Longevity Risk


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Annuities Provide Income Certainty


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Retirement planning has changed a lot over the last few decades.  Pension plans became very costly for businesses. So, the private sector has largely transitioned to 401(k) plans for its workers instead — which has resulted in plenty of new challenges, including the need for Americans to take charge of their investments as well as the rate of their retirement savings.

The power of compound returns is a basic tenet of investing, but it’s still shocking to see how it works especially with the extremely low interest rates offered at this time. The problem with the current interest rates is that it’s unfair that people who’ve saved every penny, paid off mortgages, and everything they were supposed to do and they were going to retire with their beautiful nest egg and now they’re getting one-eighth of 1%.

What makes resistance to the stock market is that seniors who bought at a certain level – only to see the market fall from there.  Investors need to consider the sequence of returns in retirement, because if their portfolio is all invested in equities and they take money out of their portfolio while the market is down that can rapidly accelerate the depletion of their assets.

Standard retirement investing advice has you invest heavily in stocks early in your career and then slowly adopt a more conservative strategy going forward. One simple rule involves taking your age and subtracting it from 100, and that gives you the percentage of your portfolio you should invest in stocks.

Longevity risk is a growing concern for today’s workers and retirees…many Americans are facing the likelihood of outliving their resources. Increased longevity has had a profound impact on how one must plan for retirement.  Nevertheless, many are not financially prepared for these extra years of life.

One of the big reasons retirees may end up spending more than they thought they would is because of how much they unexpectedly have to spend on health care — that’s up nearly 30% over the past decade — on health care throughout retirement, even though they have Medicare health coverage.

For those who don’t have the backstop of a traditional defined-benefit pension plan, however, annuities could be an attractive way to re-create the kind of guaranteed retirement income most Americans enjoyed in decades past.  Annuities make it so you can still have a pension.  The basic feature of an annuity that makes it attractive to savers is the promise of a guaranteed income stream for the rest of their lives.

That kind of certainty is hard to replicate with other investments, which can fluctuate in value or income potential over time.  In its purest form, an annuity is taking a portion of my assets and turning it into a lifetime income stream   That’s an incredibly appealing idea to people who don’t have the guarantee of a pension plan.

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Thursday, April 21st, 2016 Wealth Management Comments Off on Annuities Provide Income Certainty

A Great Standby for Retirees!

Being fully funded for retirement means that you can safely lock-in your retirement spending goals without taking market risk.  The worst-case scenario is that later in retirement the retiree ends up being forced to make substantial cuts to their spending, which could make their final years quite worrisome and difficult.

Seniors need an increase in interest rates to restore your savings accounts to relevance.  Income inequality is “the defining challenge of our time and a zero interest rate for seniors contributes to inequality.

Seniors on fixed incomes have to get returns somehow, and junk bonds and riskier stocks have been the answer for many.  But the idea of a system in which the returns to frugal saving are zero with certainty, while the returns to investing money in risky high-yield stocks and bonds — a form of gambling — often pays off, is troubling, to say the least.

Seniors in particular, will be better when the Fed abandons its low-interest-rate policy, despite some initial turbulence.  Low interest rates and high stock market valuations both suggest that we should expect lower investment returns in the future.  Over the past 13 months, the S&P 500 has seen two corrections of more than 10% and is down about 3%.

The trouble is we’ve lived through an amazing bull market in all … asset classes.  Investors are betting that bull market is going to continue indefinitely.  That violates a fundamental principle of finance.  You can’t assume that you did well taking risky investments in the past [and] that you’re going to get the same returns taking risky investments in the future.

Millions of Americans who saved diligently over the years have been crying out for relief. Many have found themselves struggling, thanks to rates that have remained near 0% for years.  If you are living off the interest your assets generate, a low-interest rate environment obviously means less income to live on yet the cost of everything we purchase is going up, requiring more income to meet expenses.

Any time you go to the store, eat at a restaurant or fill up at the gas station, there’s a chance you’ll end up paying more for the same products than you would have paid the day before.  We’re all living longer. And most of this longevity can be attributed to leading more active, healthy, and smoke-free lifestyles, as well as advances in medical treatments. But just because we are living longer doesn’t mean we’re going to remain healthy throughout our entire lifetime.

Few consumers need to be reminded that costs on everyday items are rising: They see it at the checkout. Health care expenses in retirement can be significant.  The reality is that medical expenses may be a very real (and substantial) cost for retirees, especially with us all living longer.  But whether it’s medical care, prescription drugs or food, senior citizens’ wallets are being hit particularly hard, and at a time when Social Security isn’t rising. Recipients got no raise for this year.

Annuities are a great standby for retirees – Annuities can provide peace of mind. Annuities are a type of insurance product that guarantee regular payments (at a either fixed or variable rate) for a designated period or until your death, even if you turn out to be a centenarian and laddering can be done with annuities,.

Fixed annuities do deliver the guaranteed lifetime income as an option you can exercise plus you retain the flexibility and predictability that is needed for the longest and most expensive journey you’ll ever take: retirement.  Check out fixed annuities and see if they’re suitable for your retirement needs.

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Tuesday, April 12th, 2016 Wealth Management Comments Off on A Great Standby for Retirees!

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

Roadblocks to a Safe, Secure Retirement

As an investor moves into retirement, their financial priorities will change. Their attention will turn to generating income from investments. The attitude towards risk for the investor should also change, and in general they will begin to move towards lower risk investments. Preservation of their principal is also important to retirees so that they have enough savings to last throughout their lifetime and perhaps their spouse’s lifetime.

There are Roadblocks to accomplishing a safe, secure retirement. You have to squint to see the interest rates paid by bankers; stocks up big one day and down big the next; dividends from blue chip stocks are not guaranteed and neither is their favorable tax treatment; safe bonds pay tiny returns; investment real estate is for the brave; gold, silver and other precious metals are a crap shoot; get rich quick schemes are crazy if you want your money back.

In the past pension plans were differentiated from other types of retirement plans in that employers were committed to providing a certain monetary level of benefits to employees upon retirement.  Gone are the days when you could basically rely on a combination of your employee pension and your Social Security benefits.  The fact that Employers have shifted from traditional defined-benefit plans to defined-contribution plans means workers will have to take responsibility for planning for retirement.

Retirees and working adults are increasingly responsible for making and understanding sophisticated financial decisions involving investments, diversification, retirement and money management.  401(k) money is generally invested in mutual funds and mutual funds are composed of stocks and bonds. Since stock prices have been violently, and predictably, waxing and waning in recent months, so has the value of your 401(k) account.

Not to worry, you say, because this is your retirement money and there is lots of time to recover from market downturns. True, unless you’re in the red zone right before or after retirement.  We judge our retirement money by how big it is (how much) rather than how long it is (years it will last). Rather than focusing on “how big” let’s think about “how long”.

The likelihood of the average American outliving their retirement savings is become more and more of a possibility.  The greatest fear of most retirees is running out of money before they draw a last breath. This is called longevity risk and is probably the most overlooked aspect of retirement.

What can you do to protect your 401(k) assets if you’re scared stiff that a major market downturn will ruin your retirement?  The best way to sleep well at night is to know that your “must have” expenses are covered.  If you’re interested in a guaranteed income for life that you cannot outlive regardless of what happens to the stock market, interest rates or real estate prices, the insurance industry has come to your rescue.

Retirement annuities are exactly the investment vehicle that is required to help retirees make this transition in financial priorities. Retirement annuities offer them an income stream for life. One of the most credible options of retirement income planning is to give consideration to various annuity plans that are very useful for this particular financial purpose.

Here are some basic tips and information that would give better insight over the choice of right kind of annuity that would comply with best possible retirement income planning –

  • Whatever be the type of annuities, they are akin to the pension plans except the fact that annuities are more receptive to inflation.
  • One of the striking benefits of annuities are that they provide an inflow of funds for entire lifespan. The amount put in during the accumulating stage will be rendered back regularly along with the interest that has been accrued over all through the years. It is for certain that annuities will pay funds to the policy holder as long he/she is alive, even if it is for 120 years.
  • Annuities are the most preferable option for retirement income planning since it also comes along with death benefits. In case of the untimely death of the annuity holder, the accrued assets, and its consequent benefits, will get transferred to the nominated beneficiary. Hence annuities provide not just income to the annuitant during his life time but also provide death benefits to policy’s beneficiaries.
  • When it comes to payouts, annuities offer more than one choice. Its various payment choices are – payment for rest of annuitant’s life; lump sum payment of funds; periodic delivery of funds (monthly, quarterly or yearly); and systematic allocation of funds.
  • One way the annuities are little less lucrative than other retirement income planning programs is the charging of surrender charges. Surrender charges refer to the mandatory rule of insurance company that demands money to be kept in annuity plan for at least 7 initial years. But this feature is not as negative as it appears. Retaining of investment for 7 consecutive years is not a major issue for a retirement plan.
  • There are guaranteed options that don’t involve out guessing the market. The first is an income annuity purchased from an insurance company that guarantees you a set income for life – including your spouse’s life if you choose and also inflation protection can be included.

All these suggested points clearly indicate the annuities are the best option to be taken up as income option after retirement.  If you want retirement peace of mind and no financial worries, a guaranteed lifetime income deserves a look.

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Friday, December 18th, 2015 Wealth Management Comments Off on Roadblocks to a Safe, Secure Retirement

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