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6 Types of Investment Risk and Strategies

6 Types of Investment Risk and Strategies

Sep 2021

We’d all love to reap the rewards of high returns on our investments without risk. But unfortunately, wishing does not make it so. Like it or not, risk is part of the equation if you’re aiming for anything other than preservation of capital — a risky goal in and of itself, since the buying power of your money will slowly erode over time if you don’t outpace inflation. The good news is that there are many ways to manage different types of investment risks.

  1. Market RiskStock prices rise and fall over time, sometimes dramatically. While this can be thrilling in the case of a run up, it can be stomach churning when prices fall precipitously. Other asset classes are not immune to market risk as the price of bonds, real estate, gold and other commodities can fluctuate as well. However, diversification among stocks, bonds and other asset classes can help balance market risk. Losses on paper are realized only when you actually sell, so take steps to avoid being forced into selling into a down market. Adjusting allocations as you approach retirement or any other need for divestment is another way you can potentially reduce the impact of market risk.
  2. Inflation Risk.As alluded to earlier, inflation can eat away your purchasing power over time. Today, many savings accounts don’t even keep pace with inflation — meaning a negative real rate of return on your money. Additionally, while higher inflation generally goes hand-in-hand with more favorable savings account rates, if your money is locked up in a lower-interest/longerterm CD as rates climb, you can fall prey to the deleterious effect of inflation. Ironically, in this case, risk can potentially help offset risk as often the only way to outpace inflation involves taking on higher risk through greater exposure to equities (and subsequent market risk).
  3. Mortality RiskThere are really two types of mortality risk. One is not living long enough, and the other is living longer than you expect (yes, this can actually present a problem despite the obvious benefits). In the case of annuities, there’s the possibility that you don’t live long enough for your premium payments to be worthwhile. For the risk of greater-than-expected longevity, proper planning can go a long way. Target date funds, where assets are rebalanced periodically according to a specific retirement goal date, strive to keep your portfolio appropriately positioned as you approach retirement and can potentially help manage the risk of losses associated with an untimely exit from the market. The principal value of a target date fund is not guaranteed at any time, including at the target date.
  4. Interest Rate Risk.The Federal Reserve recently raised interest rates (the principal value of a target date fund is not guaranteed at any time, including at the target date) for the second time this year and signaled two more increases were coming. While this most recent move wasn’t a surprise, it’s expected to impact investors and many individuals who carry debt. New and adjustable rate mortgages are predicted to rise along with credit card rates. This move by the Fed will also likely affect bond prices negatively. Maintaining a portfolio that includes investments that typically benefit in a rising interest rate climate and avoiding excessive exposure to longer term fixed-rate bonds are both strategies to help manage this type of investment risk.
  5. Liquidity Risk.Liquidity, or having immediate access to funds, is an important aspect of investment planning. You never want to be in a position where the need to withdraw funds forces you to incur losses or other penalties. An emergency fund is a good example of the need for liquidity since you never know exactly when disaster may strike. This risk can be mitigated through thoughtful asset allocation that maintains an appropriate cash position at all times.
  6. Inertia Risk.This is the risk of doing nothing. And it’s particularly detrimental for younger investors who may benefit most from the effects of compounding. The earlier you start saving, the better your chances of positioning yourself for a comfortable retirement. So especially if you’re young and haven’t already started contributing to your 401(k), the time to start is now

  7. Be aware of risk when in comes to your investments, but there’s no need to be terrified. There are many ways to manage investment risk so you have the potential to grow your nest egg with confidence. Schedule a meeting with your 401(k) advisor to discuss how to address risk to your portfolio so you can pursue the retirement of your dreams.

Disclaimer: Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Asset allocation and diversification do not protect against market risk. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Investing in real estate involves special risks such as potential illiquidity and may not be suitable for all investors

CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity. Annuities are not FDIC insured. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply. Guarantees are based on the claims paying ability of the issuing insurance company.

The opinions voice in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult an advisor prior to investing.


Tags: investments, managing investments, retirement

Planning for the New Normal Retirement

Planning for the New Normal Retirement

Sep 2021

The need for retirement planning didn’t really exist until well into the 1970s. Up to that point, people worked until age 65, spent a few years in leisure through their life expectancy which was about 69. Many retirees of that era were able to coast into retirement with a cushy pension plan. Over the next few decades, as life expectancy continued to expand, as did the number of years in retirement, financial planners came up with simple rules of thumb for determining how much a person would need at retirement in order to maintain his or her lifestyle.

That’s where the 70 percent rule came from. People were told that they would only need 70 to 80 percent of their pre-retirement income to preserve their lifestyle throughout their golden years. While that may have worked for retirees back in the 1970s and 80s, it could spell disaster for today’s retirees.

It’s not your Grandfather’s Retirement Anymore -Today’s retirees face a whole new set of financial challenges. Many are carrying mortgages and other debt into retirement. Health costs have increased nearly ten-fold. And, because we are living longer these days, health care costs will consume an increasing piece of the retirement budget. About 50 percent of today’s retirees find themselves sandwiched between their own kids, who may still be in college, or struggling to break free of the nest – and their aging parents who may require assistance in their daily living. Some retirees are actually finding that their retirement income needs may be as much as 110 percent of their pre-retirement needs. So much for the rules-of-thumb.

Better to Manage your Risks than your Investments -Today’s retirement savers are finding that there are no certainties in the markets, or in the economy. The only certainties that do exist are the risks they face leading up to and all the way through retirement. The two biggest risks all retirees must confront are longevity risk and inflation risk. Unlike market risk, which can be avoided by simply taking your money out of the market, these two risks are inescapable. And, most people are either unaware of these risks, or have not fully grasped their significance in planning. It seems like decades ago that we experienced any real inflation. And, it has only been in the last couple of decades that the life expectancy rates have been accelerating.

For today’s retirees, longevity risk is a new phenomenon. While people may understand that they can expect to live longer, few realize that age longevity is constantly expanding, meaning that the higher your attainted age, the greater your life expectancy. The risk of longevity is further compounded by the risk of inflation. Even at an average inflation rate of 3 percent, the cost of living will double in 20 years which could put many retirees’ life style in jeopardy.

Retirement as a New Life Cycle -For this reason, most retirees are viewing their golden years not as retirement, but as a new life phase in which earnings from some form of employment or a business may be a necessity. But who says that is a bad thing? Many people can’t imagine themselves coasting through 30 years of life without being able to apply their skills or knowledge in a meaningful way. For many, it is an opportunity to regenerate themselves through new opportunities and new knowledge. Instead of an ending phase of life, retirement will be looked upon as a new life cycle in and of itself.

The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do.

Today’s retirees are finding that retirement requires at least as much psychological and emotional preparation as it does financial preparation. So, retirement planning needs to include a thorough assessment of human assets and liabilities along with an assessment of financial assets and liabilities. It is no longer enough for retirees to know how much money they will need to live; they need to know how they will be able to make the most of this new life stage.

By focusing primarily on financial issues, traditional planning reduces retirement to an economic event with its financial objectives marked by a finish line. The dangerous misconception it perpetuates is that, if you hit the finish line, on time and on goal, your planning is done and you’ll have a successful retirement. While it may address the financial goal of creating a sufficient standard of living, it doesn’t address the larger, more important issue of the quality of life.

Tags: education, retirement planning, tax planning

Tags: investments, managing investments, retirement

How To Pay Back Student Loans

How To Pay Back Student Loans

Sep 2021

You just graduated college, so congratulations are in order and so is a big warm welcome to adult life.

First order of business? Pay your bills!

That diploma wasn’t free and if you’re like 73% of the other 2017 graduates, you have student loan debt and need to figure out how to pay it back.

The good news is that you have choices. There are several student loan repayment plans to choose from. Some are based on a percentage of discretionary income, run for 20-25 years and may include loan forgiveness if all payments are made on time. Other start with low payments that increase over time as your income increases.

Regardless of which plan you choose, make sure you know who your loan-holder is, where to send payments and how much to pay. You may also have questions about discharging your loans or the consequences of missed payments. Get answers to your concerns before you fall behind, and join the 4.2 million borrowers who were in default at the end of 2016.

When must I begin repaying my student loans? Do I have a grace period?

Most student loans have a six-month grace period, which means you won’t have to start making payments until six months after you graduate, drop out or drop below half-time status. The grace period is meant to give you a chance to find a job and begin earning an income before you’re swamped with bills.

Tips to prepare for student loan payments:

  • Use the grace period to research student loan repayment options,
  • Create a budget built around your student loans
  • Prioritize paying off student loans
  • Communicate with your loan servicer
  • Set up automatic payments to avoid late fees
  • Avoid student loan default at all cost
  • Know the exact date when you expect to pay off the loan and give yourself a target ahead of that to shoot for

The following types of loans have six-month grace periods:

  • Direct Subsidized/Unsubsidized Loans
  • Subsidized/Unsubsidized Federal Stafford Loans
  • Some private student loans

PLUS loans have no grace period, and you must begin repaying them as soon as they are fully disbursed.

The grace period on Federal Perkins Loans depends on the school that gave you the loan. If you have this type of loan, check with your school to find out when you must begin repayment.

The grace period on a private student loan depends on the lender and your loan contract. Most private student loans have a short grace period, but you must check with your lender to make sure.

You may also choose to consolidate your student loans during the grace period. This will group your federal student loans into one payment and simplify matters considerably.

If you have federal student loans, you can choose to consolidate them with the department of education, through your loan servicer, or consolidate with a private lender. Private lenders offer lower interest rates, but only to those with high credit scores. If you have good credit and are looking to lower your interest rates on medical school loans, for example, working with a private lender may be the best option.

How much do I pay each month? Can I pay more?

Your minimum monthly payment is based on the type of loan, the amount you owe, the length of your repayment plan and your interest rate. You’ll typically have 10 to 25 years to repay federal loans entirely. Shorter lengths of repayment time or larger loans will result in higher monthly payments.

The Standard 10-year Repayment Plan is by far the most popular plan with 11.37 million borrowers enrolled in 2017, but that doesn’t mean it is the best plan for you. This is the default plan. Borrowers are automatically enrolled in the Standard Repayment Plan unless they choose a different one.

You’ll make fixed monthly payments for 10 years. It’s a great plan if you can afford the monthly payments and the cheapest option long term because you’ll pay a lot less interest. But, if you don’t have the income to support these payments, you should enroll in one of the income-driving repayment plans.

As for making additional payments, you can always pay any amount more than the minimum payment each month. There are no penalties for early repayment, and taking this approach can save you a significant amount of interest over time.

How do I make payments?

Once bills are due, you’ll be responsible for sending your monthly payments to the companies that hold your loans

If you don’t know where to send a payment, check with your school’s financial aid office. The financial aid office will be able to tell you who your loan servicers are. You can then contact your loan servicers directly with specific questions.

You can also retrieve loan information via the National Student Loan Data System.

Be aware that your payments are due even if you don’t receive the bills. If you move after graduation, tell your loan servicer your new address to ensure that you receive bills and can stay on top of your payments.

Consider changing your loan due date to make budgeting easier. The student loan payment might be due before you receive your paycheck each month. Contact your loan servicer to see if they can switch your payment date to directly after you get paid.

What are my options when I’m having trouble meeting minimum loan payments?

If your monthly required payment is more than your income allows you to pay, you may be eligible for income-driven repayment plans like the Income-Based Repayment Plan (IBR); Income-Contingent Repayment Plan (ICR); or Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE).

The income-driven repayment plans are based on your income rather than the amount you owe, thereby lowering payment requirements for low-income borrowers. Generally speaking, these plans take into account your income, family size and state where you live. You pay between 10% and 20% of your discretionary income and plans run 20-25 years, depending on which program you choose

If you expect your financial difficulty to be short term, such as if you are in between jobs or are on medical leave, you can temporarily suspend payments on federal student loans. However, your loans will continue to accrue interest, meaning you will owe more when you resume payments.

You may also be able to extend the time you have to repay federal loans by using an extended repayment plan.

Or, if you expect your earning power to increase significantly over the years, you can opt for a graduated repayment plan. This allows you to pay less at first, with monthly payments increasing over time.

What are the consequences of missed payments? Defaulting?

Student loans never disappear. There’s no statute of limitations, and student loans are rarely discharged even in bankruptcy. With few exceptions, your student loans will follow you through life, until you pay them off

If you make a late payment on a federal student loan, you may be responsible for a late fee of 6% of the payment.

Defaulting on federal student loans will result in more severe penalties. You are considered delinquent when you haven’t made a payment in 90 days. When you haven’t made a payment in 270 days (nine months), you go into default and suffer a lot of consequences for it.

The government can garnish up to 15% of your wages and Social Security benefits, as well as offset income tax refunds. The government may also deduct 25% of each payment for collection fees, making the loan cost significantly more.

Late or missed payments will also show up on your credit report and can harm your score.

If you cannot afford your payments, it is much better to contact your loan servicer and review your repayment options rather than simply not paying.

Can I cancel my student loans?

Federal student loans may be canceled under the following circumstances:

  • Your college closed down while you were a student there or within 90 days after you withdrew.
  • Your school owed you or your lender a refund after you withdrew but never provided it.
  • The loan was a result of identity theft.
  • The student borrower dies.
  • You become totally and permanently disabled.

Can my loans be forgiven?

Federal student loans may be eligible for certain forgiveness programs depending on your profession.

If you have an IBR plan, any balance remaining after 10 years will be forgiven if you spend those years in a public service sector such as the military, public education or police work.

You can have up to $17,500 in loans forgiven if you teach in a low-income area for five years.

If you ever find yourself struggling with student loans, keep in mind that you always have options. Don’t wait until you’ve missed several payments or have already defaulted on your loans; get help as soon as possible to create a plan that works for you and your budget.

NFPR-2019-75 ACR#324822 08/19

Student Loan Defaults Can Wreak Havoc on Retirees

Student Loan Defaults Can Wreak Havoc on Retirees

Sep 2021

No one could have foreseen the convergence of two of the most consequential economic events in our history – the mass migration of the Baby Boom generation into their final life stage and the tectonic shift of a declining global economy. Unhinged stock market volatility, rising health care costs and historically low interest rates on savings have caused millions of preretirees to rethink their plans and their vision, especially as they consider the prospect of having to stretch their retirement income over 25 or 30 years. As if that weren’t enough, now tens of thousands of retirees are finding that their only real safety net is threatened as a result of their decision to default on their student loans.

That’s right; at least 700,000 student loan debtors are over the age of 65, double the number just five years ago. Nearly 10 percent of these debtors are at least 90 days past due on their student debt payments up from 6 percent in 2005.1Unlike most other forms of debt, the federal government will not rest until it receives all of its money. And, because the federal government issues Social Security checks, they can also withhold what they need, leaving many retirees unexpectedly short of cash.

The government can deduct as much as 15 percent from each check until the debt is repaid. With the average monthly benefit being $1,234, that would mean about $200 less in available to meet tight monthly budgets. Needless to say, it can make life much more difficult, especially for retirees living on a fixed income.

The sudden increase in senior student debtors can be attributed to two key factors: In the last couple of decades, parents who wanted to ensure their children had a college education became mid-life borrowers; and many older adults took out student loans to continue their higher education later in life. Student loan defaults among seniors are accelerating as more Baby Boomers are crossing the retirement threshold with very tight budgets. What many of them may not have realized is that student loan guaranteed by the federal government is not dischargeable through bankruptcy.

Retirees facing tough decisions about their finances need to consider the long-term consequences of defaulting on student debt. Not only will a default result in automatic deductions from your Social Security check, it will also make it difficult to find employment or obtain financing if either become necessary at some point. It would be better to look for an additional source of income, perhaps through part-time work or even refinancing a mortgage.

Additionally, retirees can also look into the Income-Based Repayment (IBR) program which can reduce your payment or cap it at 15 percent of their income. As long as payments are made on time, the loan balance is forgiven after 25 years.

If a retiree can find full-time employment (30 hours per week) in certain public services, such as a public library, military organization, emergency service, child or elderly daycare, etc., the Public Service Loan Forgiveness (PSLF) will forgive the loan after 10 years of payments. The PSLF program can be combined with IBR to keep payment low.

Lessons Learned -The unfortunate position of these retirees should provide valuable lessons for mid-life adults considering taking on student debt, either for their children or for their own continuing education. Parents especially should consider the viability of financing their children’s college education. Early planning and savings are the obvious solution for parents who are intent on sending their children to college; however, for parents who aren’t financially prepared, other options, such as community colleges and less expensive, and local public colleges can provide a quality education without the added financial stress.

Tag: student loan, student debt, retirement

How to Make Your Retirement Savings Last

How to Make Your Retirement Savings Last

Sep 2021

At one time, employees worked until they reached their 60s and passed away not long after retirement. However, as life expectancies have reached the late 70s and early 80s, planning for a long retirement is an integral part of managing financial risk. Consumers must plan for longer golden years.

Set a Budget

When your income is reduced, the best way to combat the difference is to pull back on your spending. You already won’t have the expense of a daily work commute, so look for other ways to cut back as well. Set a monthly budget and stick to it, tracking expenses as you go and asking someone to hold you accountable. Over time, you’ll observe spending trends that will help you make reductions and save even more.

Continue Earning Income

One of the best ways to safeguard your retirement savings is to ease into retirement rather than quitting work cold turkey. This could mean going part time at your current workplace or retiring and starting a small job. Retirement is the perfect time to do what you’ve always wanted to do; if you love books, work in a bookstore; if you’ve always wanted to run your own business, consider becoming part of the sharing economy, driving for a ride-sharing service, or shopping for grocery delivery services.


Retirement is a great time to change your location. Since you no longer need to live within a reasonable commute to a business, the world is wide open. Consider moving to a more remote area or another state where the cost of living is much more affordable, and you’ll be surprised by how far your dollar stretches.

Managing your financial risk means making sure you have enough money in the bank to keep you comfortable during retirement. With a little planning and some cutbacks, you can confidently enjoy your senior years.

Tags: help with budget, retirement planning, retirement

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