Retirees and those facing retirement probably spend more time thinking about money than any other time in their lives. Some choose to go it alone, others look for a financial planner, some pick a middle course with a little of both. Since some experts predict that
You have an alternative to bonds
Josh Jalinski, Jalinski Advisory Group President and commentator on finance at Bloomberg, CNBC
“Sold by insurance companies, uncapped FIAs are not invested in the market. Instead, your money is conservatively invested in the general reserve of the issuing insurance company. The company gives you a guaranteed “floor” in the value of your contract as well as market upside due to the options bought by the insurance company based on the index (e.g., the S&P 500) to which your contract is linked.
“In addition to providing an attractive “non-market” opportunity, uncapped fixed income annuities can:
- Protect against the declining values of bonds in a rising interest rate market.
- Protect from stock market declines.
- Participate in the positive performance of stock market indexes.
- Offer tax-deferral in non-retirement accounts.
- Provide sustainable lifetime income with an optional lifetime income rider.
“There are drawbacks to uncapped FIAs to consider, including:
- Limited liquidity. There is generally a fee on withdrawals that exceed a set amount (usually 10% of the contract value).
- While the basic index annuity has no fees, optional riders do. (Lifetime Income Rider is the most popular.)
- Contract participation rates (and caps) can – and usually are — adjusted annually.
Try low-cost, diversified mutual or index fund investments
The top piece of advice offered by Scott Brewster, MBA, CFP, EA, is “After setting up a cash reserve and emergency funds, structure a sustainable retirement portfolio using low-cost, highly diversified mutual or index fund investments.
“Use high-yield FDIC insured savings accounts for immediate expenses and emergency cash needs. At least six to twelve months of living expenses is a great starting point.
“Next, allocate your money among Stocks and Bonds.
“Historically stocks have provided higher total returns than bonds. Their higher returns over the long term also help to combat inflation.
“Bonds typically provide lower returns over time. On the other hand, they’re usually “safer” than stocks, which are considered “riskier”. Because in later years the need for income and stability is typically greater than the need for growth, many retirees allocate more of their portfolios to bonds.
“As you get older it may make sense for the amount allocated to stocks to shrink further and move to bonds. While everyone’s situation is different, an appropriate retirement allocation along with reasonable spending habits can give you a sustainable portfolio that can last your whole life.”
And now for something completely different
Jeffrey Kreisler, co-author of Dollars and Sense and Editor-In-Chief of PeopleScience.com examines how to apply behavioral principles to the marketplace. He says, “My best advice to retirees: Keep in mind this proven behavioral science principle: Experiences have much more value than purchases.
“Example: Which of these expenditures will mean more to you in one year: Replacing your worn sofa? Or taking your grandchildren to the Grand Canyon for a week?
“Years after the trip, your grandchildren will remember their ‘Grand Canyon Week.’ So will you. And the new sofa? Soon enough you’ll be used to it; it won’t “open” your life in any way whatsoever. But that trip to the Grand Canyon….
“To spend in ways that matter – creating experiences and memories — use “tier” budgeting:
∙ Tier 1: Things you really need. You must spend
∙ Tier 2: Things you think you need. Do you need to go out to dinner so often?
∙ Tier 3: Things you want but don’t need. You don’t need that trip to the Grand Canyon – or any special outing or trip. But aren’t you delighted that’s where you spent money?
“Use Tier 2 to cut spending to have the flexibility to “buy” amazing Tier 3 experiences. Best of all? Experiences go into the only bank you can never draw down to zero: Your Memory Bank.”
Photo Credit: Cafe Credit via Flickr, under the Creative Commons License
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