Safe Money Strategies – The Basics of a Financially Secure Retirement
As you approach retirement, it is important to make sure that your savings are protected from stock market volatility and other possible risks. Otherwise, your financial “base” for income generation could be depleted. So, to have a financially secure retirement, it will typically require that you put some safe money strategies in place.
Using Safe Money Strategies for Creating a Financially Secure Retirement
Many people are aware that investing in equities is generally riskier than placing money in bonds and other fixed investments. This is the case both before and after you retire. Even a slight stock market “correction” could lead to substantial loss, and the closer you are to retiring, the more devastating this type of loss can be. Plus, the larger the drop in value, the higher the future returns must be in order for your portfolio to break even. A large loss in value can often take longer to recoup – if it is ever recovered at all.
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Gain Required to Recover from a Past Investment Loss
Loss in Value Required Return to Break Even 10% 11% 20% 25% 30% 43% 40% 67% 50% 100% 60% 150% 70% 233% 80% 400% 90% 900%
Generating a Reliable Ongoing Retirement Income for Life
Throughout the years, individuals and couples have relied on various strategies for generating retirement income. In the past, many retirees received incoming cash flow from three primary sources. These included:
- Employer-sponsored pension plan
- Social Security
- Interest/dividends/portfolio drawdown strategy using personal savings and investments
These income sources oftentimes provided retirees with the income security they needed for the remainder of their lives. Unfortunately, though, things are different today. For instance, most companies have done away with traditional pension plans and “replaced” these programs with defined contribution plans that require employees to take charge of their own future income generation. Social Security is also facing some changes that could make this income source far less reliable than it has been in the past. This pay-as-you-go program uses contributions from current workers to pay the income benefits to retirees. However, because fewer workers are paying into the Social Security program and more retirees are collecting benefits, the program will face some significant challenges going forward. This can create risk because, for many average income earners, Social Security benefits can make up roughly 40% of their overall retirement income. Income that is generated from personal savings and investments has become more important over the years. But, given historically low-interest rates today, many “safe” income strategies require the tradeoff of a low return. For example, given average 5-year CD rates of under 1% (in late 2020), even a $1 million investment would generate less than $1,000 per month. This can make it difficult for retirees to maintain purchasing power. So, where can you ensure the safety of principal and a higher rate of income for a secure retirement? One option is through a fixed (or fixed indexed) annuity.
Generating More Income and Keeping Your Principal Safe (in Any Market Environment)
Over the past decade or so, many retirees and pre-retirees have discovered the benefits of using fixed annuities for getting reliable, tax-advantaged growth, as well as a guaranteed stream of future income in any type of stock market environment. Annuities can be either immediate or deferred. An immediate annuity is typically funded with one lump sum of cash. This could come from a personal savings or investment account, or it may be “rolled over” from an employer-sponsored retirement plan such as a 401(k). Once an immediate annuity is funded, the income stream that it generates can begin right away or within 12 months of purchase. Deferred annuities can pay an income stream that begins at some point in the future. In the meantime, during a deferred annuity’s “accumulation” period, one or more contributions can be made. The growth that takes place in a deferred annuity is tax-deferred. This means that there is no tax due on the gain until the time of withdrawal. Therefore, the funds can grow exponentially over time, especially compared to a comparable taxable investment. All annuities are considered long-term financial commitments. If you cancel the contract or withdraw more than a certain amount of the account value each year, you will typically incur a surrender charge if you do so within the first several years. Many deferred annuities offer additional features, such as a death benefit paid out to a beneficiary if the annuitant (income recipient) dies before receiving all of his or her contributions back. There may also be a waiver of surrender charges if the annuitant makes withdrawals from the annuity due to a chronic or terminal illness diagnosis or if they must reside in a nursing home for a certain amount of time.
Fixed Annuities Fixed annuities are appealing to many retirees because of their safety and guarantees. The account value of a deferred fixed annuity will continue growing no matter what happens in the stock market. These annuities are designed for providing a set dollar amount of income for a set period of time (such as 10 or 20 years), or even for the remainder of your lifetime, regardless of how long that turns out to be. Many fixed annuities offer a joint income option whereby income will continue for the remainder of two individuals’ lives, such as a husband and wife.
Fixed Indexed Annuities Fixed indexed annuities, or FIAs, are a form of a fixed annuity. However, an FIA can offer the opportunity to generate higher returns during the accumulation period. That is because the return is based on an underlying market index’s performance, like the SP 500. If the index performs poorly and generates a negative return in a given contract year, no losses are incurred in the annuity. Instead, it is credited with a guaranteed “floor,” typically in the range of 0% to 2%.
Other Ways that Annuities Help Create a Financially Secure Retirement In addition to offering a worry-free retirement income source, the guaranteed cash flow from fixed and fixed indexed annuities can provide other enticing benefits, too. For instance, studies have shown that a reliable income stream can reduce stress. In turn, this can help to prevent a wide range of health issues, such as high blood pressure and heart disease, and possibly even lead to a longer life. Without the concern of whether or not income will arrive, retirees can spend their time focusing on more important issues, such as spending time with loved ones, traveling, or just relaxing and enjoying all that retirement has to offer.
Putting Safe Money Strategies in Place
While most people strive for a financially secure retirement, not all financial tools are right for everyone. Therefore, basing your safe money strategies on your specific goals is essential. That starts with defining your short- and long-term goals. It should also encompass your risk tolerance and time frame until retirement. To put the right safe money strategies in place, it is recommended that you work with a retirement planning specialist who can create a customized plan for you. To set up a time to meet with an expert, either in-person or online, feel free to contact us directly by phone at phone number, or send us an email at [email protected] We look forward to helping you reach your financial goals.
