1. Taking too much risk with your investment:  Most people work a lifetime to save enough so they can have a comfortable retirement. The last thing they want is to lose their retirement nest egg in bad investments. So why is it that most retirees have all their money in mutual funds, stock, bonds, a diversified portfolio of securities, variable annuities, and things like these?  All these things carry the risk of loss. Your stock broker will tell you if you just hang on the market will come back. Most of the time in retirement, you don’t have time to just hang on.

In the closing years of the 1900’s and up until 2002 the stock market was roaring upward — would-be-retirees were making loads of paper profits and looking forward to retirement next year.  Out of the blue came the dot.com bust and a market meltdown; within two years the S&P lost half its value, the Dow Jones index sank like a rock and the NASDAQ lost well more than half.  Many “risk taker” retirees had to change plans or go back to work as Walmart greeters or whatever they could get. Can this happen again?  Look around you: sub-prime problems, foreclosures, inflation picking up, real estate activity grinding to a halt, economic recession being mentioned often, record federal deficits, grocery prices shooting upward and lots of gloom and doom. The first big
mistake retirees or those getting ready for retirement is they have taken too much risk with their retirement money.

What can you do?  Examine every retirement investment you have and make sure the money you’ll be using in the next 10-15 years is in rock solid places. It’s not time to roll the dice with what you worked hard for. For growth and income many use fixed annuities to provide both immediate income and growth for guaranteed income options. If you don’t like those, you can continue to keep your money at risk and hope for the best.

2. Putting all your money in short-term bank CDs:  Many of you have all your retirement money in 6-months CDs because you want safety and are afraid you’ll need it all very soon.  The good news is that you’ve got safety and ready access…the bad news is that this is costing you a king’s
ransom.

Generally, the longer you commit your money the higher the rate of interest you’ll earn. That’s why a 5-year CD pays more than a 3-month CD.  You should have your money coming due about the same time you think you’ll need it.

For example: you have $180,000 in short-term bank CDs that you’ve accumulated just for retirement.  You will want about $12,000 a year of this money to cover expenses above your Social Security, and/or pension and other income. Put $12,000 in a money market account to access the funds anytime you want them; $12,000 in CDs maturing in one, two, three, and four years. You will now have the $12,000 yearly for the next five years to cover your needs.

What do you do with the other $120,000? Why not look into a tax-deferred fixed annuity with a lifetime income rider? You’ll pay no taxes on the interest you earn in the annuity until you withdraw it and you’ll have safety because your principal and interest is guaranteed by a major insurance company. You won’t strike it rich this way but you will avoid the risk that goes with that high flying stock market your broken keeps promising. When your annuity starts to pay monthly in five years, you will not be able to outlive the income and many annuities have added benefits such as double income if you are confined in a nursing home. Retirement is a time to keep what you’ve got rather than trying to roll the dice with your money. You can also make an error by being too safe and too liquid with everything in short-term bank CDs. Retirement is a time to avoid unnecessary risk and make sure you can afford the worse case outcome. That’s why money in the market does not make sense unless you’ve got a lot more money than you’ll need for retirement. If you want help figuring out a plan, contact me.

The recent movements in the market are stomach churning for many who are tired of speculating, too short on time to recover losses, and fearful of living longer than their money. Notwithstanding these concerns, those who don’t like risk stay in the market because those benefiting by investing other people’s money have used myths to keep them there. Let’s review several myths used to keep you coming back or stop you from leaving.

Myth 1. In the long run you’ll be better off in the market because it lets you participate in the growth of the economy! In April 1999 the market, as measured by the Dow Jones Industrial Average was at roughly 10,500, nearly the same level as today. Anyone caring to compare an economy’s growth, either domestically or internationally, to that of the stock market will learn that the two often go in different directions. What is “long term” varies by individuals but history indicates (a) you may be worse off a decade from now and (b) someday you will die.

Myth 2. Stocks on average return about 10% a year! Even if this were true you’d have to buy low and sell when prices are higher. In January 1970 the DJIA was 810. If the 10% rule were true, the market should currently be at 37,000 rather than the present 10,700 or so. Over this period the annual growth rate has been about 5.6%, and roughly half of that has been due to inflation. Is the elusive 10% myth worth the risk?

Myth 3. Now is a good time to buy, or selling turns paper losses into real losses! A good time to buy is before prices rise: but who knows when prices are going to rise? If there is a good time to buy, there must also be a good time to sell! Your broker probably didn’t tell you that October 2009 was a good time to sell. If brokers don’t know the good time to sell, what makes you think they know the good time to buy?

Myth 4. The best way to avoid risk is a diversified portfolio of mutual funds! There’s a zillion types of mutual funds but all have one thing in common: they rise and fall together with major moves in the market. All mutual funds sank like a rock from October 2007 to March 2009, and rose smartly through year-end 2010 but have stalled and dropped since. Mutual funds are always 100% invested in the market.

To manage your retirement money wisely, you must consider strategies that do not require you to “time the market”; to try and catch the market’s unpredictable bounces and turns. Your strategy must also include not running out of money in retirement. So rather than committing all your retirement money to the market, consider moving that amount “essential for your retirement lifestyle” into a guaranteed lifetime income that you cannot outlive. Yes, this strategy does exist because as the ranks of the retired have grown, the insurance industry has crafted ways to protect you financially from living too long. Ask your financial advisor to explain how an annuity delivers a safe, worry-free guaranteed lifetime income, or use our contact request above.

Bank CD rates are at historical lows and as a result the incomes of many retirees have also plummeted to new lows. Retirees that have historically kept retirement money in the stock market have been rocked by violent feast-to-famine cycles. With the stock market dropping from its last peak and searching for a new valley, there is widespread fear about the future direction. Many safety conscious retirees trying to avoid risk have found a compromise in bonds: fixed rates like bank CDs, but less volatility than the stock market. Could it be that danger also lurks here? Let’s look at how bonds really work.

Businesses and governments borrow money by issuing bonds. These bonds are a promise to repay lenders at maturity and a fixed rate of interest in the meantime. Bonds can be backed by collateral or they can be an unsecured obligation of the borrower. The future year when the principal is repaid is referred to as “maturity” and the fixed interest rate paid is called the “coupon”. A bond generally has market liquidity, meaning it can be sold prior to maturity. A major determinate of the value of an existing bond is the difference in the coupon rate and the market rate of comparable bonds. It is this relationship between price and coupon/market rate that needs to be understood.

Let’s say you purchased a ten-year $1,000 bond and the coupon rate is 4%. Parenthetically, purchasing bond mutual funds is one very popular way to generate an income and also get diversification. Fast forward two years when your bond’s maturity is eight years hence and the market rate for a comparable bond is 10%. Assume you need money and you’ve decided to sell your bond. Your bond will be worth about $625 because its coupon rate is 6% below the market rate of present bonds. The longer the maturity of a bond, the more prices change as interest rates fluctuate. Bond prices rise and fall with interest rates and this is the risk of owning bonds.

The Federal Reserve, the government agency that manages monetary policy, has forced market interest rates to historical lows in hopes of raising economic activity and returning people to work. They do this by “buying” government bonds with newly created money: demand for bonds increase and their prices rise [rates fall]. In theory, lower rates stimulate borrowing which expands businesses, fosters new construction and prompts people to buy more goods and services. Heightened economic activity is the result. What happens if the economy strengthens and the Federal Reserve sells bonds to push rates higher to control economic activity? The holders of lower rate bonds will (a) realize a loss if they sell or (b) earn below market interest rates until maturity if they hold. Either way a monetary loss is realized. Since the Federal Reserve is also selling, what about their losses? They manage the monetary affairs of the economy and don’t consider profit or loss.

Generally, interest rates and inflation move in lockstep over an economic cycle. There seems to be an emerging consensus opinion that huge federal deficits, the flood of new money created by the Federal Reserve and the deteriorating U.S. currency will fuel future inflation as the economy  recovers. Accordingly, locking in fixed rate long-term bonds involves risks that must be considered. My advice is to work with your financial advisor to select suitable savings and investment places to provide the lifestyle you have planned for your retirement. So, instead of blindly following the herd to the new Mecca of bonds please make sure you understand them first. If you need an alternative, click the Contact Request tab above.

With the stock market failing to provide positive direction for the past several years, and the baby boomer generation edging toward retirement, more and more investors are seeking secure places for their investments.

Consumers have long considered certificates of deposit (CDs) as safe havens for their money. CDs are federally insured by the FDIC and provide competitive interest rates when compared to savings accounts. But there are additional conservative investment options to consider. Financial advisors often discuss another kind of weatherproof investment that has no risk and offers tax deferral and insurance protection. Fixed annuities are savings plans for income that have no risk to your principal.

Like CDs, fixed annuities are conservative vehicles that offer competitive interest rates, typically with no up-front sales charges. But unlike CDs, you won’t receive an annual 1099 on the interest earned in a fixed annuity, giving you a higher potential return on your investment. Tax-deferral allows investors to accumulate interest without paying current taxes on the earnings. The power of compounding means your principal earns interest and your interest earns interest. That also means instead of losing money to taxes now, your money remains where it can continue to work for you.

How Annuities Work

Annuities are designed specifically for retirement savings and are priced accordingly. If you withdraw money from an annuity prior to age 59½, IRS penalties, income taxes and surrender charges may apply. Once you decide to withdraw money from the annuity after age 59½, income taxes apply. But, you are more likely to be in a lower tax bracket when you retire (under present tax structure). Another benefit of fixed annuities is the potential for life-long income. According to many financial consultants, the number one fear of retired Americans is running out of income before running out of life. With CDs, and other taxable accounts, there is the potential of outliving your investments. As its name suggests, with a fixed annuity, you can choose to annuitize your payment options.

Some annuities have a guaranteed minimum and pay a fixed rate determined by the insurance company before you begin and are adjusted each year by economic conditions and current interest rates. Other annuities are credited by using market indexes which have the potential to earn more when the market moves up without any downside risk. Some annuities offer an income rider that will accumulate at a fixed rate (7-8%) and when you are ready for income you will have a guaranteed income for life while still having access to your principal; however, if you withdraw more than you have accumulated, you will still receive income but your principal may have been exhausted. Regardless of how much you have withdrawn, you will have regular payments for as long as you live.

Who thinks taxes will rise in the years ahead? Everyone, that’s who!

The only options currently available in employer-sponsored retirement plans are market investments, and when money is rolled out of a 401K to an IRA, most people go right back to “the market”. We’re bombarded with ads about “market advantages” and when the crash comes the message changes to “don’t sell Now; you’ll be fine longer term”. But what if you don’t have “longer term” before you need income?

If you have an IRA that is in the market, you currently have less money because the volatile market has moved south. I’m convinced that future taxes are headed higher for everyone. Maybe you have money in low paying bank CDs that are wasting away to inflation. Why not convert some or all of your IRA money to a Roth IRA? You could pay the taxes with zero-interest-earning bank money. If you want, you could even move the new Roth IRA money to a safe harbor like a fixed index-linked annuity. The annuity’s bonus will offset some or all of your market losses and your lower account value means the income taxes will be less even if future taxes don’t rise.

The money converted to a Roth IRA must be counted as income in the year of conversion and ordinary income taxes paid. Accordingly, you will want to make sure you don’t graduate to a higher tax bracket. If so, you can convert some of your money with plans to convert more next year. If you later change your mind you can unwind the conversion and go back to your IRA without having a tax liability. The outlook for the market is not encouraging and the DJIA is currently at about the same level as April 1999, and that’s before adjustment for inflation. This 12-year period is roughly half an average retirement; thus, so much for the “Wall Street Myth” that you’ll be okay in the long run. The market in the most recent decade has earned very poor returns.

If you go from a market investment to a traditional or index-linked annuity with a bonus, you need to do the conversion to a Roth IRA before you move the money into an annuity. The reason for this sequence is because if you convert to a Roth after the annuity is purchased, your account value could be higher which means you could pay income taxes on the bonus. I say “could” because this matter has not been addressed by the IRS and you don’t want to be the test case; thus, do the conversion before the bonus annuity is purchased. If your brokerage firm is reluctant or slow to complete the conversion to a Roth, you can move the money as an IRA to your bank’s money market account via trustee-to-trustee transfer, convert to a Roth and then transfer again via transfer to the annuity with a bonus. There is no limit on the number of trustee-to-trustee transfers, but a rollover that pays you the money can only be done once per year.

If you want a good summary of Roth Conversions that also shows you how to use fixed and index-linked annuities, click the Contact Request above.

No other savings vehicle is as misunderstood, under-appreciated and maligned, as fixed annuities. Most people who can benefit from annuities have been bombarded by misinformation, biased opinions and outright lies. The truth is: fixed annuities are safe because they are guaranteed by insurance companies, a great place to keep retirement money because they pay tax-deferred competitive returns, and all of your money is working 100% of the time.

Sometimes those providing information about fixed annuities have hidden agendas, biased opinions and/or little knowledge. Many personal financial columnists for newspapers and magazines fall into this category: their opinion is tainted by their brokerage background, the agenda is to get you to put your money in market investments that compete with annuities, and their limited knowledge was supplied by the brokerage industry. Why is the brokerage industry biased? Simply stated, it’s because they make commissions from stock market and brokerage investments. In their mind an “annuity purchased” is a “brokerage commission lost”. Unfortunately, the biases of many columnists and brokers may be unknown even to them because they come from or receive information from those in the market.

Notwithstanding all the misconceptions about fixed annuities, it is important that you always understand your investments and confirm they are suitable for you. The best way to get fixed annuities “right” is to work with a financial advisor you trust and whose best interest is your best interest. Below are the ten biggest misconceptions of fixed annuities and a short rebuttal of why they are not true.

1. Come with huge surrender penalties: like all contracts, penalties are assessed for breaking the rules, otherwise there are no penalties.
2. All charge high fees: like bank CDs, annuity fees are built-in and not taken from your money you put into an annuity or the interest you earn.
3. Are extremely hard to understand: no more so than any investment or savings option, in fact, annuities are far easier to understand than most
   investments.
4. Money is tied up for a long period of time: you have access to your money at all times and without penalties if you abide by the annuity contract.
5. Nothing is left for my family if I die: not only is this not true, your money bypasses probate without delay if you’ve named a beneficiary.
6. Different types of annuities are confusing: there are only four main types of annuities compared to thousands of mutual funds.
7. Not good for older folks: they are especially good for seniors because they are safe, tax-deferred and convertible to a guaranteed lifetime income.
8. They are not safe: rock-solid safe with never a penny of principal lost due to the guarantee by the same insurance companies protecting our other assets.
9. Agents are paid huge commissions to sell: agent commissions are paid by the insurance company, not taken from your principal or earnings.
10. Annuities are a substitute for life insurance: annuities are great for retirement savings but not good for wealth transfer like life insurance.

The next time you hear a scary story about fixed annuities, consider the source to determine if it is biased, misinformed or just plain lying. If you put your money in an annuity, make sure you understand how it works and is suitable for you. Like all savings and investment places, fixed annuities work great if used for their intended purpose: annuities are intended for those who don’t like risk, are safety conscious, and are retirement-minded savers who are satisfied with a competitive rate of return.

The number one fear of most retirees is running out of money. What does Wall Street and their “so called financial planners,” propose as the solution? It is always “invest in the stock market” to lower the “probability” of outliving your money. Crap table simulations and other forecasting techniques tell you the probability of running out of money but they don’t offer any guarantees or solutions if you do. Nor are you told what to do if the forecast is wrong. Here are some ideas from “experts” in the investment community:

1. [Some advisers recommend that you follow the 4% withdrawal rule to not deplete your principal]

What do we say? You can still run out of money, especially if you get hit with losses early in retirement or the market fails to go up.

2. [A financial planner did research showing that you may be able to safely go to a higher initial withdrawal rate, say, 5% or more, if you’re starting out when the stock market is undervalued and thus more likely to earn above-average returns going ahead]

What do we say? How will you know if “the stock market is undervalued” until you look back ten years? And, if it is undervalued does that mean you’re “likely to earn above-average returns”? What if your guess was wrong?

3. [Another financial planner and software developer produced computerized simulations showing that a retirement portfolio has a high probability of lasting 40 years even with an inflation-adjusted initial withdrawal rate of just over 5%, provided you strictly follow a series of “decision rules” that call for you to adjust your withdrawals throughout retirement based on your investment performance]

What do we say? All you have to do is “adjust your withdrawals throughout retirement based on your investment performance”. Wow, this is sage advice – if your money runs out, just stop withdrawing!

What all these “solutions” by financial experts have in common is “investing in the stock market”. This means your money will be “at risk” which in turn means you could lose it. The advice from these “financial advisers” is speculative and may add stress during your later years in what is supposed to be your “worry free years”.

There is another, and far simpler in our opinion, way that eliminates the probability of running out of money: purchase a guaranteed lifetime income annuity from an insurance company. Using insurance is far less complicated than trying to out-guess the market. If you are in the stock market and run out of money, then what? Why face risk when the solution is simple, and cheap?

The path to retirement income has a lot to do with how you get there. Let’s say you and a friend are going on a long voyage across the ocean. You choose a sailboat equipped much like a racing yacht while your friend chooses a much more modest boat equipped with a small motor. As you begin together on the first day, the winds are strong and you make great progress while your friend doesn’t fair as well! On the second day unfavorable winds caused you to give up the previous day’s gain but your friend moved forward. The third day there was no wind and no progress. The days went on turned to weeks and weeks to months. You are completely off course and lose your way but your friend arrives on time and in good shape. It sounds a lot like the tortoise and hare, but it is actually a description of the journey of retirement.

You selected a way that was not sure to produce the needed wind, an unpredictable way to get there much like and putting your money in the stock market. One day you make great gains but give them all back the next day. Adding to your woes is what will happen tomorrow or the day after. Will you be blown off course and fail to reach your retirement destination? Your friend chose the dull way by putting money in safe places and makes steady, but modest progress, always in the same direction: forward.

In recent years the stock market has been a “risky place” where you can lose, or make, big money. At the turn of the century it melted down in response to the dot.com boom and bust, fought its way back to a peak in late 2007 and then reversed directions as the housing collapse took hold and spawned the Great Recession. The bottom came in 2009, thereafter inching higher until July 2011 when it again reversed after regaining about two-thirds of the previous losses. At the current time there is paralysis in Washington, global economic and political uncertainty, mounting inflationary pressures, historically high unemployment, the lowest interest rates in a generation and a dismal economic outlook. In response the stock market continues extremely volatile and risky.

Against the odds of realistic expectations, many retirees continue to hope and pray their money in the market is safe. Wall Street and brokers are saying, “Now is a time to buy, good times will return in the long run and don’t sell”. Here are the facts:

• the stock “market is a gamble because you can win or lose; you may do fine longer term but there are no guarantees;
• if you are in or near retirement the long term may be too long; no one knows the future; the stock market could be on the precipitous of a secular decline that could last for decades (witness Japan);
• if you lose your retirement money there is no time to replace it.

If you believe these facts, you may want to consider decreasing your market exposure unless you have more than needed for retirement and losses will not affect your lifestyle. You know your circumstances, so please act accordingly.

          The Roth IRA offers a number of advantages over its traditional counterpart. These include: 

• Tax-free distributions at retirement
• Ability to continue making contributions beyond age 70-1/2
• No required minimum distributions beginning in the year you turn 70-1/2
• Leaving assets to survivors that are free from income taxes 

Details on eligibility to convert a traditional IRA to a Roth IRA. 

• For years before 2010, if your filing status is married filing separately, you don’t qualify unless you lived apart from your spouse for the entire year.
• For years before 2010, if your modified adjusted gross income is greater than $100,000, you can’t convert a traditional IRA to a Roth IRA.
• For years before 2008, direct conversions from an employer plan to a Roth IRA were not permitted. You can do that now, but in some situations it may be preferable to roll to a traditional IRA and then convert to a Roth IRA.
• If you inherited a traditional IRA from a person other than your spouse, you can’t convert it to a Roth IRA.
• You can convert a traditional IRA to a Roth IRA even if you made a rollover within the previous 12 months.
• If you’re otherwise eligible, you can convert part of a traditional IRA to a Roth IRA. But you can’t convert only the nontaxable part. 

Assets converted to a Roth IRA must remain in the account for at least five years before any distributions are taken. Otherwise, a significant tax penalty may apply. 

You’ll maximize the potential for tax-free income later if you pay conversion taxes out of pocket, rather than withdrawal them from your IRA. If you can’t pay conversion taxes without using part of your IRA funds, you probably shouldn’t convert unless you are certain you will be in a high tax bracket during retirement.

 You wouldn’t think of being operated on by anything less than a board-certified surgeon. Or going into court without qualified legal representation. Or even repairing your late-model car without a trained mechanic. Then why do so many people believe they can manage their own financial affairs without professional guidance?

Investing is often a complex and confusing process. Even success can throw your investment strategy out of kilter. For instance, let’s say you want to have 60% of your portfolio invested in stocks. If the market does really well and you are realizing higher than expected returns on your stock investments, after a couple of years you may find that you now have 80% of your portfolio invested in stocks, even though you haven’t changed a thing. Without rebalancing to your target asset allocation, you might find yourself getting whipsawed by a volatile market, which happened to literally millions of investors in 2000 through 2002.

No matter what type of investor you are, it’s crucial to keep your plan on track. Revisit your asset allocation periodically (every year or so, depending on market conditions) to determine whether it needs adjustment. You should also periodically re-examine your risk tolerance and investment profile, especially as you get closer to your goal. You may discover you need to tweak your portfolio’s risk exposure over time.

Sitting down regularly to reassess your goals, time frame, and asset allocation allows you to fine-tune your strategy, keep your risk within acceptable levels, and make sure you’re on track. A skilled professional can help you identify investments that not only achieve the greatest absolute return over the years, but also subject you to the lowest overall taxes along the way. Your advisor will also show you how to properly allocate investments among your various accounts and work with you to integrate your investment and financial goals. A truly knowledgeable advisor will also help you stay abreast of developments in the financial marketplace as innovative new products and services become available.

Just as you see your doctor for checkups, your lawyer for legal advice, and your mechanic for tune-ups, consult a qualified financial advisor for financial planning.