We hear bad news about Social Security running out of money. Social Security income is just a portion of how most of us are funding our retirement. But if Social Security fails, or our pensions fail or are revised, then we’ll have to rely on our savings. That’s a huge problem because as more people are approaching retirement, or are currently in retirement, they wonder what to do with their retirement funds?
The question everyone has is where can they place their money to have safe growth? The options for most people are the same. We can place our money in the bank, in stocks, in mutual funds, or in bonds. All have advantages and disadvantages. We’re all looking for that balance of growth, risk management, and safety.
Banks are usually safe. Your money is insured up to $250,000. If the bank goes insolvent, only $250K is protected. Any monies over $250K are not insured, are at risk, and subject to unrecoverable loss. From 2008 through 2011, there were 414 U.S. bank failures. More importantly, banks are paying extremely low interest. You’re lucky to find CD’s that pay 1.5% interest. That means, you’re losing 2.0% per year on your money because you’re not keeping up with inflation at 3.5%. Don’t forget, you’re usually paying taxes on that growth unless it’s designated as an IRA.
For most people, Stocks have only one good attribute. You receive 100% of the gain (minus the expensive broker fees) when the stocks increase in value. However, we all know that you also receive 100% of the loss when they decrease in value too.
As we get older, the preservation of our money is more important to us that trying to make a killing in the market. When we earn, it feels great! But when we lose, it feels horrible. It has been said the short term good feeling of gain pales in comparison to the horrible gut wrenching pain from losing our money. It seems that people have short term memories when it comes to the market too. We had two major loss periods in the market in the last 10 years. It takes many years to recover and most people don’t have the stomach or the time for trying to earn that money back.
Mutual funds are stocks. Read “STOCKS” above as the advantages and disadvantages are exactly the same.
BONDS and BOND FUNDS:
Most people view bonds as safe. True, they’re safer than equities, but bonds have and do fail. Do you remember Enron? GM? Orange County, California? If you held those bonds when the entities failed, you lost your money.
Many people are turning to Fixed Indexed Annuities (FIA) as a safe alternative for their retirement funds. The best Fixed Indexed Annuities today have an optional feature called an Income Rider. Many advisors prefer to call them Hybrid Annuities. But essentially, money in the Income Rider grows at such a guaranteed rate per year that upon first hearing about the product, most people find very hard to believe. That’s quite understandable too. “If it sounds too good to be true, it probably is.” Some companies have growth rates of 7% compounded annually and others grow as much as 10% simple annually! These rates are contractually guaranteed by the insurance company.
Ultimately, the intention is for you to take advantage of the growth in the form of payments or as a death benefit. The annual guaranteed Income Rider growth will produce an account value from which you can now take a guaranteed payment for life. Again, the payment is for your lifetime meaning you cannot outlive the payments and you can never run out of money. Some insurance companies pay premium bonuses, provide an enhanced death benefit, and/or provide a payment doubling feature for nursing care or nursing home confinement.
Yes, yes, yes, I know…. This all really does sound too good to be true, right? Well, keep in mind, that in today’s low interest environment in order to offer those kinds of growth rates, there will definitely, and without a doubt come with restrictions and conditions. It is VITAL that you understand those restrictions and conditions thoroughly. Make no mistake, the annuity with Income Rider provisions are NOT for everyone. But they might just prove to be a safe alternative to risking your retirement money in the stock market or subjecting your money to low interest growth at the bank. Annuities may not be right for all of your money, but it is quite easy to make a compelling argument for a portion of your money!