Helping You Protect Your Money. Helping You Protect Your Future.
Consider what you might be giving up.
Recession fears continue to spike as major indexes are approaching bear market territory, after months of market volatility that have put a strain on retirees’ and pre retirees’ retirement portfolios.
Those at an age to claim Social Security may be thinking about claiming sooner than previously planned to give them a source of income and to give their portfolio a chance to recover some losses.
There is no right answer to when to claim Social Security. An individual receives 100% of the benefits they’re owed at full retirement age, which also depends on when they were born.
Retirees can begin claiming as early as age 62, but any time before full retirement age results in a reduced benefit. Individuals can also receive more than what they’re owed for every month they delay up to age 70. Benefits are based on a formula that factors in age and earnings history.
There’s also no right time to start withdrawing from a retirement account, or exact amount a person should take from these accounts every month. The 4% rule, which suggests individuals take 4% of their portfolio balance every year to stretch their money over their retirement, has been widely contested in recent years. Some experts state the withdrawal rate should be closer to 3% in an effort to make retirees’ money last their lifetimes.
Market volatility and rising inflation has been a big concern for Americans of all ages, but for retirees it can be especially stressful as they tend to live on fixed budgets after leaving the workforce. Taking too much from an investment portfolio can trigger the sequence of returns risk, which is when a portfolio has fewer assets in it to grow when the markets rebound. Beginning Social Security too early, on the other hand, results in a permanently reduced benefit for the rest of one’s lifetime.
Retirees might want to opt for taking from their 401(k) plans instead of Social Security, said Larry Kotklikoff, an economist and founder of Economic Security Planning, which has a Social Security analyzing software called MaxiFi Planner. During a Barron’s Live event, Kotlikoff said taking Social Security early to keep your investment portfolio intact, when adjusting for risk, can generate a negative return. Social Security is also inflation-protected, since there is a cost-of-living adjustment, which is a bonus for retirees whether they’ve begun claiming or not.
There’s certainly interest in taking from a 401(k) in an effort to postpone Social Security benefits. In a study about a 401(k) bridge option, which is when investors use assets from their retirement accounts equivalent to Social Security benefits so that they can delay claiming, more than a third of people who were given information about this option chose to try it. This survey, conducted by NORC from the University of Chicago and the Center for Retirement Research at Boston College, was likely the first time these respondents have heard of a “bridge,” and if there were more exposure to this option in retirement accounts, more Americans may choose it in their own retirement journeys, says Alicia Munnell, director of the Center for Retirement Research at Boston College.
Of course, waiting to take Social Security isn’t always the best option either. One of the many factors retirees should consider when deciding when to claim includes medical history and status as well as longevity – someone who only expects to live to their mid-70s wouldn’t enjoy the benefits they worked hard for if they only started claiming at 70. In other instances, people may use Social Security as one component of their retirement income strategy, pairing it with annuities or a pension, and would rather their retirement savings vehicles, like a 401(k) or an IRA, continue to grow for the decades to come.
Another great option to consider is a fixed index annuity. In a fixed index annuity, a portion of your money can be set to grow with the index of the market, but never risk loss! Fixed index annuities help both savings and benefits last longer. Ensuring an experience of lifelong savings and income which will retain its buying power both now and in the future.
At Summerlin Benefits Consulting we want to make sure your money is safe in this turbulent time. Our team of advisors will work with you to figure out the best vehicle for protecting your retirement nest egg, so that you can feel confident no matter what happens in this bear market.
Retirement savers are often told they’ll see a greater return in their retirement assets if they invest it – and that may be true – but it’s important to prioritize some cash in a retirement plan as well.
For those close to retirement, consider keeping a portion of your retirement plan in cash – whether that be in the portfolio itself, in the bank, or in another safe retirement account like a fixed index annuity.
Bank and money market accounts do not typically generate the same type of returns as investments, though when the stock market is in decline, some investors may argue that safe money with low returns is better than losing money. Investing in equities can be an important piece of the puzzle while you are younger and planning for future retirement income, as stocks and equity funds create large returns sometimes over time.
But there are instances – like right now – when more mature investors, especially those that are already retired, could really benefit from having some of their money placed safely AWAY from the volatility of equities, stocks, mutual funds, etc. In fact, some more mature investors find that Fixed Index Annuities, especially those with lifetime income benefits, can serve as a very good middle ground since they tend to grow at a more reasonable rate of return than a bank account or money market account, during years when the stock market is doing well but they do not lose value during market declines.
As the saying goes, “cash is king.” That’s not always true when it comes to preparing for retirement, but having some cash on hand does allow retirees the opportunity to avoid tapping into their portfolio during market volatility. Retirement savers often find value in the fact that accounts like Fixed Index Annuities can sometimes provide just enough access to their cash (typically allowing a 10% free withdraw yearly) to ensure liquidity needs are met when they need it most. Retirees may also be stressed to see their investment balances dropping week after week as major indices and sectors across the US stock market suffer from the current volatility and an FIA can alleviate that stress as well, since it will not lose value, even in times of investment strife.
Since taking money out of an investment portfolio and converting it to cash when it’s on the decline can provoke the “sequence of returns risk,” an FIA can provide a better way to liquidate for safety while still maintaining some market growth. This means, when investors are suffering from deficits in their portfolio, they can still maintain a reasonable rate of return over time on some of their money using an FIA. Of course, people who do need cash in retirement should withdraw from their portfolios- albeit conservatively. Having cash on hand in the bank, or receiving a cash payout or income benefit from your Fixed Index Annuity, can help avoid excessive withdrawals from other investments.
If the thought of riding out a down market sounds daunting, safe money strategies, like a fixed index annuity can really help. They can provide cash access and can also be an ideal tool to supplement other income sources like social security income and pensions.
There’s no one set amount of money that should be kept in cash – the answer depends on individuals’ personal circumstances and comfort level. One rule of thumb is to keep about a year’s worth of living expenses in cash, which could be drawn against when portfolios are riding a rollercoaster investment market. During these times, for many people, cash can be kept safe, achieve growth, and last a lifetime with the help of a fixed index annuity through Summerlin Benefits Consulting.
Summerlin Benefits Consulting has helped many people determine what type of strategy makes sense for them and their families and we can help you too!
It is no secret that there is a retirement crisis facing Americans.
In a recent survey conducted on behalf of home financing and real estate website “Anytime Estimate,” Americans were surveyed on how much, or little, they have saved for retirement, and the results were not pretty.
Less than half of those surveyed have saved $100,000. The median income in retirement is $40,000, so this savings is not even close to being enough. One out of every six have saved absolutely nothing. One out of three are currently making no contributions at all. One might discount these statistics by saying, “it must be young people who are contributing to these numbers," but that is not the case. And if it were, at least young people have decades to make up the ground. Boomers do not.
Respondents who are still working, with a median age of 60, have average savings of around $112,000. One quarter of those surveyed, and 30% of millennials, said they were planning to rely on “cryptocurrencies” to finance some of their golden years.
Good luck with that! This may be hard to do if the crypto bubble continues to deflate at its current rate.
Probably the saddest part of the survey was that around 80% of people expect their standard of living to decline in retirement, while 10% feared they wouldn’t be able to retire at all. What is sad is that these people are obviously well aware of the problems they face but may not know the right steps to take.
Financial professionals, like those at Summerlin Benefits Consulting, help people determine how they can combat this retirement crisis, regardless of their age. It is never too early or late to get help.
For those who are young, the obvious answers are to save more, save earlier, and invest better- which usually means investing in long-term assets like stocks and keeping your costs low. But we all know how volatile the stock market can be, so even time is not always a guarantee of a healthy retirement.
Those who are older don’t have the luxury of time at all, and in most cases, they will need to rely on Social Security providing the bulk of their retirement income.
The Social Security dollars forcibly extracted from your paycheck have been poured so far this year into bonds paying interest between 1.625% and 3%. This, at a time when consumer price inflation is running at nearly 9%.
Las year FICA dollars were blown on bonds paying just 1.4% interest, and in 2020 less than 1%. So, large chunks of that money have already gone out the window.
No wonder Social Security is in a deepening financial crisis. The fund is invested early in low-paying U.S. Treasury bonds. Since the early 2000s, the fund has earned an average return of 3.8% per year, enough to increase an investment by only 80%. This is minimal compared to the return that other countries are seeing from their social security or “future” funds.
If you’re thinking that sounds like an unwise investment policy, you’d be right. But it seems like Washington won’t be making moves to change the policy any time soon.
Social Security is a “defined benefit” rather than a “defined contribution” retirement plan, so your benefits aren’t directly tied to the investment returns from the underlying assets. Instead, your benefits are set by law- but are supposed to be financed by underlying assets. The poor investment returns mean those assets are running out. This is why many people are talking about cutting Social Security benefits.
Heaven forbid they should improve the returns.
This is why many Baby Boomers have utilized products like Fixed Index Annuities (FIAs), which provide guaranteed income for life. An FIA is a safe money vehicle, where you can grow an asset (some portion of your overall retirement strategies) for the purpose of turning on income in the future. It allows you to create your own future fund, with a defined monthly income benefit that will work kind of like a pension, which can supplement social security and other retirement income sources. Boomers who haven’t set aside a huge amount of liquid savings can at least use some of what they have saved for this purpose, and it is a really good way to fill that void.
At Summerlin Benefits Consulting we are Safe Money Experts. We believe that helping clients protect the money they do have will go a long way to helping them protect their futures as well. If you’d like help reviewing your options for retirement income protection and/or to discuss how to best plan your financial future, please feel free to call today for a no-obligation meeting.
Most people think bonds are safe, but in today’s volatile climate, they are not. Interest rates are poised to rise even further, which is bad news for bonds. Investors seeking a measure of safety along with the possibility of a return have a few choice alternatives to consider instead.
In the not-too-distant past, bonds were portrayed as a secure part of a portfolio – a safer investment than stocks. Investors looked to government bonds as the bedrock of a stable retirement income. But bond yields are extremely low these days, prompting some investors to seek alternatives. This has sparked renewed interest in various investments that can generate passive income and stability.
Most people don’t remember what a bad bond market looks like because we haven’t seen one for 30-plus years! We’ve had steadily declining interest rates since the mid-1980s. Bond prices move in the opposite direction of interest rates. If interest rates rise, bond prices fall, and vice versa. The Federal Reserve has raised interest rates in 2022 and is slowing its purchase of bonds, so the climate is likely to be less favorable for long-term bonds going forward. And with bonds paying historically low interest rates, long-term bonds falling in price could mean a low-yield investment for years.
The problem with bond mutual funds
Bonds issue at par value of $1,000, and you are in effect loaning a corporation or some form of government your $1,000. There is a length of time you have to leave it there, until it reaches what is known as its maturity date, which can range from one year to 40-plus years. There will be a set interest rate for that length of time. So, as interest rates rise and bond prices fall, you can hold until maturity and get your $1,000 back.
A huge issue is that most people don't hold their bonds directly anymore; rather, their bonds are in mutual funds. And within mutual funds, there are two problems: There is no set interest rate, and there is no maturity date. So when interest rates rise and your bond prices fall, there is no date in time when you will get your $1,000 back.
Three other investments to consider instead
To avoid getting trapped while the outlook on bonds is not all that bright, here are some alternatives that can provide more security and a decent rate of return:
Fixed annuities and fixed index annuities
Fixed annuities, sold by insurance companies, offer long-term tax-deferred savings and monthly income for life. They involve an upfront payment by the owner, will grow annually at a fixed rate, and can provide either a lump sum pay out to the policy owner at the end of the policy term or a series of guaranteed income distributions from the insurance company. The insurer guarantees the owner the fixed interest rate on their contributions for a specific period of time. The value of the owner’s principal will grow based on interest applied each year.
You can also choose a fixed index annuity, where your principal is protected and the return is tied to a market index, like the S&P 500. If the market is down, the worst you can do is zero (zero is your hero!), and it will have a participation rate on the upside. So as an example, if we have a 80% participation rate and the S&P 500 is up 10%, then 8% would be credited to your account on your anniversary date and that new value is locked in and won’t drop below that value because of a market decline. In other words, your principal and your gains are protected each and every year.
We at Summerlin Benefits Consulting help our clients use fixed and fixed index annuities as “safe money strategies” because of the manner in which they can help reduce risk by protecting consumers’ savings and growth against down markets, while still achieving a reasonable rate of return over time.
Annuities can also generate more income than bonds of similar maturity purchased at the same time. And because annuities aren’t priced daily in an open market as bonds are, they can be better than bonds at holding their value while generating a more predictable cash flow.
Buffered or defined-outcome ETFs
Buffered or defined-outcome exchange traded funds (ETFs) offer investors protection from severe dips in the stock market. They are seen as solid alternatives to bonds because they allow more access to various investment products. In many portfolios, bonds traditionally served as a ballast, helping offset the risk of equities. But with interest rates so low, buffered/defined outcome ETFs are replacing bonds in some portfolios.
These ETFs set an exact percentage in losses – 9%, 10%, 15%, 20% or 30% – that shareholders are protected from over a 12-month period. In exchange for limiting an investor’s downside, some of the gains are capped at 10%, 15% or 20%.
Most buffered/defined outcome ETFs are linked to the S&P 500 Index and use flexible exchange options (FLEX), which allow both the contract writer and the purchaser to negotiate different terms.
Real estate investment trusts
This is the best-known bond alternative, created in the 1960s to provide investors with a way to invest in funds that own, manage and/or finance income-generating real estate. The REIT investment space is enormous; investors can target specific real estate segments and diversify across different segments. They get 90% of the profits.
REITs are tax-advantaged as dividends and trade like stocks. And unlike bonds, which pay a fixed amount of interest and have a set maturity date, REITs are productive assets that can increase in value indefinitely. Many REITs have dividend yields between 5% and 10%. Be careful though – many REITs are not liquid if you need access to your money in the short term. If you are looking for a strategy that allows you to have access to your money, fixed index annuities may be the better route to go.
Alternatives to bonds do offer higher yield potential. But remember – that comes with risk. It’s wise to work with a financial professional to go over your options as you assess your portfolio, differentiate between safe and risky assets, and help you structure your portfolio in a way that makes the most sense for you. We at Summerlin Benefits do this day in and day out with our clients. Call us today and we'd be happy to go over your options with you!