Protecting Your Retirement Savings

Protect the savingWhether you are about to retire, recently retired, or have been retired for years; protecting your hard earned retirement funds is critical.  There are many factors that can negatively impact your retirement saving. A few of the biggest factors that can devastate your retirement is Long-Term Care, investment risk, taxes, and inflation.

How Can An Annuity Help?

A fixed type annuity is not a silver bullet, but it can defiantly help provide protection when it comes to investment risk.  There are guarantees when it comes to the principal and the interest that is credited to the principal.  Some annuities are now offering a Long-Term Care benefit rider that increases the amount of funds that will be available for Long-Term Care costs.  In fact, some people are using them to self fund their Long-Term Care Insurance.

We are all familiar with the saying “only two things in life are certain death and taxes.”  The only question when it comes to taxes is when do you have to pay them, and what your rate will be?  For details on how an annuity is taxed see the Tax Differed Annuity Page.

When it comes to inflation protection, annuities can offer payout options that are adjusted for inflation so your income can keep pace with inflation.  To understand more about income options with an annuity read our Guaranteeing Your Retirement Income section.

In relation to the growth phase, you have to start with the premise that if you simply put your money in your mattress, personal safe, or checking account you will have an average loss of 3%-4% every year.  This effect of inflation (or buying power of your money) is due the cost of goods increasing, but the value of your money staying the same.  Currently the fixed rates on the most competitive long term Multi-Year Guarantee Annuities are falling in the range of 3%-4%.  At face value this may not seem like a lot, but the fact is that most Financial Advisors use 6%-7% at a long term growth rate to estimate future returns for planing purposes.  Now there is a lot of speculation that suggests that the actual return rate for individual investors is much lower due to investor behavior, but for posterity’s sake let’s assume that the majority of Financial Advisors are accurate in their predictions.  That prediction also assumes a long term average return, and the long term ability to ride out down turns in the market.  Many experts also suggest reducing the risk in your portfolio as you approach retirement.  Since we all understand the relationship between risk and reward it would be prudent to assume that your return rates will be lower in your retirement years than in earlier years.  There are three questions to ask yourself when considering an annuity:

  1.  Does your current investment offer any guarantees on the loss of your principal?
  2.  Is difference between a fixed guaranteed rate and the potential rate of return worth the risk you’re taking?
  3.  Doesn’t it make sense to guarantee the return rate on (at least a portion of) your funds?