As we approach the end of 2017, the stock market has been achieving all-time highs. This is very interesting since some people were calling for the stock market to crash this past year due to a number of factors. Of course, this crash did not happen.
This has left many retirees and people approaching retirement with some important questions:
1. Is now the time to take some of my money out of the stock market?
2. Should I invest (risk) more money?
3. Should I adjust any of my investments?
The list of questions can go on and on, and for good reason. Nobody really knows the future of the market. Some can try to guess, but it’s just a guess. Successful retirement planning and wealth management do not come down to guessing – it’s all about planning in advance, looking at multiple options, and making informed decisions.
“Prepare for at least two (stock market) declines of 25-30%, maybe even 50%, in the coming decade.” – John Bogle (Founder of Vanguard)[I]
What people don’t want is the market downturn of 2008, where many lost 40% or more of their portfolios. In hindsight, there were warning signs that went ignored in 2006 and early 2007 because so many were focused on the new highs of the market. But with hindsight being 20/20, many could not believe how they missed what they saw as obvious signs that the market could crash so dramatically. The hangover from this stock market party was a big one for many: some had to return to work, while others had to cut expenses. In 2008 and 2009, many people began to see that working with the right financial professional could be the difference between a lackluster or successful retirement.
How To “Lock In” Your Gains
What if there was a way to “lock in” your stock market gains so you could potentially grow your portfolio and not lose money to stock market loss? Actually, there is – annuities.
There are a variety of annuities from different companies, but the key to success can be working with an independent financial professional with access to that information. Extensive research is done to show your options so you can make an informed decision that is best for you, something your Wall Street broker may or may not offer. Many Americans have been locking in their gains with fixed index annuities (FIAs).
Fixed index annuities are structured to capture some of the upside of the market index, but without the downside. Depending on the market and indexing strategy, a person could capture a good portion of the market upside. Fixed index annuities have several crediting strategies, some of which even include bonds, commodities, real estate, or gold. Remember, your annuity can only rise in value due to market index gains, but never lose value from market downturns.
Fixed Index Annuities in Practice
Let’s look at an example of how a person could “lock in” some of their stock market gains: Someone has a brokerage account starting at $250,000 that increases to $400,000 over time – that’s an increase of $150,000 that they don’t want to lose. Some of this money could be transferred to a fixed index annuity – notice the word “transfer.” You would be rolling it over into the same kind of tax-structured investment. If it’s already in an IRA, it would still be in an IRA to avoid tax consequences – if it’s not in an IRA or 401(k), it would be a 1035 transfer. All of this is easily done through some paperwork.
Let’s say this person transferred $200,000 to an FIA.
If the market index that the fixed indexed annuity is tied to rises, the value of the FIA would rise. This person would see their account continue to grow. In some years people with fixed index annuities have seen their account increase over 10%, depending on which FIA they have, the crediting strategy, and when investment began. Many are targeting 3-7% returns, although some years could be higher.
If the stock market suffered a downturn, the money in your fixed index annuity would not decrease in value, but the money that was still in your stock market investments could go down in value, like we saw in 2000, 2001, 2002, and 2008.
When the markets are up, the money in both the stock account and in the FIA increases in value. When the markets are down, then only the money in the stock account could lose value, while the money in the fixed index annuity would not lose value. Are you starting to see some of the potential benefits?
Fixed index annuities generally have very low fees of 1% or less – some even have no fees. Compare this with some brokerage accounts where people are paying much more than this.
Safer Growth and/or Lifetime Income
Fixed index annuities can be set up for safer growth of your money and/or as an option for a future lifetime income.
Some folks simply want a growth vehicle or investment that will continue to grow their money at a greater rate than they could with the bank, but without the risks of the stock market. It’s easy to imagine the benefits of seeing your money grow more than it would at the bank without worrying about the next stock market “crash.” If somebody had $200,000 invested in an FIA that grew at an average annual rate of 5%, this person could see their money double to $400,000 in about 15 years. It would take the same person 70 years to have their money double at the bank if they were getting 1% interest.
Some people want a residual lifetime income they can’t outlive, even if they or their spouses live to 90 or beyond. We all know about the risks of future inflation and rising medical costs. It’s hard to find a person who thinks medical costs will be cheaper in five years. Just think if you had a lifetime income stream that you could start right away, or in the future – at a date you decide. The best part is you do not have to predetermine your start date, so there is flexibility. Since many are worried about the state of Social Security, and even more do not have pensions, a fixed index annuity with an option that can pay a lifetime income can be an important part of your financial plan. Even if you do not feel you need extra income right now, you might feel differently in the future. It’s certainly a nice option to have, and many are glad they set this up before they needed it.
When structured correctly, an FIA could be a critical part of your investment portfolio and long-term financial well-being.
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Investment Advisory Representative of ZEGA Financial. Investment Advisory Services offered through ZEGA Financial. Riedmiller Wealth Management and ZEGA are not affiliated. NE Insurance License #17294119 Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any comments regarding guaranteed income streams refer only to fixed insurance products. They do not, in any way, refer to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by ZEGA Financial.
[i] Business Insider interview, 2013: http://www.businessinsider.com/jack-bogle-warns-of-two-50-percent-market-declines-in-next-10-years-2013-4
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