Retirement risk and uncertainty: a fixed strategy

Money Matters

Within the next five years, 46 million Americans are expected to retire, according to data from the National Institute of Aging at the University of Michigan. The transition to retirement results in a major shift in financial priorities — from asset accumulation to income management and wealth preservation.

In the midst of this, people now face the powerful headwinds of a deep, prolonged recession and unprecedented market volatility. With the majority of retirement savings now residing in 401(k) and IRA accounts, the market downturn has had a profound impact on the retirement security of many, causing them to re-evaluate their retirement savings and investment strategy.

Retirement risks beyond the turbulent market
While a more risk-averse investment posture may be warranted for those approaching or in retirement, there are other retirement risks that cash-oriented solutions don’t help address.

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For instance, employers continue to eliminate traditional pensions and retiree benefits such as healthcare. This means that more Americans must increasingly rely on personal savings and investments to fund the bulk of their retirement income. Plus, Americans are living longer than ever before. While this is great news, longer life expectancies mean that more dollars must be available for longer retirements — bad news for those who haven’t planned for such a reality. The challenges of having sufficient income in retirement are compounded by escalating health care costs.

With these non-market related retirement risks in mind, more people are taking a fresh look at how to provide balance to their retirement portfolio while they are actively saving for the future. One option for your retirement strategy is a fixed annuity since it has a combination of safety, tax-deferral and the option for guaranteed lifetime income.

A balanced response to retirement risks
Fixed annuities help mitigate the risk of outliving one’s retirement assets by providing an option for a steady stream of income for life, which is an important consideration for people who do not have a retirement or pension plan to rely on. A lifetime income stream from a fixed annuity can help defray the costs of Medicare supplement or long term care insurance, or even college education expenses for a grandchild.

The principal and interest are guaranteed in a fixed annuity and all guarantees are based on the continued claims paying ability of the issuing company. In the today’s market environment, this provides protection for your hard-earned retirement nest egg. In addition, fixed annuities provide guaranteed returns. With the comfort of a guaranteed minimum interest rate, no matter what’s happening in the market, your annuity is guaranteed to grow. Bear in mind that fixed annuities are not a bank deposit nor bank guaranteed. Also, fixed annuities are not FDIC insured, nor insured by any government agency.

The money in a fixed annuity grows tax deferred, so retirement savings have the potential to grow faster. Most annuities have a tax-deferred feature, as do many retirement plans under the Internal Revenue code. As a result, when you use an annuity to fund a retirement plan that is tax-deferred, your annuity will not provide any necessary or additional deferral for that retirement plan. But annuities do have features other than tax deferral that may help you reach your retirement goals. You should consult your tax advisor prior to making a purchase for an explanation of the tax implications to you.

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Another feature of fixed annuities is payout flexibility. Annuities offer a broad range of payout options, including a lump sum, payments for a certain period of time, or payments for life. This provides the flexibility to choose a payout plan that best meets your needs when you retire. Together with other income sources, such as investments and social security, annuitization can help provide a consistent level of ongoing retirement income. Withdrawals from fixed annuities may be subject to surrender charges and penalties. Furthermore, withdrawals will be taxed and may be subject to a 10 percent IRS tax penalty for withdrawals before age 59-1/2.

Fixed annuities also can help avoid the costs and delays of probate and estate settlement in the event of the contract holder’s death. Money distributed to named beneficiaries is paid directly to them and does not go through probate.

Take a strategic approach
Staying on track to achieve your retirement goals, even in volatile markets, depends on striking the right balance in your financial plan in order to address all types of retirement risk. Talk to a financial advisor to determine the right retirement strategy for you.

This information is provided for informational purposes only and is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor.

info: 704-987-9794 . email: lynn.j.davidson@ampf.com

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One Reply to “Retirement risk and uncertainty: a fixed strategy”

  1. I noticed that this is not the first time you mention this topic. Why have you chosen it again?

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