Is Your Safe Money Really Safe?

Is Your Safe Money Really Safe?

With so many employers doing away with the defined benefit pension plan these days, the responsibility for ensuring that you have enough income to cover your living expenses in retirement is now squarely on the shoulders of individuals.

Plus, not only will you need to just simply generate enough income each month for meeting your expenses, but you also need to make sure that your incoming cash flow will last for the remainder of your life – however long that may be.

How to Keep Your Money Between the Lines of Safety and Growth

When working to keep savings and investment dollars safe, investors will oftentimes turn to traditional strategies, like shifting funds over to certificates of deposit, bonds, and/or money market accounts.

Unfortunately, though, in return for principal protection, these options typically won’t meet – much less beat – inflation. This could lead to some serious loss of purchasing power down the road, particularly if you live a nice long life.

When looking at the whole picture, then, you could actually be doing yourself a disservice by opting to keep your money, well, “safe”. Yet, by choosing equity-related investments, you run the risk of losing some – or possibly even all – of your hard-earned savings.

So, where is that happy medium between the potential for higher returns and no worrying about the stock market taking a nose dive?

Here’s what Roger Ibbotson, Professor Emeritus at Yale School of Management, best selling author, and financial researcher, has to say.

Opting for the “Best of All Worlds”

Known for his groundbreaking research and analysis, which is oftentimes adopted by the financial markets at large, Roger Ibbotson’s latest study titled “Fixed Indexed Annuities: Consider the Alternative,” is making a stir with both consumers and financial professionals alike.

In his report, Ibbotson defines a fixed indexed annuity as “a type of financial vehicle that eliminates downside risk, while allowing the opportunity to participate in upside market returns.”

How exactly does a fixed indexed annuity, or FIA, accomplish that?

For starters, these vehicles are actually a type of fixed annuity. So, there is a fixed account option where some or all of your contributions can be placed. But fixed indexed annuities also garner a return based on the performance of an underlying market index – or indices – such as the S&P 500.

Here, investors can take advantage of positive return in the tracked index – oftentimes up to a certain cap, or maximum. But, if the underlying index has negative performance in a given year, there is no loss to the annuity holder. Rather, a 0% return is recorded for that period of time.

So, while there is no gain during the period(s) of poor index performance, there is also no losses that need to be made up. This, in turn, can more easily allow gains to continue growing on top of gains, without having to first get back to even.

In addition, as with other annuities, the gain that takes place inside of the FIA’s account is tax-deferred. This means that no tax is due on the growth each year until the time of withdrawal. And, when the time comes to convert the annuity over to an income stream in retirement, you can count on a certain amount of income for a set period of time… including the remainder of your life.

According to Ibbotson, “[A] generic FIA using a large-cap equity index in simulation has bond-like risk but with returns tied to positive movements in equities, [which] allows for equity upside participation. For these reasons, an FIA may be an attractive alternative to consider”.

Setting Your Retirement Income “Floor” with a Fixed Index Annuity

Although you may have a number of goals for your pending retirement, it is likely that your primary aim is to ensure that you have a steady stream of reliable income that will last for as long as you need it to.

With a fixed indexed annuity, you can set up an ongoing “base” income for your needs, while at the same time allocate other assets in more growth-producing vehicles that can, in turn, allow you the opportunity to continue growing your portfolio.

Doing What We’ve Always Done Doesn’t Mean We Have to Keep Doing It

In the past, many retirees relied upon a combination of stocks and bonds to provide them with an income, as well as the possibility of future growth. But unfortunately, given the volatile state of the market, this can be a risky road to take.

Because our longer life spans today demand that our retirement savings last longer, a fixed indexed annuity could be an integral part of your future income strategy. As Roger Ibbotson advises, “fixed index annuities, if properly structured, can help control financial market risk and mitigate longevity risk.” And with those two bases covered, you can set your sights on a financially stress-free future.

Given that, it’s no wonder that the sales of fixed indexed annuities have reached an all-time high over the past few years.

Want to learn more about whether or not a fixed indexed annuity is right for you?

At Annuity Gator, our mission is to educate retirees and those who are preparing for retirement on how annuities work, and whether or not they are right for certain situations.

We can walk you through various scenarios so that you can determine if an annuity would fit, and if so, which of the many different types of annuities could be more “customized” to meet your objectives.

Feel free to reach out to us anytime using our secure contact form and set a time to talk with one of our annuity experts.

Is Your Safe Money Really Safe?

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