Wednesday, January 23, 2008

Why Are Some Pre-Retirees NOT Concerned About the Stock Market Falling?

There are few things more frightening than a stock market doing one of its free falls. Intellectually, we know that it will rebound. It always has - even after 1929. But that doesn't make it much easier on our confidence level.

It's especially upsetting for those in retirement or just about to go there. A rule of thumb is that the market fluctuates from high to low and back in 7 to 8 year cycles. (Let's see, 2000 to 2008? Hmm. Coincidence?) Younger people can ride out a few cycles, but you may not have time to recover from a downturn if you are going to "pull the trigger" and retire soon.

In 2000, we saw a lot of people who had been planning to retire, but by 2002 they couldn't "pull the trigger"because their Nest Egg had shrunk so much. Their nest Egg could not sustain their planned retirement lifestyle. A lot of those people are still working today.

But I have clients who are unconcerned. Since 2000 they became aware of investments with Guarantees. Despite the fact that they can continue to invest in the market, their investment accounts will not go below what they invested. Plus the accounts will actually lock in gains on a periodic basis. That is, if the account increases in value at the designated time, the account will lock in the amount of that gain and will not go below that new, higher, value in the future.

What are these magical investments? They are Annuities.

Before we go on, this is a good time for a warning. Annuities are complex and they have special rules. Also, there may be extra costs. But, after a complete disclosure of all the points of Annuities, a confirmation of suitability for the prospect, and a full understanding of it, Annuities may be appropriate to help you protect your Nest Egg.

Annuities are offered by insurance companies and have special rules about when you can access the funds (age 591/2 is the minimum age without tax penalty), and where surrender charges for a period from 5 to 16 years are charged if you choose to liquidate your account. These are to be long term investments. Some Annuities even off an "Equity Bonus", which means the company adds to your invested amount. For that, you typically see a longer "surrender period".

But they were designed for retirement and the special treatment given by the IRS (tax deferred account growth, for example) are benefits you get in exchange for the complexity.

But what of the Guarantees and their costs? Sometimes, you do not pay extra for these Guarantees. But you often do, especially with Vairiable Annuities. When you do, here is how it works.

Simply put, you pay a relatively small amount annually to be sure your Nest Egg is safe and will not lose ground when the market turns. You insure your house, your life, your car, and your health, don't you? Why wouldn't you insure that one asset that you are counting on to help you through those "Golden Years"?

But, are the extra costs worth it? To decide that, you need to check the past annual returns to investors. See how that compares to returns of those who did not have guarantees on their Nest Eggs. When the stock markets are volatile the guarantees can be a big comfort to those looking to retire soon.

While those past returns are no assurance of future performance, they can give you some idea of whether the costs would be worth it. In most cases, you will probably find that the extra premium is worth the costs and the return is not noticeably lessened. If you don't agree, that is the time to say "No".

What about all those commissions you hear commentators criticize? They are higher than simple Mutual Funds.

That's the bad news. The good news is that - unlike mutual funds or most any other investments Annuities' commissions and costs typically do not come out of the invested amount. Thus, if you invest $100,000, that $100,000 goes to work for you right away. And it's tax deferred, too.

With Annuities, time is money. The cost of commissions and expenses are returned to the insurance company over a period of time from earnings. That's why there are surrender charges. They repay the company those costs if someone liquidates early.

But, the bottom line is still to check the returns reported against what you might find elsewhere, taking into consideration the tax deferred nature of the investment and the ability to have those Guarantees of principal.

Whew! This article started out as a simple discussion of how Annuities can help you sleep at night, not worrying about what the stock market is doing to your Nest Egg. But it ended up discussing a lot of the good news/bad news of Annuities. That's probably good, since they are complex and need to be thoroughly understood before investing.

But the concept embodied in Annuities is one of the precepts for Retirement Rescuers - to give clients the ability to earn returns that follow the upsides of the stock markets, and still have the peace of mind knowing that you will have your Nest Egg intact, no matter what the market does.
- Tom Willoughby, JD

This article is a general discussion of features available with some various types of Anuities and is not an offer to sell nor an invitation of an offer to buy any securities mentioned herein. Such an offer or invitation of an offer can only be made through an offering memorandum or prospectus, and then only after a thorough review of the offeree's suitability for such product.

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