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A Great Standby for Retirees!

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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!

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

Retirement Risk Strategy

In retirement, most people rely on a combination of social security, retirement plans and personal savings income. There are many key concerns of retirees’ about the myriad financial risks related to retirement, at the top of mind for many is the risk of outliving their wealth.

In most cases, investing is not a sure thing — it is more or less like a game – you will never know the outcome of the game until it has been played and a winner has been declared. When you play almost any type of game, you should have a strategy. Investing isn’t any different – you need an investment strategy.

The strategy in investment is basically a plan for investing your money in various types of investments that will help you meet your financial goals in a certain amount of time. Each type of investment contains individual investments that you must choose from. A clothing store sells clothes – but those clothes consist of skirts, dresses, shirts, pants, undergarments, etc.

Stocks, bonds and annuities are all excellent retirement savings vehicles. Depending on an investors’ time horizon and risk tolerance, each has unique advantages. Stocks have the greatest growth potential, bonds provide a level of stability and income, and annuities offer guarantees that neither stocks nor bonds can provide. In the world of investing there are many different investment vehicles and strategies but they can be split into a couple of broad categories.

Retirees who invest their savings in other assets, such as stocks, bonds or funds, can potentially earn higher returns, but run the risk of outliving their wealth. This might occur due to a financial market downturn, poor investment choices or living longer than expected.

Stocks are high risk.  This is because such investments have the potential to return excellent profits but there is also a raised risk of losing your total investment. To do well in stock investing you need to have considerable knowledge of the investment vehicle or vehicles that you are using. You also need to understand the basic principles such as when to collect profits, when to cut losses and how to analyze the market. You also need the emotional strength to apply these strategies as required (this is often the most difficult aspect of active investing).

Bonds have limited earning potential because their long term value is known at the time of purchase. If you’re looking for big rewards on your investment, you’re not likely to hit the jackpot with Bonds. When you invest in Bonds, you do so knowing the maximum payout your investment can generate. With current bond yields low, interest rates lower, and the economic outlook cloudy at best, in this low-rate environment we feel that that the bond portfolio returns are likely to be fairly puny going forward, we’re inclined to expect significantly elevated levels of volatility in the bond market.

Mutual Funds – The sad fact is that the vast majority of mutual funds underperform the average return of the stock market. Some simply pick bad stocks. Others pick stocks fairly well, but not well enough to compensate for the costs of the fund. Remember, fund shareholders have to reduce their returns by whatever costs are imposed by their funds. In addition to fees, there are four other pitfalls mutual fund investors have to watch out for:

  • Dubious management. Given how many funds there are, not everyone can be above average. Many mutual fund managers have proven no better at picking stocks than the average nonprofessional, but charge fees as though they are.
  • No control. Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of somebody else’s car.
  • Dilution. When mutual funds own too many holdings, even insanely great performance by their best ideas gets watered down when you look at their overall performance.
  • Buried costs. Many mutual funds specialize in burying their costs and in hiring salespeople who do not make those costs clear to their clients.

A key threat to retirement security is longevity risk, the risk of living longer than planned and exhausting one’s assets.  Longevity risk, the risk of living longer than expected, heightens a retirees’ need for lifetime income. This risk is substantial: 23% of couples aged 65 will have at least one member live past 95. The retirees who live the longest face a heightened risk of outliving their wealth.

They can buy lifetime immediate annuities to hedge the risk of living so long that they exhaust their assets during their lifetime.  What makes annuities both unique and significant is that they are the only financial instruments available today that, like Social Security and pensions, can provide a lifetime income regardless of how long a person lives.

Annuities can offer retirees peace of mind as well as a means of boosting their current income. One way clients can accomplish this is to consider making immediate annuities part of a well diversified retirement portfolio. Annuities are the only financial instruments available today that, like social security and pensions, can provide an income for life. thus, annuities can offer clients added peace of mind.

Twenty five years ago, Social Security and defined benefit pensions supplied more than half of retirees’ income, but that number has been shrinking. Retirees are increasingly responsible for generating income from their own assets, and immediate annuities can be a very efficient way to generate a pension-like solution from retirement savings.”

While retirees shouldn’t annuitize all of their assets, income annuities offer unique qualities as an asset class when mixed into a broader portfolio of stocks and bonds.  Putting about 20 to 25 percent of retirement income portfolio into an immediate annuity can dramatically reduce a client’s risk of running out of money.

Annuities can generate more stable lifetime income and greater potential inheritance for heirs at a given risk level when compared with a portfolio comprised of traditional assets.

Investors who incorporate income annuities can realize:

  • Reduced income risk. You can’t run out of money, even if you live well beyond life expectancy.
  • Greater capacity to bear risk in the rest of a portfolio – Because income annuities are not correlated with market swings, they can smooth out overall performance.

A retiree might, for example, allocate 30% of his or her wealth to an annuity, while investing the remaining 70% in other assets. By so doing, he or she can gain the longevity protection and regular income that annuities provide while allocating capital for other purposes such as future liquidity needs or bequests. This possibility is one unappreciated by many individual investors, who too often view immediate annuities in isolation.

An income annuity offers an interesting way to insure that living expenses can be met in retirement. First, estimate total monthly expenses, and subtract expected Social Security and any other guaranteed income source, such as a defined benefit pension. The gap amount is what you could consider filling with an income annuity.

Income annuities will be one of the single most important investment products over the coming decade. Most products can only offer dividends, interest and capital gains, but an annuity has that fourth component, mortality return. The reason for this is simple: someone who purchases a lifetime immediate annuity is exchanging the use of his or her capital after he or she dies for a higher rate of return during his or her lifetime, earning what are known as “mortality credits.” There is no need for the retirees to hold bonds. SPIAS are like super bonds with no maturity dates and which boost retiree returns with mortality credits.     This trade-off may be worthwhile for retirees who need to generate higher retirement income than is available from other lower-risk investments.

The risk is that you die ‘early’ and made a bad deal – but you’re dead, so you don’t care! Those who live on get the extra gravy. Since most people are approaching retirement without enough money, this will be one of the best options for not running out.”

Given the recent economic climate, immediate annuities are becoming a good option for an increasing number of investors. For one thing, fixed immediate annuities are a relatively safe way to take some of your money out of stocks in a volatile marketplace. It used to be that bonds offered a better value than immediate annuities, but now bond rates are low and lots of people are concerned that if interest rates go up, bonds will lose value.

For many retirees, immediate annuities can be a valuable part of a sensible, well-diversified portfolio that provides income for life.  Indeed, in today’s low interest environment, immediate annuities are a uniquely important tool for many retirees.  Under Federal law, annuities can only be issued by life insurance companies. However, it is important to realize that insurance regulation is a matter of state law in the U.S., so annuity products available in one state may not be available in another.

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Tuesday, February 5th, 2013 Wealth Preservation Comments Off on Retirement Risk Strategy

Annuities Provide An Income Stream That Lasts a Lifetime.

Risk Umbrella

The primary function for annuities in today’s marketplace is as a risk management tool.  If people want to guarantee a certain minimum income, then they can do that through annuities.  This allows them to invest the rest of their money more aggressively without fear of not having enough money to cover their minimum living expenses should the investment not do well.

Imagine on the day of your retirement, you sit down to plan your financial future.  You know what your annual expenses have been and you want to maintain your current standard of living.

So you consult a recent mortality table and find that if you’ve made it to your 65th birthday, you can expect to live to age 85 years old.

You perform a little calculation and find that, together with your Social Security monthly payment, you have just enough savings to maintain your current standard of living, and will have spent all of your savings and future expected earnings by the time you die at the age of 85.

But, what if you live longer?  The Tsunami Wave – is about to engulf you from all sides.  If you live to age 85, the mortality table finds that you can expect to live an additional 6.8 years or more.  Will you be reduced to eking out an existence on Social Security alone?  Where will the additional money come from?  What if future investment returns are not what you anticipated at the start of retirement?

These questions are increasing urgent in America today, as forces are combining to make planning for outliving your resources more important that it has been in the past.  Old rules of thumb for spending your assets in retirement, called de-cumulation, needs to be reconsidered.

If your objective is to ensure enough money to live on, no matter how long you live – think consumption instead of accumulation.  While we cannot present here all the scenarios that can be considered, we can give some general conclusions.

Imagine a retirement-savings well that never runs dry, no matter how long you live. Annuitization provides the only viable way to achieve this security without spending a lot more money.

We suggest putting enough of your portfolio into an immediate annuity and annuitizing enough of your assets so that you can provide for 100% of your minimum acceptable level of retirement income for the rest of your life, no matter how long you live.  Buy your own pension.

People tend to be drawn to annuities for safety, since users can protect themselves against losses and guarantee an income stream.  During a year like 2008, when the stock market sustains significant losses, people holding annuities tend to fare better.

If you had purchased a safety rider, (annuity) you may not have lost much of anything.  People who owned annuities in 2008 ended up in a much better position that those who were invested directly in the stock market.

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Wednesday, July 15th, 2009 Wealth Distribution Comments Off on Annuities Provide An Income Stream That Lasts a Lifetime.

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