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Are you over 50 and invested in mutual funds? January 6, 2014

Posted by shaferfinancial in Uncategorized.
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If you are within 15 years of retirement and can gain access to your retirement funds you should read this very carefully. There is no rational reason to accept mega-market risk on your retirement funds.

Why, having watched what has happened since 2000 would you ever consider being invested in mutual funds at the end of your working life? If there is a picture of crazy, then the picture would be of folks and their retirement/mutual fund statements.

For the longest time I resisted deferred annuities. But, they kept getting better. Now they have guarantees that put them over the top for folks approaching retirement with traditional 401K/IRAs/Roths that they fund with mutual funds. And the best of the annuities are indexed annuities.

Let’s talk about them.

Say you are 50 years old, plan to retire at 65, and have $300,000 inside your 401K invested in indexed mutual funds. You have done everything Wall Street has told you, 50% in equity mutual funds and 50% in bond funds. You rebalance each year as you are instructed. You have saved quite well as you have more retirement funds than 90% of families. You don’t know exactly how well you have done, because the true internal rate of return is masked by your great savings rate each year. You are pleased that you have gotten your value back up past where it was in 2008 and are again making progress.

You expect to be able to average 8% return over the next 15 years and turn that $300,000 into $951,000. Common financial advise suggests you can safely take out 4% annually during retirement years and not run out of money [this is debatable but for the time being lets leave it with that]. Using these figures you think you now have around $38,000 per year in retirement benefits.

Now that is a whole lot of assumptions that have to happen, mainly these two:
1. You get an average of 8% return on a mix of bonds and equities [over double what the average mutual fund investor has gotten over the last 20 years]
2. When you get to retirement the market hasn’t just had a poor spell [sequence of return risk]

You are subject to a whole lot of MARKET RISK. In fact, you have bet your entire retirement on not getting bit by that market risk.

Now, let’s say you listen to me and you take that $300,000 and put it into a fixed index annuity?
Fifteen years from now that annuity is guaranteed to be worth a minimal of $910,000 [10% bonus + 7% minimum annual rate of return]. It could be worth more, but it will be worth at least that amount.
But there is a catch to that. In order to access that value you have to initiate the income rider. That income rider guarantees you 5.5% annually on your value or $50,000 a year for life.

Your choice a non-guaranteed annual amount of $38K, if things go well or a minimal guarantee of $50K?
Market risk or not?

Now you may be thinking, what if I die earlier than expected? What about my spouse? Well under the income rider you don’t lose your principal the day you take the income rider. Each year your principal is issued an interest credit based on a particular stock index and a cap [much lower cap than EIULs]. And the amount of your annual income is then subtracted from your annuity value. So if you die early the annuity value is inherited by your spouse. But, if you live a long life, that income is guaranteed for your life.

It was crazy from the very beginning to think that individuals can and should be subject to market risk. But that is what we are told and what the 401K game is about. Instead of a defined benefit retirement plan where the companies had the market risk, they readily changed it to a defined contribution plan where individuals have the market risk.

But you can change that if you have access to your retirement funds.

Don’t be a stooge to Wall Street. Contact me for a much longer discussion about annuities and if they can help you retire better.

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