Don’t Let Unexpected Economic Twists Throw You for a Loop

The last few months have proven without a doubt that good times don’t last forever and that years of financial gains can be lost in a day.

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There’s no signed and stated rule that bans septuagenarians from bungee jumping. A rush-seeking senior can strap into a bungee harness and throw themselves off a platform for the thrills just as enthusiastically as any twenty-something, provided that they don’t have a disqualifying medical condition. But generally, you don’t see older folks standing in line for the adrenaline rush. Why? Because for most, the extreme highs and lows don’t hold any appeal. 

Bungee jumping is all about enjoying the thrill of flying upward and the panic-inducing excitement of crashing down. The experience spikes your adrenaline, but it can also give you whiplash and induce enough nausea to ruin your entire day. For senior vacationers, the highs just aren’t worth the uncomfortable — and, let’s be honest, risky — lows. 

In my work as a fiduciary advisor, I’ve seen much the same sentiment expressed in regard to wealth management. Most of my 60-and-over clients know they could hold investments that make sharp inclines or drops based on a company’s earnings or the economy; they simply choose not to. The reason for this is simple: as people approach retirement, they feel less inclined to put their money into risky holdings that could as easily provide crushing losses as high rewards. Low-risk, stable investments are more appealing. 

Recent events have put this line of reasoning into perspective. At the start of 2020, Americans were looking forward to the 11th year of a seemingly endless bull market. But by the end of March, the COVID-19 pandemic had triggered a massive economic disaster. According to data provided by the Bureau of Economic Analysis, the US GDP shrank at an annual rate of 32.9 percent between 2019 and 2020 — a shocking and sudden decline. 

The last few months have proven without a doubt that good times don’t last forever and that years of financial gains can be lost in a day. As those of us at Goldstone Financial Group see it, savers have two options when planning for retirement. First, they can keep a white-knuckled grip on their metaphorical harness and hope that they’ll pull through when the market’s bungee drops them into a plunge. It’s a valid option, and many people find themselves hooked on the rush that a risky portfolio provides. 

But for those who don’t want to weather the twinned exhilaration and anxiety of an economic bungee, there is another option: annuities. 

As defined by Investopedia, an annuity is: “a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.” 

Annuity benefits are considerable. This financial arrangement enables you to participate in market growth while insulating your funds from sudden drops; it also creates a steady retirement income stream and allows retirees to opt into long-term care coverage if they so choose. 

That said, if you have researched annuities previously, you probably have a few doubts. After all, annuities have gotten a bad rap over the years for being confusing, having hidden fees, and not being as accessible as more “liquid” investments. It certainly doesn’t help that some insurance agents push annuities towards clients who don’t need them for their own profit-minded reasons. 

I need to stress that annuities are not one-size-fits-all products and should only be used when advised by a fiduciary advisor. Hundreds of annuities on the market are terrible — and even those that are good aren’t a fit for every portfolio. That said, those that are structured in the right way can provide a powerful financial tool to certain people. 

There are three primary types of annuities: 

  • Fixed: The annuity pays a set amount for the length of the agreement.
  • Variable: Payments fluctuate depending on the performance of the fund in which you’ve invested. 
  • Fixed-indexed: A model that takes features from both of the above options. 

Generally, fiduciary advisors at Goldstone Financial Group recommend that couples and individuals invest in fixed-index annuities. There are countless benefits to doing so, and I’ll provide a few here:

  • Because annuity funds are tied to a market index, you can participate in market growth and take advantage of stock market gains. 
  • Most fixed-index annuities provide a hedge against market losses, so while you won’t earn anything during market dives, you also won’t lose any gains. That said, you also won’t experience drastic highs, as your gains will be similarly capped. 
  • You will enjoy tax-deferred growth on your investment earnings until you begin making withdrawals. 
  • You’ll create guaranteed income backed by the issuing company for yourself and your spouse. 
  • You can add a long-term care rider to your annuity. This addition will let you access long-term care coverage at a significantly lower cost than a typical standalone policy. 

At Goldstone Financial Group, we’ve seen annuities come through for our clients often — but I can give you a specific example. 

A while ago, a couple — Roger and Sarah — came to us for advice on how they might fund their retirement. Despite saving a respectable $4 million nest egg, the pair were concerned that they wouldn’t have enough to support themselves through their sunset years. Roger felt the portfolio was too vulnerable to volatility; Sarah worried about outliving their money. Neither had a pension. 

Together, we determined that Roger and Sarah would need about $200,000 annually to maintain their current lifestyle through retirement — and that to do so, they should invest in an annuity, rather than relying almost wholly on variable sources of income to make up the bulk of their income. We shifted a quarter of their portfolio into a fixed indexed annuity to help create a reliable income stream. When combined with their Social Security benefits, the annuity would cover 50 percent of their desired annual retirement income. 

Now, to be clear — what worked so well for Roger and Sarah may not provide the same gains for you. Fixed-indexed annuities aren’t for everyone, and you should always consult with an independent wealth management professional before reallocating your investment assets. After all, some people’s unique finances are better-served by a riskier portfolio. 

Ultimately, the decision to walk away from — or strap in for — high-flying bungee thrills will be entirely up to you.

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