pexels-teona-swift-6874466

Emotional vs. Strategic Decisions

Information vs. instinct. When it comes to investing, many people believe they have a “knack” for choosing good investments. But what exactly is that “knack” based on? The fact is, the choices we make with our assets can be strongly influenced by factors, many of them emotional, that we may not even be aware of.

Investing involves risks. Remember that investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.

Deal du jour. You’ve heard the whispers, the “next greatest thing” is out there, and you can get on board, but only if you hurry. Sound familiar? The prospect of being on the ground floor of the next big thing can be thrilling. But while there really are great new opportunities out there once in a while, those “hot new investments” can often go south quickly. Jumping on board without all the information can be a mistake. A disciplined investor may turn away from spur-of-the-moment trends and seek out solid, proven investments with consistent returns.

Risky business. Many people claim not to be risk-takers, but that isn’t always the case. Most disciplined investors aren’t reluctant to take a risk. But they will attempt to manage losses. By keeping your final goals in mind as you weigh both the potential gain and potential loss, you may be able to better assess what risks you are prepared to take.

You can’t always know what’s coming. Some investors attempt to predict the future based on the past. As we all know, just because a stock rose yesterday, that doesn’t mean it will rise again today. In fact, performance does not guarantee future results.

The gut-driven investor. Some investors tend to pull out of investments the moment they lose money, then invest again once they feel “driven” to do so. While they may do some research, they are ultimately acting on impulse. This method of investing may result in losses.

Eliminating emotion. Many investors “stir up” their investments when major events happen, including births, marriages, or deaths. They seem to get a renewed interest in their stocks and/or begin to second-guess the effectiveness of their long-term strategies. A financial professional can help you focus on your long-term objectives and may help you manage being influenced by short-term whims.

A financial professional can help: If you’re a woman concerned about saving for retirement or have questions about your unique situation, give us a call. Our team understands the unique challenges women face, and we’re passionate about helping women just like you plan for a comfortable retirement. Contact us and let’s get started. Email retire@herretirement.com. 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

7b583295-61f6-44b3-a54e-31c2c6fa3085

5 Reasons Why Women Need to Invest

Despite progress toward financial planning and saving, women often face challenges regarding their financial security. These challenges can include more time away from the workforce (often caring for children or for parents), the gender pay gap, and other factors that impact their investing and saving for retirement. Women need to recognize these barriers to saving and investing and prepare by making informed decisions for themselves.

Here are a few of the unique challenges women face when saving for retirement:

Women live longer: The average life expectancy for women is age 86, and she’ll spend, on average, 21 years in retirement.

Women are more likely to live in poverty: Women age 65 or older are 43% more likely than men to live on an income below the poverty level, and 65% of the elderly poor are women.

Women are more likely to work part-time: 30% of female workers are part-time workers with no retirement savings benefits.

Women earn less than men: In 2020, women earned 84% of what men earned of both full- and part-time workers.

Women care for others: 35% of caregivers are women, and mothers are more likely to reduce their work hours or step away from employment to care for their children. Often, they provide care to other adult family members.

Even though women face more significant risks and challenges in saving for retirement, there are essential components to retirement readiness that can help you put a more solid foundation in place as you prepare for retirement:

Participate in your employer’s retirement savings plan: If you work for an employer that offers a retirement savings plan, participate in it. Even if working part time, you may be able to participate. Contribute at least enough to ensure you receive the employer’s matching contributions.

Set up and contribute to a self-directed retirement savings vehicle: The more you save at an earlier age into a Roth IRA or Traditional IRA, the better prepared you’ll be for retirement. While some rules apply based on your income and if your spouse contributes to a retirement savings plan, a financial professional can help determine which is appropriate for your situation.

Prepare for emergencies and have a backup plan: Circumstances like divorce, death, or injury can prevent retiring as planned. Setting up an emergency savings account with three to six months of expenses, life insurance, disability insurance, a budget, and a plan to reduce your debt can help ensure you have enough left to fund your retirement savings in an emergency.

Create a ‘single-view’ financial plan: Women should work with a financial professional to create a single-view financial plan that reflects only their retirement savings contributions, and only their source of income. While you may have a secure relationship, having a single view plan will help prepare you for the future, regardless of what happens.

Consider the possibility of delaying your retirement: A 2021 report indicates that eight in ten women are taking steps to ensure continued work:

  • 61% are staying healthy so they can work longer
  • 48% are keeping their job skills up to date
  • 25% are networking and meeting new people
  • 22% are taking classes to learn new skills
  • 17% are scoping out the employment market and opportunities available
  • 16% are obtaining a new degree, certification, or professional designation
  • 12% are attending virtual conferences

A financial professional can help: If you’re a woman concerned about saving for retirement or have questions about your unique situation, give us a call. Our team understands the unique challenges women face, and we’re passionate about helping women just like you plan for a comfortable retirement. Contact us and let’s get started. Email retire@herretirement.com.

pexels-anna-tarazevich-5697260

Avoiding Scams

Scams got a big boost during the pandemic and I’ve been hearing about more folks (even very tech-savvy ones) getting caught up.

I wanted to reach out with some tips so you and your loved ones can stay safe.

I’d also like to ask for your help: Please forward this email to anyone you know who could use a refresher on the latest scams.

You might think your friends, family, and elders would be too smart to get caught, but the wider we spread awareness of the latest info, the better. Saving even one person would be worth it.

The goal of scams is to steal your money, steal your accounts, or steal your identity.

Here’s what you need to know:

Phishing emails and texts mimic legitimate communications to trick you into giving up account logins, credit card or bank details, or other sensitive data so scammers can use or sell them.

What do they look like? Scammers send you an email or text message asking you to verify your account or payment info, track a package, or unfreeze your account. Inside is a link to a (very convincing) fake website that steals your info.

Scammers might also send you a file attachment or document link to get you to click and install malware on your computer or phone.

Here’s how to avoid getting scammed:

  • Remember that legitimate institutions will never ask for sensitive information (like usernames, passwords, SSN, or bank details) by email or SMS.
  • Be suspicious if a message contains odd phrasing, grammatical mistakes, or typos.
  • Check the “from” information carefully to make sure messages are from a legitimate domain name or number that is actually associated with the company (e.g. bankemail@yourbank.com and not bankemail@bank23abc.com). Not sure? Call the company’s public phone number and check.
  • Don’t click on links or open attachments unless you fully recognize and trust the sender and are expecting the message. You can hover over a link to view the URL and make sure it’s sending you to a legitimate site.

Here’s a phishing email in action. Can you identify the red flags? (Answers in the P.S.)

How many did you see? Did you catch the fake number at the bottom? Sneaky!

Spoofing calls are another scam that’s on the rise. Scammers “spoof” the info on your caller ID to make it look like they’re calling from a legitimate organization.

What do they look like? Scammers may claim to be from your bank, the IRS, the Social Security Administration, or other organizations to trick you into sending money or giving up sensitive information.

They may claim you owe money or threaten you with the police if you don’t take action right away.

In other cases, they will impersonate a financial institution, claim your account is locked, and attempt to gain your account credentials to “unlock” it.

They might even call about an unexpected refund or windfall that you can only receive right now by handing over your personal information.

How to avoid getting scammed:

  • Be suspicious of calls from the IRS, SSA, or any financial institution. If you receive one, ask for a case or employee ID, hang up, and call them back on the official number on their website.
  • Never confirm information over the phone unless you have personally called the official number or are expecting a call.
  • Hang up immediately if the caller threatens you or pressures you to resolve an issue over the phone right now.

Want to report a scammer who targeted you? The FTC collects reports here.

Folks, stay safe out there.

Scams work by taking advantage of fear, greed, and the desire to do the right thing. If something seems “off” or “too good to be true,” take a break.

Never be afraid to contact a company through its official phone number or website to ask for clarification about a message or call. Better safe than sorry.

 

pexels-cottonbro-7047438

Conquering Retirement Challenges for Women

When it comes to retirement, women may face unique obstacles that can make saving for retirement more challenging. Given that women typically live longer than men, retirement money for women may need to stretch even further.1

Despite these challenges, a wise strategy can give women reasons to be hopeful.

Get clear on your vision.

Do you want to spend your retired years traveling, or do you envision staying closer to home? Are you seeing yourself moving to a retirement community, or do you want to live as independently as you can? If you’re married, sit down with your spouse to discuss your visions for retirement.

You can’t see if you’re on track for your goals if you haven’t defined them. If you do find you’re falling short of where you want to be, a financial professional can help you strategize about how you can either get to where you want to go or adjust your strategy to fit your situation.

Get creative with your strategy.

If you expect to or have taken time off from the workforce, you may want to increase your contributions to your retirement accounts while you are working. If you’re staying home while your spouse works, you may be able to contribute to an individual retirement account.

Once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account and other retirement plans in most circumstances. Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Traditional IRA contributions may be fully or partially deductible, depending on your adjusted gross income.

Look for sources of additional income.

If you’re caregiving for an elderly relative, there are ways to be paid for your time. According to AARP, the Veteran’s Administration or Medicaid may be a potential source of income. Working with a professional who has expertise in this field can help you navigate your options and potentially find a way to earn income for work that you’re doing.2

Keep the conversation open.

One of the best things you can do is to make sure you are having regular conversations about finances and hearing from well-informed sources. There are more resources than ever at your disposal, and working with a trusted financial professional can help ensure that you always know where things stand.

While women can face many challenges as they save for retirement, careful preparation and a creative approach can help you rise to the occasion and pursue the fulfillment of your goals.

If you have questions or need help, send us an email.

1. Transamerica.com, 2021
2. AARP.org, 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

pexels-liza-summer-6347720

Do Our Biases Affect Our Financial Choices?

Investors are routinely warned about allowing their emotions to influence their decisions. However, they are not often cautioned about their preconceptions and biases that may color their financial choices.

In a battle between the facts & biases, our biases may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. It may actually “pay” to recognize blind spots and biases with investing. Here are some common examples of bias creeping into our financial lives.

Letting emotions run the show.

How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision and to, therefore, believe that the findings with the best outcomes were the best decisions (not necessarily true). Put some distance between your impulse to make a change and the action you want to take to help get some perspective on how your emotions affect your investment decisions.1

Valuing facts we “know” & “see” more than “abstract” facts.

Information that seems abstract may seem less valid or valuable than information related to personal experience. This is true when we consider different types of investments, the state of the markets, and the economy’s health.1

Valuing the latest information most.

The latest news is often more valuable than old news in the investment world. But when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next market cycle.1

Being overconfident.

The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up, and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong, thanks to the state of the market, our investing acumen, or both. This can be dangerous.2

The herd mentality.

You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. The herd mentality leads some investors to buy high (and sell low). It can also promote panic selling. The advent of social media hasn’t helped with this idea. Above all, it encourages market timing, and when investors try to time the market, it can influence their overall performance.3

Sometimes, asking ourselves what our certainty is based on and reflecting on ourselves can be helpful and informative. Examining our preconceptions may help us as we invest.

1. Investopedia.com, 2022
2. Investopedia.com, 2021
3. WebMD.com, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

pexels-energepiccom-159888

Investment Basics

Why invest? 

To keep ahead of inflation. 

Inflation has reduced the purchasing power of your dollars over time. According to the U.S. Department of Labor, the average annual inflation rate since 1914 has been around 3%. If $100 is $100 today, it would cost $181 in 20 years. Inflation has skyrocketed, but most experts agree it will settle back down. Investing in stocks is your best hedge against inflation.

To take advantage of compound interest. 

Anyone with a savings account understands the basics of compounding: the funds in your savings account earn interest, and that interest is added to your account balance; the next time interest is calculated, it’s based on the increased value of your account. In effect, you earn interest on your interest. 

Many people, however, don’t fully appreciate the impact compounded earnings can have, especially over a long period. To benefit from the longest possible investment period, the sooner you start investing, the more time your investments have for potential growth. Waiting too long can make it very difficult to catch up. 

Consider the examples. Let’s say you invest $5,000 a year for 30 years. After 30 years, you will have invested a total of $150,000. Yet, assuming your funds grow at precisely 6% each year because of compounding, you will have over $395,000 after 30 years. This is a hypothetical example and is not intended to reflect the actual performance of any specific investment. Taxes and investment fees, and expenses are not reflected. If they were, the results would have been lower. 

Investing is Risky Business

Investing is different for every individual. The investment plan that’s right for you depends mainly on the level of comfort you have when it comes to risk. You can’t completely avoid risk when it comes to investing, but it’s possible for you to manage it. 

Investors are typically grouped into three categories for purposes of discussing risk tolerance: 

  • Aggressive: those who have a high degree of risk tolerance 
  • Moderate: those willing to accept a modest amount of risk 
  • Conservative: those who have low risk tolerance 

When it comes to investing, there’s a direct relationship between risk and potential return. This is true for investment portfolios as well as for individual investments. More risk means a greater potential return but also a greater chance of loss. Conversely, less risk means lower potential returns and less likelihood of loss. This is known as the risk/return tradeoff. You can’t have it all. There’s a relationship between growth, income, and the stability of our investments, and when we move closer to one, we generally move away from another. This is a dilemma all investors face. 

Managing Risk 

Only you can know your risk tolerance level when it comes to investing. Let’s now look at the types of investments and their level of risk and return.

Cash alternatives 

Cash alternatives are low-risk, short-term, and relatively liquid instruments that you may use. 

Advantages:

  • To provide you with relative stability 
  • To maintain a ready source of cash for emergencies or other purposes 
  • To serve as a temporary parking place for assets until you decide where to put your money longer term 

Examples of cash alternatives include: 

  • Certificates of deposit (CDs) 
  • Money market deposit accounts 
  • Money market mutual funds 
  • U.S. Treasury bills (T-bills) 

 

Now let’s talk about the next instrument: bonds. 

Bonds are essentially loans to a government or corporation, which is why they’re called “debt instruments.” Bonds are issued in denominations as low as $1,000. The interest rate (or coupon rate), which can be fixed or floating, is set in advance, and interest payments are generally paid semiannually. Bond maturity dates range from 1 to 30 years. However, bonds don’t need to be held until they mature. Once issued, they can be traded like any other type of security. Currently, bonds are at historic lows, so many experts are suggesting people replace the bonds in their portfolios with alternatives. You can listen to episode 56 of the Her Retirement Podcast, What’s Better Than Bonds, to further understand what’s happening with bonds and what are some alternatives.

Bonds include: 

  • U.S. government securities 
  • Agency bonds 
  • Municipal bonds 
  • Corporate bonds

Now I’m going to go over Stocks. 

When you buy company stock, you’re actually purchasing a share of ownership in that business. Investors who purchase stock are known as the company’s stockholders or shareholders. Your percentage of ownership in a company also represents your share of the risks taken and profits generated by the company. If the company does well, your share of the total earnings will be proportionate to how much of the company’s stock you own. 

The flip side, of course, is that your share of any loss will be similarly proportionate to your percentage of ownership. If you purchase stock, you can make money in two ways. First, corporate earnings may be distributed as dividends, usually paid quarterly. Second, you can sell your shares. If the value of the company’s stock has increased since you purchased it, you will make a profit. Of course, if the value of the stock has declined, you’ll lose money. 

Types of stock 

  • Stock is commonly categorized by the market value of the company that issues the stock. For example, large-cap stocks describe shares issued by the largest corporations. Other general categories include midcap, small-cap, and microcap. 
  • Growth stocks are usually characterized by corporate earnings that are increasing faster than their industry average or the overall market. 
  • Value stocks are typically characterized by selling at a low multiple of a company’s sales, earnings, or book value. 
  • Income stocks generally offer higher dividend yields than market averages and typically fall into the utility and financial sectors and other well-established industries. 

Common vs. preferred stock 

Common stockholders hold many rights, including the right to vote. However, common stockholders are last in line to claim the earnings and assets of the company. They receive dividends at the board of directors’ discretion and only after all other claims on profits have been satisfied. 

Preferred stockholders are given priority over holders of common stock when it comes to dividends and assets. Preferred stockholders do not receive all of the privileges of ownership given to common stockholders, including the right to vote. Preferred stockholders typically receive a fixed dividend payment, usually quarterly. For preferred stockholders, there is less return potential than for common stockholders; there is less risk. 

Let’s talk about Mutual Funds. 

The principle behind a mutual fund is quite simple. Your money is pooled, along with the money of other investors, into a fund, which then invests in certain securities according to a stated investment strategy. The fund is managed by a fund manager who reports to a board of directors. By investing in the fund, you own a piece of the total portfolio of its securities, which could be anywhere from a few dozen to hundreds of stocks. This provides you with both a convenient way to obtain professional money management and instant diversification that would be more difficult and expensive to achieve on your own. 

Another concept I want to explain is active vs. passive management 

An actively managed fund is one in which the fund manager uses their knowledge and research to actively buy and sell securities in an attempt to beat a benchmark. A passively managed account called an index fund typically buys and holds most or all securities represented in a specific index (for example, the S&P 500 index). 

The objective of an index fund is to try to obtain roughly the same rate of return as the index it mimics. Funds are commonly named and classified according to their investment style or objective: 

  • Money market mutual funds invest solely in cash or cash alternatives. 
  • Bond funds invest solely in bonds.
  • Stock funds invest exclusively in stocks. Stock mutual funds can also be classified based on the size of the companies in which the fund invests–for example, large-cap, mid-cap, and small-cap. 
  • Balanced funds invest in both bonds and stocks. 
  • International funds seek investment opportunities outside the U.S. Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Get a copy and review it carefully before investing. 

Now let’s cover Dollar Cost Averaging

Many mutual fund investors use an investment strategy called dollar-cost averaging. With dollar-cost averaging, rather than investing a single lump sum, you invest small amounts of money at regular intervals, no matter how the market is performing. Your goal is to purchase more shares when the price is low and fewer shares when the price is high. Although dollar-cost averaging can’t guarantee you a profit or avoid a loss, a regular fixed dollar investment may result in a lower average cost per share than if you had bought a fixed number of shares each time, assuming you continue to invest through all types of markets. 

For example, let’s say you decide to invest $300 each month toward your child’s college education. Because you invest the same amount each month, you automatically buy more shares when prices are low and fewer shares when prices are high. You find that your average cost per share is less than the average market price per share over the time you invested. 

On to another concept called Asset Allocation.

It’s almost universally accepted that any portfolio should include a mix of investments. That is, a portfolio should contain investments with varying levels of risk to help minimize exposure. Asset allocation is one of the first steps in creating a diversified investment portfolio. 

Asset allocation is the concept of deciding how your investment dollars should be allocated among broad investment classes, such as stocks, bonds, and cash alternatives. The underlying principle is that different classes of investments have shown different rates of return and levels of price volatility over time. Also, since other asset classes often respond differently to the same news, your stocks may go down while your bonds go up, or vice versa. Diversifying your investments over non-correlated or low-correlated asset classes can help you lower the overall volatility of your portfolio. However, diversification does not ensure a profit or guarantee against the possibility of loss. 

How do you choose the mix that’s right for you? Many resources are available to assist in asset allocation, including interactive tools and sample allocation models. Most of these take into account several variables: 

  • Objective variables (e.g., your age, the financial resources available to you, your time frames, your need for liquidity) 
  • Subjective variables (e.g., your tolerance for risk, your outlook on the economy) 

Ultimately, though, you’ll want to choose a mix of investments that has the potential to provide the return you want at the level of risk you feel comfortable with. For that reason, it makes sense to work with a financial professional to gauge your risk tolerance, then tailor a portfolio to your risk profile and financial situation. 

Factors that should be considered: 

  • Diversification 
  • Risk tolerance 
  • Investment time frames 
  • Personal financial situation 
  • Liquidity needs

Asset Allocation–Sample Models 

Conservative 

Everyone’s situation is unique. Nevertheless, in general, conservative asset allocation models will invest heavily in bonds and cash alternatives, with the primary goal of preserving principal.

This asset allocation suggestion should be used as a guide only and is not intended as financial advice. It should not be relied upon. Past performance is not a guarantee of future results. 

Moderate 

In comparison, a moderate asset allocation model will attempt to balance income and growth by allocating significant investment dollars to both stocks and bonds. This asset allocation suggestion should be used as a guide only and is not intended as financial advice; it should not be relied upon. Past performance is not a guarantee of future results. 

Aggressive 

An aggressive asset allocation model will concentrate heavily on stocks and potential growth. This asset allocation suggestion should be used as a guide only and is not intended as financial advice. Past performance is not a guarantee of future results. 

How a Financial Professional Can Help 

As you’ve seen, there’s a lot to consider when investing. A financial professional or  retirement advisor can help you: 

  • Determine your investment goals, timelines, and risk tolerance 
  • Evaluate markets and investments 
  • Create an asset allocation model 
  • Select specific investments 
  • Manage and monitor your portfolio 
  • Modify your portfolio when necessary 

 

I hope you’ve found some value in this Investment Basics overview. There’s so much more to investing, but this will give you the basics you should know. I encourage you to listen to Episode 56: “What’s Better Than Bonds?” for an overview of the issue with bonds in a pre-retirees and retirees portfolio. Also, listen to Episode 10: “Retirement Portfolio Design for a Changing Economy.” While Her Retirement does not provide investment advice, we seek to help women understand investing topics so that more information conversation can happen and more informed decisions can be made. It’s all about knowing more and having more. Let’s Get Her Done. Thanks for listening.

pexels-pixabay-53621

What is Better than Bonds?

Hello and welcome to this week’s episode of the Her Retirement podcast. My question for this week is, What’s Better Than Bonds? Sounds kind of like the start of a knock-knock joke. But it’s no joke. 

Bonds have historically played a safety role in your traditional portfolios. However, bonds are basically a bust these days. But, what’s the alternative? Well, that’s what I’m going to dig into.

Drum roll please…the bond alternative everyone should at least learn about is…Fixed Indexed Annuities.

In 2010, the National Association of Fixed Indexed Annuities (aka NAFA) decided to designate June as Annuity Awareness Month to help educate Americans on the important role annuities can play as a part of a secure retirement savings plan. NAFA is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities. 

Annuities in general can be an integral part of your long-term retirement planning strategy, providing direction to help overcome unnecessary risks and important optional benefits that can help protect your financial future. Annuities can offer guaranteed death benefits and payment options to help meet retirement income needs, depending on the terms of your annuity contract. A key step in planning for retirement is to put strategies in place that maximize guaranteed income and protect against market risk.

Guaranteed income annuities can be part of a personal pension and protection plan that I abdicate for many women. There are several reasons I believe annuities and fixed indexed annuities can be part of what I call a simpler, smarter, and safer journey to and through retirement.

Let’s talk about why guaranteed lifetime income is important. The fact is, Americans, especially women, are living longer. There has been a significant increase in the life expectancy of 65-year-olds over the past quarter-century. Today, the average life expectancy for a 65-year-old male is 84 and for females is 86.51. This compares with 81 and 84 years respectively in 2002. While an increase of three or five years may not seem dramatic over a lifetime, it can have a significant impact on retirement security. Additionally, health care costs continue to rise. For the average 65-year-old, health care costs will be $280,000 over their retirement, further necessitating the need for lifetime income. (1)

 

Using guaranteed income sources to meet essential expenses helps address the issue of living longer. In addition, these income sources provide some assurance that you’ll be able to cover basic needs such as housing, health care, and food for as long as you live. 

The remainder of your assets can then be directed to investments with more growth potential to help protect against inflation, rising health care costs, and market volatility. Annuities are just one potential source of income in retirement. You’ll need to consider all of your sources, such as pensions, Social Security, life insurance, your home equity, working, inheritances, etc., as well as the income you’ll be able to generate from your retirement savings such as 401ks and IRAs.

One of the misnomers of annuities is the growth potential or lack thereof. While they can protect from a market decline with zero downside protection, many Fixed Indexed Annuities (or FIAs) provide some pretty attractive growth potential. They are used as an accumulation vehicle, as well as a safety vehicle in your portfolio. They are in essence, a replacement for bonds (since bonds are doing so poorly currently) and when needed you can turn on an income stream from your FIA(s). Remember…FIAs are an alternative to safe bonds because they have no downside risk. They are not an alternative to stocks…you still need stocks in your portfolio.

With an FIA, your worst-case loss from stock market decline scenario is 0%. 

 

Now I want to dive into a strategy for turning a 4% return into 10%. How is this accomplished you ask? By utilizing an FIA. An FIA provides upside leverage in the form of what is called a participation rate.

Participation rates allow the insurer to limit the upside potential on indexed annuities. The participation rate is a percentage by which the insurer multiplies the index gains to arrive at the amount of interest they will credit to the annuity contract. For example, an indexed annuity with a 75 percent participation rate would earn 75 percent of the index gain. If the index was up 13 percent at the end of the contract term, the insurer would credit 9.75 percent interest to the client. At this point in time, some of the leading FIA providers are offering up to a 245% participation rate, which means that if the particular index that your FIA is tied to returns 4%, you make just under 10% during that period of time. So, you have the potential to earn anywhere from 8% to 10% returns with these newly increased participation rates with no downsides. It’s a pretty crazy opportunity right now because as interest rates go up, participation rates go up as well. 

If you’re wondering how long you’re locked into an FIA like this, it’s typically similar to a five-year CD. There are also seven- and 10-year products.

But once again, the beauty of these things is, even if you’re with a five-year seven, or 10-year contract term, you do have a 10% free out that you can take each year. So, for instance, if you put a hundred thousand dollars into an FIA contract, you can still take out 10% per year without any penalty. So, on a hundred thousand dollars, 10% equals $10,000 per year.

One expert I spoke to has never seen participation rates this high. And I quote, “it’s a pretty awesome opportunity.”

But experts do warn people that not all FIAs are created equal. You need to look for “client-centric” FIAs. There’s the good, the bad, and the ugly, and many annuity salespeople who are ready to pull the wool over your eyes. You need to go into an FIA strategy with your income and retirement goals clearly defined and with the right advisor who understands your big picture. Never purchase an annuity, FIA, or otherwise within a silo…like without all your stuff being integrated together.

Yes, FIAs can be complicated, but with the right retirement planner, he/she can fully explain how an FIA fits into your overall plan. The right planner will be 100% transparent about the FIA, the fees, and the overall expected result from incorporating one or more into your plan.

Retirement planning experts and retirement academics seem to agree that FIAs should outperform bonds for some time…both in terms of providing the safety effects of bonds in a traditional stock/bond portfolios and in terms of returns. I’d take even a 4% return from an FIA vs. a bond right now. Let alone a 10% return. With bonds in your portfolio, you’re losing a lot of money. You’ve lost close to 10 to 15% in your bond funds already this year. So, these are great alternatives to the bond component, the safe component of your portfolio. 

 

But Lynn, someone might say, my investment guy is telling me annuities are bad because of high fees or that I could lose all my money.

Well, I would say that you have to understand that the investment advisor or the investment company that you’re talking with is absolutely biased because they offer only stocks and bonds. They don’t offer annuities. Right? So that’s number one. You have to think about that. 

What I would ask the investment guy is how are you going to protect a portion of my portfolio against stock market decline? Can “their” bonds or index funds offer 100% of the upside of the S&P let’s say but zero downsides?

As for fees, let’s say there’s a 6% one-time fee on the annuity. Well, if your investment guy is managing your assets for say 1.5% over the course of 5 years, you’re paying him 7.5% and for 10 years, it’s 15%. The annuity doesn’t look so expensive now. Plus, you have zero downsides and all the upside of the market when it’s growing.

There are terrible, overpriced annuities for sure. There are bad products and unscrupulous salespeople in all industries. That’s why you need to get educated about how to ask the right questions and understand why you’re using the various products in your plan.

The bottom line is this, an FIA is looking like a great bond replacement right now and can offer a myriad of benefits to many people. One of the major benefits is purchasing risk protection against market risk. If safety and protecting some of your portfolio from this risk is important to you, then you should consider or at least learn about how an FIA could work to your benefit. And on the plus side, an FIA does offer growth opportunities. Additionally, because of where interest rates are right now, FIAs are particularly attractive if you find the right contract, company, and advisor who’s both insurance and investment licensed to provide you with as much balanced advice as possible. Sounds a little like having your cake and eating it too?

Thanks for listening to this week’s episode about the unique opportunity of fixed indexed annuities right now. The website annuity.org provides a wealth of information on annuities. FIA Insights.org also offers great information on FIAs. If you have any questions or want to connect with a retirement advisor about your investments or portfolio, annuities, and/or your retirement plan, reach out to me at lynnt@herretirement.com. If you’d like to see how much income you’ll have in retirement, please also ask for a free trial of my Her Retirement readiness software platform and I’ll hook you up. Here’s to knowing more and having more and getting her done.

 

pexels-anna-shvets-5257616

Is there a “right” time to retire?

Retirement is about YOU – your values, your priorities and your dreams for the future. Is there a “right” time to retire? There is – the time you determine works best for you.

Thinking about retiring early? Consider the consequences associated with that choice:

  • You might be giving up prime earning years during which you could be adding to your retirement savings
  • The earlier you retire, the longer your accumulated assets must last
  • If you begin collecting Social Security benefits as soon as you are eligible (age 62 for most people), your benefits may be 25% to 30% less than they would be if you wait until age 66 or 67
  • Because you’re not eligible for Medicare until you turn 65, you may need to purchase health insurance and/or pay for out-of-pocket health care prior to age 65

Thinking about delaying retirement? That choice comes with certain advantages…

  • The longer you work, the more you can contribute to your retirement savings
  • If you postpone tapping into your nest egg, you reduce the likelihood you will outlive your money
  • By waiting until full retirement to collect Social Security benefits, you may increase future benefits
  • Continued employment may also include continued access to company-sponsored health insurance

Of course, the decision about when to retire is yours, and should be made with your unique circumstances in mind. If you’d like to discuss questions about the timing of your retirement, let’s connect. We’re here for you. Reach us at retire@herretirement.com. 

pexels-linkedin-sales-navigator-1251833

Mutual Funds vs. ETFs

The growth of exchange-traded funds (ETFs) has been explosive. In 2005, there were less than 500; by the latter half of 2021, there were over 8,000 investing in a wide range of stocks, bonds, and other securities and instruments.1

At first glance, ETFs have a lot in common with mutual funds. Both offer shares in a pool of investments designed to pursue a specific investment goal. And both manage costs and may offer some degree of diversification, depending on their investment objective. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.

Structural Differences

Mutual funds accumulate a pool of money that is then invested to pursue the objectives stated in the fund’s prospectus. The resulting collection of stocks, bonds, and other securities is professionally managed by an investment company.

ETFs work in reverse. An investment company creates a new company, into which it moves a block of shares to pursue a specific investment objective. For example, an investment company may move a block of shares to track the performance of the Standard & Poor’s 500. The investment company then sells shares in this new company.2

ETFs trade like stocks and are listed on stock exchanges and sold by broker-dealers. Mutual funds, on the other hand, are not listed on stock exchanges and can be bought and sold through a variety of other channels — including financial professionals, brokerage firms, and directly from fund companies.

The price of an ETF is determined continuously throughout the day. It fluctuates based on investor interest in the security and may trade at a “premium” or a “discount” to the underlying assets that comprise the ETF. Most mutual funds are priced at the end of the trading day. So, no matter when you buy a share during the trading day, its price will be determined when most U.S. stock exchanges typically close.

Tax Differences

There are tax differences, as well. Since most mutual funds are allowed to trade securities, the fund may incur a capital gain or loss and generate dividend or interest income for its shareholders. With an ETF, you may only owe taxes on any capital gains when you sell the security. (An ETF also may distribute a capital gain if the makeup of the underlying assets is adjusted).3

Determining whether an ETF or a mutual fund is appropriate for your portfolio may require an in-depth knowledge of how both investments operate. In fact, you may benefit from including both investment tools in your portfolio.

Amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.

Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

At a Glance

Mutual funds and exchange-traded funds have similarities — and many differences. The chart below gives a quick rundown.

1. 1. ETFGI.com, 2021
2. The Standard & Poor’s 500 Composite Index is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
3. Investopedia.com, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

 

pexels-binyamin-mellish-106399 (1)

Mortgages in Retirement

Anyone who has gone through the process of mapping out their retirement knows there can be a lot to keep in mind. Saving, investing, anticipating medical costs, and making sure you have enough tucked away for years to come is just the start. One question many people overlook is: “Should I pay off my mortgage before I retire?” The answer is more complicated than you may think.

Maintaining a Mortgage in Retirement

Opportunity Cost

Imagine you have $300,000 set aside to pay off your mortgage. But rather than using those funds to pay off your mortgage, you instead invest that money. Sure it’s tempting to stop making a monthly payment, but what if that $300,000 earned a hypothetical 6% for the next five years. You would have a little more than $400,000. Yes, your house may appreciate in value over the same period of time, but you should consider all your choices for that lump-sum of money.

Eradicate (Other) Debt

Before you pay down your mortgage, any extra cash might be better suited to paying off other kinds of debt that carry higher interest rates, especially non-deductible debt, such as credit card balances.2

Make Your Mortgage Work

Some homeowners benefit from a mortgage interest deduction on their taxes. Here’s how it works: the amount you pay in mortgage interest is deducted from your gross income, which reduces your federal income tax burden. But remember, the further along you are toward paying off your mortgage, the less interest you’re paying. If you’re unsure if you’ll be able to take advantage of this mortgage benefit, it’s best to consult your financial professional.3,4

Retire Your Mortgage

Don’t Throw Your Money Away

Your monthly mortgage payment may be a large part of your available capital, especially in retirement. Eliminating unnecessary subsidies can significantly reduce the amount of cash you need to meet monthly expenses.

Uninteresting Interest

Depending on the length of your mortgage term and the size of your debt, you may be paying a substantial amount in interest.

Paying off your mortgage early can free up money for other uses.

True, you may lose the mortgage interest tax deduction, but remember as you get closer to paying off your loan: more of each monthly payment goes to principal and less to interest. In other words, the amount you can deduct from taxes decreases.5

Home Is Where the Heart Is

There’s a value to your home beyond money. It’s where you raised your children, made fond memories, and you may want it to remain in the family. Paying off the mortgage may help make your home part of your legacy. Afterall, some things you just can’t put a price on.

  1. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Investments seeking to achieve a higher rate of return also involve higher risks. You should consider your risk tolerance before committing to any investment strategy.
  2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  3. Investopedia.com, 2021. Under the 2017 Tax Cuts and Jobs Act, mortgage interest deductibility is limited to mortgages up to $750,000 ($375,000 if married filing separately) in principal value. This article is more informational purposes only, and is not a replacement for real-life advice. Please consult a tax, legal and accounting professional before modifying your tax strategy.
  4. IRS.gov, 2022
  5. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security