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The Risk of Avoiding Risk

The Risk of Avoiding Risk

Apr 2021

What comes to mind when you think of investment risk?

  • Picking the wrong mutual funds for your 401(k)?
  • Buying into a tech bubble?
  • Purchasing a stock based on a tip from your buddy?
  • Having too many stocks in your portfolio too close to retirement?

Indeed, some of these things quite legitimately could be considered risky. But have you given any thought to the risk of doing nothing? In other words, the risk associated with not investing your money, not contributing to your 401(k), not increasing your contributions on a regular basis, waiting to start investing? Or perhaps not even facing the idea of retirement planning at all?

Choices like these may in fact be among the riskiest behaviors of all when it comes to investing.

It's pretty clear that unless you actively take charge of - and plan for - your retirement, no one else will do it for you. And when the day comes that you're no longer willing or able to work, you won't have the funds you'll need to enjoy a comfortable retirement.

It's very easy to let retirement planning become one of those "I'll start next year" items on a perpetual to do list. There may always seem to be a compelling reason that you can't "afford" to take some portion of your earnings and put them away today for tomorrow's retirement. Maybe you're saving up for a car, a vacation you badly need, a wedding or starting a family. Sometimes it can feel like there's just never a good time to start.

According to Vanguard, one person at age 25 who starts putting away $10,000/year into their retirement account for 15 years with an employee match will have contributed $150,000 into their account and end up with more than $1 million by age 40, while someone else who waits until age 35 to start saving at the same rate with the same match over 30 years (twice as long) will have contributed $300,000 during that time, yet their account would only be worth around $838,000 by age 65.

Delaying saving for retirement can cost you - a lot.

Another way that excessive risk avoidance can be a risk in and of itself is when, in an attempt to avoid investment losses, you fail to put yourself in a position to capitalize on upswings in the market. It's important to remember that your gains are always offset by the effects of inflation increasing your cost of living over time. If, for example, you aren't earning 3% interest during a period where inflation is also at 3%, you're not making any headway.

Investing can be intimidating. After all, some degree of risk is inherent in the process. But it's important not to let fear stand in your way of building a solid financial future. Doing things like investing over a longer number of years and at regular intervals (dollar cost averaging) can help even out the bumps along the way.

Gaining an understanding of what exactly you're investing in and the overall allocation of your assets, as well as how a prudent investment plan can help mitigate risk, may help you feel more confident to move forward.

Sitting down with your financial advisor to discuss your concerns, learn about managing risk and invest in a manner that's in line with your individual risk tolerance is a great place to start.

Source:

1. https://investor.vanguard.com/retirement/savings/when-to-start

ACR# 342330 02/20
NFPR-2020-48

Managing Risk During Retirement

Managing Risk During Retirement

Apr 2021

One of the prime risk protections for your nest egg is time: Time to recover from market downturns. But what about once the sun sets on your working years and rises on your golden years? The first thing you have to remember is that there are different kinds of risks — aside from those posed by financial markets.

Risky Business

Many financial advisors recommend reducing the inherent risk in your portfolio as you approach and enter retirement. That often means moving investments from typically riskier stocks into cash equivalents, government or tax-free municipal bonds, solid dividend stocks or even annuities. During retirement, it’s important to reassess your allocation among asset classes, keeping in mind that you may have a longer time horizon than you think. What kind of lifespan genes are you working with? And, if you took an early retirement, you could be looking at two decades of investing — which is a lot of time to add to your nest egg and recover from market reversals.

Rising Prices

Inflation has been relatively modest for the past two decades, but that doesn’t mean it always will be. For example, the average rate of inflation in the 1960s was 2.45%, but jumped to 7.25% in the 1970s . In addition to eroding the buying power of cash assets, inflation can damage fixed-rate investments, such as long-term bonds, which can particularly impact retiree nest eggs.

Ways to hedge against inflation include owning assets that can increase cash flow if inflation spikes. The rent on homes, apartments and commercial spaces — owned through a real estate investment trust (REIT) — tends to increase. Another possibility is commodities. When inflation occurs, the price of materials like oil, iron ore and wheat also tend to rise. Precious metals, like gold, platinum and silver, along with industrial metals like copper, also generally appreciate in value during periods of higher inflation.

Live Long and (Still) Prosper

Increasing numbers of Americans are living into their 80s and 90s. One way to defend against running out of money is to purchase lifetime annuities. You pay the issuer a lump sum or sometimes a series of monthly payments in return for a guaranteed fixed amount of income for the rest of your life. If you have a fixed-benefit pension, you’re in luck. Assuming the business or union that manages the pension remains solvent, you should maintain a fixed income stream to tap during retirement.

Adjust Social Security Income Projections

Social Security can help too, but there are circumstances that you may have to adapt to. Currently, the government has the funding to pay existing benefits until about 2035, just 15 years from now. While this program is expected to survive in some form past this deadline, you should prepare for scenarios such as an increase in retirement age or reductions in benefits.

Many Healthy Returns

Prepare for the possibility that you’ll have medical expenses that exceed your Medicare coverage. One forecast says that a 65-year-old couple retiring in 2019 would need $285,000 for medical expenses — over and above what’s covered by Medicare — in retirement. If you open a Health Savings Account while you’re still working, you can sock away pre-tax money in that account and enjoy tax-free growth. And, unlike withdrawals from a 401(k), money you take out to pay for qualified medical expenses is also tax-free.

In addition, consider long-term care insurance. These policies pay for some of the costs of a nursing home or home care workers if you’re aging in place. Ideally, you want to have a policy in place before you develop any chronic health conditions that will increase premiums.

Work with your financial advisor to come up with a plan that accounts for how long you think you’ll live, the possibilities of market losses and inflation and the cost of healthcare as you get older. With a solid plan in place, your golden years can truly shine.

#riskmanagement #risk #retirement #wellcents

Sources

1. https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp
2. https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/healthcare-price-check-040219.pdf
3. https://www.businessinsider.com/personal-finance/how-to-use-health-savings-account-hsa-investing-retirement

Should You Own Stocks During Retirement?

Should You Own Stocks During Retirement?

Apr 2021

Many people mistakenly assume that the time for owning stocks is over once they hit retirement. But such blanket statements are not true for everyone. There are a variety of factors that should affect how much of your portfolio, if any, should be devoted to equities during your golden years. Here are some factors to keep in mind:

  1. Your life expectancy. With people living longer, today’s retirement can span for decades. One of the main considerations for owning stocks is how long you can wait before accessing your savings should you need to recover losses from any market declines. If you have longevity on your side, and will likely need money to live on for many years during retirement, then it may be appropriate to leave some of that money invested in stocks.

  2. Other sources of income. If you’re fortunate enough to have a pension or significant Social Security benefits, then you might not need to tap your retirement accounts as soon, or even at all. If this is the case, you may be in a position to leave more of your money in stocks. However, this is a conversation that you should have with a qualified financial advisor.

  3. The timing of your retirement Even if your family doesn’t have a history of longevity, if you retire early, then you’ll likely have many years of retirement that your accounts will need to fund. This is another scenario where it might make sense to have a greater proportion of your investments in stocks even after you retire.

  4. The size of your portfolio. If you have sufficient funds such that you won’t need the majority of your money very soon, then it may be appropriate to take a portion of those assets and allow them the possibility of greater growth through continued exposure to equities. It’s important to remember that you likely won’t need all your assets the first day — or year — of your retirement. The longer you can wait to tap those dollars for your living expenses, the more likely it will be that you can leave some of them invested in stocks.

  5. Your individual risk tolerance. Even if your time horizon and other sources of income suggest it may make sense to continue to own stocks into retirement, if you’re going to lose sleep every time your shares lose value, then it may be wise to reconsider. Retirement is supposed to be a time to relax and enjoy, not stress over the stock market.

  6. Owning stocks during retirement may not be appropriate for everyone, but if it makes sense for you, the potential growth can help offset the impact of inflation. And higher returns may allow you to maintain a better standard of living or leave more for your heirs or to charity. Since owning stocks always carries some risk, it can’t be overstated how important it is to consult with your financial advisor before making such an important decision.

    #riskmanagement #risk #retirement #wellcents

    Source:

    1. https://www.thebalance.com/should-you-own-stocks-in-retirement-2388298

How Many Legs Does Your Retirement Stool Have?

How Many Legs Does Your Retirement Stool Have?

Apr 2021

The three-legged stool is a metaphor that retirement planners use to describe the three most common sources of income for retirees. At one point in time, the three legs referred to Social Security, pension and personal savings — the multiple sources of income generally needed to achieve a financially secure retirement. More recently, however, fewer and fewer companies have offered pensions, replacing them with deferred contribution plans — the most common of which is a 401(k) plan.

Personal savings rates have rebounded since a low of 2.5% in 2005, right before the Great Recession, which was the lowest since 1938 following the Great Depression. By the end 0f 2019, it stood at 7.6%. Today, however, too many families still struggle to save money with the rising costs of living, healthcare and higher education.

Social Security is also a concern for many Americans as they wonder whether this program will be sustainable with rising deficits in the federal budget. It’s important not to panic, however, as there is considerable political pressure for lawmakers to solve this important problem.

You have more control when it comes to the 401(k) leg of your stool — and potentially significant advantages compared to putting money into personal savings. With a traditional 401(k), your contributions are made with pretax dollars and earnings grow tax free until retirement.

Additionally, many employers offer a company match, where they’ll match your contributions up to a certain percentage and a certain amount. The precise formula used to determine the match varies by employer. A company match is like earning free money, which is why it’s critically important to try to at least contribute enough to your 401(k) to earn the maximum company match that your employer offers.

Faced with rising costs and the burden of consumer debt, many families struggle to contribute to their retirement savings enough to achieve a comfortable retirement — leaving many with a “wobbly” stool.

Luckily, there are a number of things you can do to help get your stool on more solid ground. If you’re over 50, then you’re eligible to make catch-up contributions to your 401(k). According to the IRS, Individuals who are age 50 or over at the end of the calendar year are eligible to make annual catch-up contributions. Annual catch-up contributions up to $6,500 in 2020 ($6,000 in 2015 - 2019) may be permitted by these plans:

  • 401(k) (other than a SIMPLE 401(k))

  • 403(b)

  • SARSEP

  • governmental 457(b)”

If you’ve already maxed out allowable contributions for your 401(k), You can also set up an IRA and make catch-up contributions to that retirement account as well if you meet the age requirement.

And, although it may sound counterintuitive, it may make sense to delay filing for Social Security benefits. This is because filing early leads to a reduction in monthly benefits, while delaying will increase your monthly payments.

According to the Social Security Administration, for those born between 1943 and 1954, 66 is considered full retirement age, the age at which you’ll receive 100% of your monthly benefit. However, by age 67, you'll get 108% of the monthly benefit, and by age 70, your benefit increases to 132%. Any monthly benefit increases stops after that, so there is no further advantage to delaying.

If you’re feeling a little “wobbly” on your retirement stool, it’s probably a good idea to schedule a meeting with your financial advisor in order to discuss your situation and come up with a plan to get back on track.

#retirementincome #retirement #wellcents

Sources:

1. https://www.forbes.com/sites/christianweller/2019/07/30/are-typical-americans-really-saving-more/#53f4f56f7337

2. https://www.bea.gov/data/income-saving/personal-saving-rate

3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions

4. https://www.ssa.gov/planners/retire/1943-delay.html

ACR# 342323 02/20
NFPR-2020-45

Are You Underinsured?

Are You Underinsured?

Apr 2021

Adequate insurance coverage is the foundation of a sound financial plan. No matter how well your investments perform, an unforeseen emergency such as a fire, theft or natural disaster may leave you completely unprepared not only to meet the financial needs of your retirement, but your immediate needs as well. This is why it’s vitally important that you review your homeowners and other insurance policies on at least an annual basis (and when your circumstances change) to make sure they’ll provide the coverage you need should such an event occur.

All too often, we take out a policy when we first purchase our home only to “set it and forget it” and continue to pay premiums year after year without ever stopping to understand what we’re actually paying for. The following are some questions you should ask yourself to see if you might be underinsured:

  1. Have building costs gone up since I took out my policy? If labor and material costs have increased since that time, you might find yourself underinsured should you have to file a claim to repair or rebuild your home.

  2. Have I made substantial home improvements? Maybe you’ve added on a master suite, a deck or home theater. If so, your policy should reflect the building costs to repair or replace such improvements should you ever have to file a claim.

  3. Have the value of my possessions increased? Things like new furniture, kitchen appliances or electronics may require increases to the coverage on your contents, which is usually determined by a percentage of home value. If your home value has stayed the same, but you have more valuable stuff in it, then you may need to raise your coverage.

  4. Have I acquired valuables excluded under my homeowners policy? Perhaps you’ve developed a new-found appreciation for modern art or antiques. These types of items and others often are excluded from your regular coverage and require additional riders to protect them. Be sure to ask if your policy covers reimbursement for full replacement value on all your possessions.

  5. Has my net worth significantly increased? Having greater assets may leave you more vulnerable in the event of a lawsuit or other loss. If this is the case, you may want to ask your insurance agent about a personal umbrella policy that provides additional coverage beyond what is offered in home and auto policies. Such coverage is often relatively inexpensive for the additional protection it provides.

  6. Is my home vulnerable to flooding? Many assume that flood damage is covered under their regular homeowners insurance, when it actually requires a special policy issued by FEMA. Your agent can help you determine whether your house is located in a flood zone.

Being underinsured can put you and your family in a precarious situation should the unthinkable happen. Be sure to review your current policies with a qualified insurance agent periodically, or when your circumstances change so that you can make the necessary adjustments to protect you and the ones you love.

#insurance #retirement #wellcents #policies #lifeinsurance #disabilityinsurance.


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