a diversified plan, deferred income annuities enable investors to take more control of their personal economy by creating a future stream of guaranteed income now. If you want to maintain your lifestyle, it’s time to lock it in.

One option is to move the money you had in stocks into an annuity.  You give up future upside but you’re also eliminating future downside.  By purchasing a deferred income annuity several years before retirement, investors have the potential to generate higher guaranteed future lifetime income, while reducing some market risk from their overall portfolio during the years before they retire.

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Wednesday, March 16th, 2016 Wealth Management Comments Off on Retirement Risk Reduction

Straightforward Retirement Program

What we’ve seen over the past month is a bear market rally and what the fed does over the next week could mark the end of that. The bull market that celebrating its seventh anniversary actually ended in the middle of last year.

Given the volatile start within the equity markets in 2016, today, the phrase “financial crisis” is used loosely to embrace a wide range of events: stock market crashes, bank panics, sovereign bond defaults, market closings, illiquidity, institutional collapse, and sharp currency declines.

We’re likely to see a period of heightened volatility and it’s a very frustrating environment.  Trying to anticipate what returns you’ll earn on your money after you retire and how your income will match up with unpredictable expenses by necessity requires some guesswork and simplification.

In the past, when rates on savings accounts were typically 4% to 5% and bond rates were in the upper-single-digit percentages.  The current environment is much more of a struggle, because many safe fixed-income alternatives pay far less than 2%.

Bond rates are low, and many see them having nowhere to go but up. That introduces the potential for capital losses in the bond market.  Those who invest in funds to get fixed-income exposure are particularly at risk, because unlike a regular bond, you can’t just hold a mutual fund or exchange-traded fund to maturity and get back your principal.

To compensate, many investors have been accepting higher than normal levels of risk in exchange for finding ways to generate income without having to sell off investments or dip into the principal of fixed-income balances.

There’s a slow-moving time bomb out there, and that’s the gradual retirement of workers in an era where 401(k)-style defined-contribution plans have become dominant, replacing defined-benefit pensions. A new study of the state of U.S. retirement shows that this change leaves Americans woefully unprepared for their non-working years, with resources too meager to uphold their standard of living.

Pensions used to be held by people of modest incomes as much as the wealthy.  The 401(k) revolution changed this.  The timing couldn’t have been worse for switching to a 401(k) system.  The pension has been substituted with a stock plan that was never intended to serve as an adequate replacement.

The new 401(k)’s “were initially viewed as a supplement to traditional pensions.  The 401(k) experiment was a historical accident, never meant to provide complete security for workers. It may sound good to “control your own retirement,” but in practice it just loads risk onto people without the resources to handle it.

Annuities main strength is that it creates a “Personal Pension” income stream by insuring the risk of dying too late. With an income annuity you enjoy peace of mind knowing your income is guaranteed for an entire lifetime. The peace of mind may grow increasingly valuable over time as each of us grows older, we may become less confident managing a “Do It Yourself” approach to creating a reliable retirement income.

The purpose of an annuity is always income, whether you need money now, or in the future.  It can be helpful to think of an annuity as being similar to other types of investment vehicles.  For instance, a CD is an investment vehicle between you and a bank, and a municipal bond is an investment vehicle between you and a municipality.  An annuity is an investment vehicle between you and an insurance company.

Annuities are straightforward, with no potential for agent salesmanship or client misunderstanding – – YOU KNOW WHAT YOU ARE GETTING. Nothing is left up to chance or agent interference. The insurance company in the policy (contract) spells out that exactly how your annuity works. 

Each year, the growth and interest on annuities is credited, locked-in, and protected by the legal (statutory) reserve system of America’s insurance companies. Therefore, principal and interest can grow, compounding. Tax deferral is a big help to investors who currently pay tax on the interest they earn each year.

Guaranty Associations were created by state legislatures to protect life, annuity and health insurance policyholders and beneficiaries of an insolvent insurance company. All insurance companies licensed to write life or health insurance or annuities in a state are required, as a condition of doing business in the state, to be members of the guaranty association. If a member company becomes insolvent, money to continue coverage or pay claims is obtained through assessments of other insurance companies writing the same kinds of insurance as the insolvent company.

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Wednesday, March 9th, 2016 Wealth Management Comments Off on Straightforward Retirement Program

Timing Management in Retirement

The Dow Jones Industrial Average is now officially in a downtrend.  The Dow slumped 254.56 points, or 1.6%, to 15,660.18 on Thursday. The S&P 500 has fallen nearly 12% since last July. Rising volatility this year in stocks, bonds, and commodities has left investors scrambling to figure out what’s going on.

After seeing several hundred thousands of dollars evaporate in a matter of days, both in 2008 and most recently at the beginning of this year. Average everyday Americans who are retired or near retirement — all are genuinely and understandably concerned about their financial well-being and how best to navigate the challenges of the current marketplace.

At the same time, Life expectancies are getting longer. With that comes an increased risk of outliving one’s retirement savings.  If the stock market collapses, so will all retirement plans, so anyone depending on investment income will be unable to pay their bills.  However, Investors are routinely reminded by Wall Street professionals to keep their money in the financial markets all the times.

A “buy and hold” strategy, after all, supposedly guarantees you won’t miss any market upticks, which happen more frequently than market downticks on a historical basis.  Basically however, it takes more than one snapback rally, even a pretty big one, to repair the damage suffered over the past nine months.

Retired and Near Retired are generally less concerned about growth and more concerned about capital preservation.  They’ve already accumulated a sizable retirement nest egg and might prefer the safety and security of high-quality fixed indexed annuities to preserve and protect the level of wealth they’ve attained.  Annuities can help to prevent losing their retirement dollars by providing lifetime income for retirees.

With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the fixed market for higher returns. 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).

Possibility to capture market dips. If you have gains from your index option, that gain is locked in permanently, never to go below that amount.  As an example, if the S&P 500 index goes from 1,800 to 1300 in one year, your index option for that year would not credit any gains, but you would start the next index option year at 1300 on the S&P 500.

A fixed indexed annuity is an insurance product that enables you to participate in the upside of the stock market without exposing your nest egg to its downside.  Investors in FIAs face little volatility, even in the bear market for stocks, because of guaranteed minimum return. Because they don’t have to worry about losing principal, little panic-selling is expected.

Possibly the most attractive provision of a fixed-indexed annuity is the no-loss provision. The great thing about fixed indexed annuities are that they actually do have a guarantee that you can’t lose the money you put in. Any deposit you make or gains that are credited get locked in at various time increments – that’s a good thing people! What this means is that values can only go up, not down.

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.  It makes sense when you consider how well the S&P 500 index has performed historically.

FIAs 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. Maybe it’s time to check out these products.

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Friday, February 12th, 2016 Wealth Management Comments Off on Timing Management in Retirement

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