When it comes to our finances, we all want to have certainty and assurance of our income, at least as much as possible. During an election year when emotions are running high, you may be tempted to pull your money from the market in an effort to protect it. However, this may not be the best choice for your situation.
Don’t Do Anything Rash
You may feel like this election year is crazier than any one before it and uncertainty is the only certainty. In times like this, it is easy to lean towards selling and getting out as fast as you can for fear of the future.
We’d like to remind you that historically, the market improved over the long term, regardless of political party. But we also understand that what you’re seeing isn’t just numbers on a page, but your retirement, grandchildren’s college funds, and maybe even that trip to the Bahamas you were finally going to take.
Reliable Income During Turbulent Times: Annuities
Unfortunately, there are two significant reasons why investors do not end up owning investments for the long run. One reason is because of the tendency to nervously get out of the market when volatility rises from things such as turbulent and disruptive elections. Learning to stay calm when others are panicking can address this.
The second reason that investors may end up selling when the markets are down is when their retirement income plan is based on withdrawing money from investment accounts each month to fund their retirement. If the markets go down in value and checks continue to be cashed, losses can be locked in never to be recovered. This is where reliable lifetime income from an annuity can be of much value.
We buy life insurance in case we die too soon, so that our spouse and our children are taken care of. We buy annuities in case we live too long, to provide a lifetime income to take care of ourselves.
Essentially, any investment can pay you income consisting of interest that you have earned as well as spending down your own principal. An annuity is the one financial product that has the ability to continue to pay you a lifetime income even if you have spent down your original principal and all of your earnings. The insurer does this by pooling your longevity risk with many other annuity owners, much like how with life insurance they pool your mortality risk with many other life insurance owners.
There are two phases to deferred fixed annuities that can provide lifetime income. The Accumulation Stage is the period of time that you may choose to leave your money in the annuity to earn interest. If it is a fixed annuity, your money would grow without exposure to market risk. The Distribution Phase would be when you choose to activate the income provisions of your annuity, at which time it would begin to pay a lifetime income that you cannot outlive.
Volatility, whether caused by disruptive political events like an election or by the normal bull and bear market cycles of the markets, can become much more manageable when our income for retirement is coming from contractually guaranteed sources like an annuity.
Keep in mind that any assurances are subject to the strength and claims-paying ability of the issuing company.
SOURCE: Fidelity Investments, 1/27/20. https://www.fidelity.com/viewpoints/retirement/income-that-can-last-lifetime
This hypothetical example assumes an investment by a 65-year-old male in a single-life immediate fixed income annuity with a 10-year guarantee period. Taxes are not reflected in this example. This hypothetical example is for illustrative purposes only. It is not intended to predict or project income payments. Your actual income payments may be higher or lower than those shown here.
For a full version of this article and more thoughts on elections and the stock market, download the full version here:
Presidential Elections and The Stock Market
What’s in Your Portfolio?
We like to think that election years are better for reflecting than panicking. Typically, a diverse portfolio is one that stands the test of time. There are many different options available to you and your funds.
If you want some sort of guarantee for your retirement income and do not anticipate needing access to your money for at least five to seven years, you may want to consider an annuity. If you don’t need a guarantee, it may be warranted to consider some other form of savings investment, as many non-annuity investments have lower expenses in the long run.
It should be noted that most, if not all of them have some sort of early withdrawal penalty, or a market value adjustment, which could result in you ending with less money than you started with.
Due to the fact that many annuities impose significant surrender charges on investors who surrender early, these products are generally appropriate only for investors with long-term investment goals.
If you are feeling like you don’t even know where to start or maybe annuities sound like an option you want to learn more about, we’d love to schedule a free consultation with you and talk about making calculated decisions that fit your risk profile as well as your lifestyle needs.
The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.
We strive to exceed client’s expectations – because we have high expectations of ourselves.