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If you are approaching retirement, chances are you have started exploring how you might enjoy a financially confident retired lifestyle.
In his whitepaper, Dr. Wade D. Pfau Ph.D.,CFA, Professor of Retirement Income at The American College and holder of a doctorate of economics from Princeton University states:
“A low-interest rate environment is risky for investors, especially those approaching retirement. First, it is important to understand that bond prices will decrease if interest rates rise. Bond funds can be volatile and experience losses, and individual bonds may also experience loss when sold before maturity. Bond duration is a measure of just how sensitive bond prices are to interest rate changes.”
What Problems Can Annuities Solve?
In considering deferred fixed annuities and the benefits they might provide relative to other fixed choices, Pfau points out four advantages:
1. Protection of the annuity’s value from investment volatility.
“Deferred fixed annuities support growth at a specific interest rate without exposure to price fluctuations and potential losses as interest rates change,” Pfau observes. “Principal is protected and secured. This provides a way to take risk off the table in the pivotal years before the retirement date.”
2. The ability to earn higher yields than Treasury bonds.
Insurance company general accounts may invest in higher-yielding corporate issues to provide diversification (similar to a bond fund), while protecting the annuity contract holder from interest rate risk. And they provide the principal protection similar to an individual bond held to maturity.
3. Reduction in credit risk.
Because insurance companies can diversify their holdings across a wide range of fixed-income securities, deferred fixed annuities may offer lower credit risk.
4. Tax deferral.
Assets grow faster when investors are able to defer taxes on the interest earned until they actually withdraw it, or it is distributed to them. Because an annuity is tax-deferred for individuals, deferred fixed annuities postpone the taxes on growth until the annuity’s maturity date, allowing interest to compound, untaxed.
Getting the Timing Right
The bottom line is, if an annuity fits into your strategy, there are reasons to continue with this game-plan, despite low interest rates. Pfau cautions that if you waited for interest rates to go up, which could or could not happen, you could spend down more of your principal.
He points out that this would be especially true if your living expenses exceed the interest, dividends, and capital gains you were earning.
And if rates do eventually rise, you might not be able to purchase more income-generating products, such as annuities. Why? Because while you might be getting a higher interest rate, it would be applied to a now-smaller investment.
Waiting, he concludes, adds a new form of risk.
Wait Until Closer to Retirement?
If you think you won’t face this risk anytime soon because you have several years until retirement, Pfau has a finding on that, too.
Laddering annuities could be a good strategy if your retirement isn't eminent, according to Pfau. This approach lets you put money into annuities over time instead of all at once. That can help you manage inflation risk, along with maximizing your guaranteed lifetime income.
With this said, an annuity -- or any financial or insurance solution for that matter -- must make sense for you and your financial circumstances.
The strategies and solutions that can help you reach your retirement goals must be customized to your unique situation.
At Jennifer Lang Financial Services, we will help you in achieving peace of mind in retirement, as you gain knowledge from making informed choices.
Planning for Your Future Income Security
If you are considering an annuity for your financial future -- or if your existing income plan could be enhanced with guaranteed income streams -- you can request personal financial guidance to explore your options.
Help is only a click away, as financial professionals at JenniferLangFinancialServices.com stand ready to assist you.
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