Should You Pay Off Your Mortgage?

When does it make sense to pay off your mortgage?

There’s a lot to consider when thinking about paying off your mortgage. Your home is likely one of the most significant financial investments you’ll make in your lifetime, but it’s also an emotional one. As you near retirement, you may start to wonder if you’ll be better off without the burden of a mortgage ­– but that’s not always the case.

You can watch the video on this topic above, or to listen to the podcast episode, hit play below.

Read on to discover why you need to think about cash flow, alternative resources to cash savings, and if it’s a good choice for you to pay off your mortgage.

Why would you pay off your mortgage?

Before you make a decision about paying off your home, we want you to consider why you’d like to do this.

Perhaps it’s a life goal of yours to pay off your mortgage. Many of our clients dream of living mortgage-free, and it’s our job to help them think through this.

But there’s another school of thought that takes a more strategic approach to mortgage payments. This is where you focus less on paying it off in full and more on paying it off in a way that benefits you financially. For example, if you have a low-interest rate on your mortgage, your savings may be able to offset the interest if they’re invested well, e.g., in the stock market or even a CD.

How would you pay off your mortgage?

In order to pay off your mortgage, you have to have the funds. Think about where these are and where it makes sense to pull the money from.

If you have savings sitting in your bank account, it’s a good idea to use these to pay off your mortgage. Cash in the bank won’t be performing very well as interest rates are currently low­ – almost zero. There are also very few tax issues with this type of account, making it a simple choice.

However, if your savings are in an IRA, and you’d prefer to use this to pay off your mortgage, then you will have to think about the tax impact. IRA money is fully taxable. So, if you want to take $100,000 out of your IRA to pay off your mortgage, you’ll also have to factor tax onto that. You could end up paying an extra $20,000-$25,000 in taxes alone.

As you head into retirement, you want to make sure you have as much money as possible. So, spending thousands of dollars in tax probably isn’t the best decision. While you may feel emotionally inclined to pay off your mortgage, it’s vital to look at how it’ll impact your finances as a whole.

Understanding your cash flow

Say you owe $100,000 on your low-interest rate mortgage. You have enough in your savings to pay this off, but is this the right decision? You want to know if you should use your savings to pay off your mortgage or if you should invest it.

If you choose to invest it, you could get a rate of return anywhere between 6-10%. If your mortgage interest rate is only 2-3%, then you may be tempted to invest your savings instead. But this decision isn’t suitable for everyone.

One of the things we look at is your principal and interest payment on your remaining mortgage balance. Your monthly payments will have been calculated on a much larger sum, so one option is refinancing. However, it’s worth noting that this comes with a cost.

Let’s go back to the example. If you owe $100,000, you may be paying roughly $1,250 per month or $15,000 a year off your balance. This is 15%, which is an incredibly high rate. It would be extremely unlikely for you to earn 15% on any other account. In this case, you’ll have an instant positive cash flow of $15,000 per year by paying off your mortgage.

We understand that this can be hard to visualize for your specific situation. So, if you’d like to see a cash flow analysis on your current mortgage, we’d be happy to calculate this for you. Get in touch with us or book a complimentary call.

Should you use all of your savings to pay off your mortgage?

In a scenario where you have just enough saved to pay off your mortgage (and it makes financial sense to do so), you may feel uncomfortable about having little to no savings left. It can be a lot to stomach watching your account drop from $105,000 to $5,000!

A home equity line of credit can be a suitable solution here. This works in a similar way to a credit card, but the interest rate is typically very, very low. It also gives you access to cash that you can draw on, if you need. So, while you may only have $5,000 in your savings, a home equity line of credit allows you to access much larger sums.

If you do end up needing to use, say, $10,000, for a roof repair or to buy a new car, then we can work with you to find out the best way to pay it down.

Oftentimes people don’t consider a home equity line of credit when thinking about paying off their mortgage. However, it can be a great option. They’re very cheap right now with low interest rates and hardly any carrying costs and or annual fees. It’s also a far quicker and simpler solution compared to something like refinancing.

Should you pay off your mortgage before retirement?

One of the most powerful tools you can have in your retirement planning arsenal is a written income plan. This gives you a clear picture of your finances in retirement, including the possibilities if you do or don’t choose to pay off your mortgage.

If you’d like to see what your financial future looks like in retirement, we can help. We offer a completely free 15-minute phone call to anyone who has questions about retirement planning. So, if you want to know more about whether you should pay your mortgage off, book your call today.

How to Manage Your Money and Your Risk Exposure

If you’re trying to learn how to manage your money and your risk exposure, you may be asking: how can I invest when the world’s economies are so uncertain? COVID-19 has caused a lot of investors to rethink their investment strategies because economies have slowed in the wake of the pandemic.

This is the topic that we’re going to be discussing today to help you better manage your money and risk exposure to weather potentially volatile markets.

Understanding the Need for Risk Management

Risk management is a major part of a lot of people’s lives. Think of it this way: you have insurance, right? You likely have insurance on your home and automobile. If a fire breaks out, you know that the insurance will cover the expenses to rebuild and get right back on with your life.

But do you have insurance on your 401(k)?

Since 1926, there have been 16 bear markets that occurred roughly every six years. During these periods, the market took a dip for over a year and a half, typically 22 months, and the market fell 20%, 30% or even higher during this time. On average, markets lose 39% of their value during a bear market.

For many people, this is a fire that is obliterating their 401(k) and retirement. Risk management is the insurance on your retirement to lower the risk of cutting your investment portfolio in half when a bear market occurs.

Importance of “No More Pies” Methodology

What “No More Pies” really means is that there’s no more standard pie chart that is given to you by a financial advisor and never updated.

A chart may be viable and worthwhile today, but markets change far too often to just follow without adjustments. Young investors may believe that they can ride the wave and not have to worry about market fluctuations.

But as you age, you should be lowering your risk tolerance.

No one wants to lose 50% of their investments. The investments may come back, but there’s never a guarantee. Even when they do come back, you’re looking at 7 to 10 years before recovering from a 50% loss. A person that is 65 waiting 10 years to recover their losses is going to lose a lot of valuable time in the process.

It’s also harder to recover from the loss when you’re drawing from the portfolio to live.

Managing Money During a Crisis: Why Not Being Passive Benefits You

Money management should always be on the top of your priority list because a passive portfolio is often set for failure. In the last year alone, we’ve seen markets highly influenced by both politics and the economy.

Passive investing is easy. You put your money into a bunch of financial vehicles, sit back and hold. The buy and hold strategy may work with some stocks and be a part of your portfolio. Yet, the passive investor isn’t adjusting to the market change or signals that show that this commodity is going to fall or that a cryptocurrency is going to tank in the next few weeks.

During a crisis, you want to:

·  Slowly start adjusting investments as problems start arising

·  Monitor and watch the markets for indicators of something brewing

·  Continue monitoring and adjusting your risk to navigate market volatility

A lot of people get overly concerned, pull all of their money out of the markets and lose out on the opportunity for strong market gains because they fear losses due to political or economic concerns.

It’s important to look at all of the variables, make daily assessments and adjust as risk increases or decreases.

If you go with gut decisions or you’re too cautious, you may miss out on market opportunities out of fear that you’ll make a misstep during a crisis. One of the worst choices that you can make is not doing anything and hoping for the best.

When you stay on top of the markets and adjust based on the indicators that are coming out daily, you’ll be adding that insurance to your retirement accounts that wasn’t available before.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

How the SECURE Act and Cares Act Affect Your IRA

Changes made in 2019 have affected a lot of people’s retirement accounts and how they work for their beneficiaries. It’s important for anyone with an IRA to know how the Secure Act and Cares Act affect their IRA because the changes are both good and bad.

The SECURE Act and Your IRA

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. Changes under the SECURE Act have both good and bad points, which have many people confused. These changes include:

Repeal on Age Restriction for Contributions

Before the ACT passed, you couldn’t contribute to your traditional IRA after you reached 70 ½. Now, you can continue making contributions after this age, which is beneficial for people that continue working after they reach 70 ½ age.

You will need to have eligible compensation to be able to make these contributions.

New 10% Early Distribution Penalty Exception

Exceptions are now given for adoption expenses along with the birth of a child. If you take distributions before 59 ½, any portion of the distribution that is taxable is subject to a 10% additional tax.

This is a steep penalty, and since most people don’t realize that they’ll suffer a 10% penalty until they do their taxes at the end of the year.

Under the new rules, there is a $5,000 exemption per participant if you want to take money out for qualified adoption or birth expenses. The changes are beneficial for anyone that plans to adopt or have a child and needs to find some way to pay for these expenses.

Death of the Stretch IRA

People save in retirement accounts because of tax deferment. You can allow compound interest to work for your retirement account and grow your money more without paying taxes now.

If you die, your beneficiaries can also leverage this same deferment to a certain extent.

Prior to the SECURE Act

A designated beneficiary could stretch distributions for your life expectancy. For a beneficiary, this was highly desirable because assets would remain in the account and grow year-over-year and only have to pay beneficiary required minimum distributions.

The practice was a great way to build wealth.

With a Roth IRA, the distributions became tax free with a qualified event, such as the death of the owner. For many beneficiaries, this was one of the most devastating changes under the SECURE Act.

The SECURE Act changed it so that the stretch IRAs now requires beneficiaries to drain the account in the first 10 years after the account owner’s death. The rule is in place for most non-spouse beneficiaries.

Distributions are optional from year 1 – 9, but if you don’t drain the account, you must increase it by the end of year 10.

A few exceptions are if the beneficiaries are:

  • Disabled
  • Chronically ill
  • Minor child
  • Spouse of the deceased

Even with a minor child, once the child hits the age of majority, the account is switched to the new 10-year period.

A lot of articles seem to miss on exception, which is if the beneficiary is no more than 10 years younger than the account owner. You’ll be able to take a distribution of the account over your lifetime.

What does this mean for you?

The stretch is available for older beneficiaries, which is a nice perk that is offered to eligible for certain beneficiaries. For any beneficiaries that are listed above, the stretch exists otherwise the SECURE Act does remove the stretch IRA.

Qualified Charitable Distributions (QCD) and Why You May Want to Make Them

QCDs shouldn’t be tied into your required minimum distributions. You can begin QCDs as long as you’re 70 ½ at the age of distribution. The Cares Act allows you to make a QCD without needing to take a required distribution.

A lot of financial managers are excited with changes to the QCD because, under the old rules, if you took a distribution from your retirement account, any pre-taxed amount is included in your income.

The exception is if you make a QCD to an eligible charity.

It’s vital that the charity be eligible because if the distribution is made to the charity, the distribution will be tax-free. You can do this up to $100,000 per person each year. Churches are included in this tax-free distribution treatment.

Note: Under the SECURE Act, you don’t have to start taking out your required minimum distribution (RMD) until you’re 72.

CARES Act and Its Importance to Your IRA, 401(k), etc.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act also has some important changes for your retirement accounts. Under the CARES Act, the RMDs aren’t required for 2020.

Under the CARES Act, if you lost your employment or income, you can take up to $100,000 in distributions from your account in 2020. You won’t need to claim 100% of the distribution on your taxes, but you can spread it across three years instead.

You’ll also not have to take a penalty due to the coronavirus-related distribution.

Qualifying for the distribution requires you to be a qualified individual, which falls into the following categories:

  • Test positive for COVID-19 (you, household member, etc.), or
  • Have your income, or a household member negatively impacted due to the coronavirus

If you took someone into your home this year, you could take this benefit if the person is experiencing hardship because of the pandemic. 

The IRS hasn’t mentioned how they will verify that your claims are true.

The CARES Act isn’t subject to that 10% early distribution penalty mentioned earlier.

Note: Many 401(k) plans don’t allow this distribution. You may be able to treat the distribution as a coronavirus distribution.

RMDs and 2021 Possibilities

A lot of advisers were uncertain of what changes may occur in 2021 as the pandemic lingered and even surged to start 2021. There was lot of speculation that there may be some RMD benefits, but this doesn’t seem to be the case as of April 2021.

It seems that those 72 or older will have to resume their RMDs in 2021, with a few changes to keep in mind:

  • You can postpone your 2021 RMD to April 1, 2022, but you will need to take two RMDs and risk having to pay higher taxes if the distribution puts you into a new tax bracket.
  • It’s expected that new legislation will take place in 2021, so you may want to hold off on your RMD because it’s possible that they could be affected.
  • Life expectancy tables have been updated by the IRS and will affect your RMD. The changes will reduce a 72’s first RMD by 6.57% under the change.

Congress has also signaled some interest in pushing the starting age for an RMD up to 75 years old, but it remains to be seen whether this type of legislation will be approved.

If you’re turning 72 this year, you will have to take your first RMD by April 1, 2022.

Overall, the SECURE and CARES Acts have changed IRA RMDs and have some tax advantages. If you’re confused about the changes, speaking to an adviser can add some clarity and help you make the most out of your retirement accounts.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

Buy and Hold is Dead: Why Risk Management is Fundamental in Today’s World

Buy and sell investments were all the rage just a few years ago. People would invest in a new, hot tech stock, hold on to it and reap the benefit of their shares rising drastically. Warren Buffett was a major supporter of buying and holding, and the strategy led him to being one of the richest men in the world.

We’re here to tell you that the buy and hold is dead for the individual investor thanks to risk management.

Buy and Hold’s Main Flaw for Asset Allocation and Investing

Buy and hold is ideal for institutions that have an infinite lifespan. A business that can be around for a hundred years doesn’t need to concern itself with the prospect of their stock fluctuating up and down and potentially losing 50% of its value.

These institutions can continue holding until the stock recovers, which is something that a person nearing retirement may not be able to do.

A regular individual that is investing and holding is unlikely to withstand a plummeting stock market.

Risk assessment is an option that allows investors to interpret and react to a changing market. For example, the risk assessment for the most recent market crash could have helped a lot of investors keep money in their retirement and investment portfolios.

Between 1999 and 2013, the S&P 500 was below its average until mid-2013.

Tens of millions of investors needed their money during this time. For example, a person in 1999 at 55 might have needed just average returns over the next decade to retire comfortably. But the market dipped by as much as 50%, causing the investor to put his life on hold.

Massive fluctuations in the market, even over a 10-year period, can be devastating for an investor or someone that has been growing an investment portfolio for retirement because 10 years is a long time.

Risk Management is Not Timing the Market

Risk management is about the ebb and flow of the market. When the market starts to become too risky, a risk management approach will take immediate measurements in the market to reallocate investments to help avoid massive losses.

And there are a lot of approaches that we take to determine risk, including:

  • Supply and demand balances to better understand how an investment may pan out in the short-, mid- and long-term.
  • The inner workings of a market. This helps us determine what the lows and highs are for a certain industry’s stock to pinpoint potential risks that an average investor may not realize is happening in the market.

Risk management also includes another important aspect: when to get back into the market. For example, when the market began to tank in 2006, a lot of investors sold off their stock and never really got back into the market because they didn’t have the data to properly calculate their risks.

Proper risk management can alert an investor when the market is good to enter again and when, even if it’s difficult, it’s time to offload an investment.

Risk Off and How a Risk Manager Determines When It’s Time to Reduce Risk

Risk is all based on a timeframe. In most circumstances, there’s a short and long timeframe that may indicate that it’s time to offload certain stocks. A long-term timeframe may be based on supply and demand measurements, especially internally in markets where these factors aren’t witnessed by the average investor.

Oftentimes, when markets are seeing a sway in supply and demand, it’s months after these internal factors are being recorded.

Rebalancing a portfolio to remove assets that may suffer from these factors is a good idea, and you may stay out of these markets for the long-term, which can be five, six or even ten years. Short-term factors also play a role in risk management.

A short-term indicator can help a portfolio withstand short-term fluctuations, such as those seen with COVID. Stocks fell in the first-quarter of the year but rebounded, which allowed someone considering their risk to reenter the market at the right time and reap the growth seen just a quarter or two after.

Multiple timeframes can be followed, which are tailored to a specific client and based on:

  • Declining internals
  • Supply and demand
  • Improving fundamentals

Buy and hold is a good strategy for some, but as you age, risk management needs to takeover. The risks that you can face when you’re younger shouldn’t be a part of your portfolio later on in life when you have proper risk management in place.

Risk management models can help predict a market’s direction, allowing investors to capture a market’s upside while not capturing a lot of downside.

While you’ll always capture a little upside and downside, the right data and management strategy will allow you to capture more of the upside in the market, reducing risk and generating more gains in the long-term.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

How Does Inflation Affect Retirement?

Are you concerned about how inflation is going to affect your retirement savings?

There’s a lot of talk right now about inflation and how it’s going to change in the future. When you’re planning for retirement, this can feel like a curveball.

However, it’s no secret that inflation does impact your spending over time, especially when you’re no longer earning a monthly income. What can help is knowing how much it will impact your spending and what you can do about it.

In this post, we share everything you need to know about inflation in retirement. We illustrate how varying inflation rates can affect your savings over time and why you need to carefully consider your spending plan.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

How inflation has changed in recent years

Inflation can have a very real impact on your retirement funds, which is why we include it as part of your written retirement plan. But it’s important that we base the inflation rate on realistic, yet conservative figures.

To do this, we look at the average rate over the last 10 and 100 years. So, over the last century, the average inflation rate is just over 3%, which is why, when we build a retirement income plan, we set it at 3%. However, if you look at the average over the last ten years, it’s 1.7%. Therefore, we consider 3% a conservative rate as we expect inflation to be closer to the 1.7 mark.

Inflation and retirement planning

In this example, we’re going to talk about fictional retiree Cindy. Cindy is 67 years old, and she’s decided to retire now. She’s saved $1.5 million and receives $3,000 a month in Social Security.

Typically, there is a cost-of-living adjustment (COLA) with Social Security, which is somewhat tied to inflation. However, in this example, we are not going to include this adjustment or any other raise to Cindy’s Social Security benefits.

The key player when thinking about inflation in retirement is spending. Cindy plans to spend $7,000 a month in her early years of retirement. This is more than she plans to spend long-term because she wants to travel and do lots of activities while she’s able to. So, her initial spending in retirement will be higher than in her later years.

At age 67, Cindy will have to combine her $3,000 from Social Security with a $4,000 draw from her savings to provide her with $7,000 each month. It’s important to note here that we are factoring in a conservative 5% rate of return on Cindy’s savings.

How inflation affects spending

By adding 3% of inflation every year to her monthly spending after retirement, it’s going to require Cindy to gradually withdraw more and more from her assets. So, what does this look like year on year? Here’s how a 3% rate is projected to affect Cindy’s planned $7,000 spending each month.

  • Year one: $7,000
  • Year two: $7,300
  • Year three: $7,500
  • At age 80: $10,000
  • At age 90: $14,000

If Cindy wants to continue the lifestyle she has at age 67 through into her 80s and 90s, she’s going to have to withdraw increasingly more from her savings each year. Here, you can clearly see how inflation puts significant pressure on your savings.

In this scenario, at age 90, Cindy’s savings of $1.5 million have now dwindled down to just $56,000. With a monthly spend of $14,000, this is too uncomfortably low for us. But what if inflation isn’t as high as 3%?

How much difference 1% makes

If inflation was particularly high (around 3%) Cindy would know that she has to cut back on her spending in order to be more financially secure at age 90. However, if inflation was more in line with the most recent 10-year average (1.7%), what difference would that make?

If Cindy plans to spend $7,000 a month with a 2% inflation rise, she’ll have $765,000 left in her savings at age 90. This tiny tweak leaves her with a far more comfortable figure.

Now, we can’t choose inflation rates, but it’s important to see how much a 1% difference can impact your retirement savings. For Cindy, a higher inflation rate means she has to be more conservative with her spending, or she risks running out of her savings. But she also knows that if inflation holds steady, she can spend more comfortably for longer.

Changing your spending plan as you age

A key part of our roles as retirement planners is to help people like Cindy think through their spending. In Cindy’s case, she wants to spend more in her initial retirement years. She could live comfortably off $5,000 a month ­– the $2,000 is just extra.

Now let’s see what happens if we change Cindy’s spending based on this plan. In this example, we’ll add 3% inflation to her monthly spending of $5,000 and allow her 10 years of “fun money” – an extra $2,000 a month, with 0% inflation.

With this spending approach, Cindy would have $1.1 million left in her savings at age 90. Compared to the two other scenarios, this spending plan is more likely to give her peace of mind that her finances are secure for longer.

Navigating inflation in your retirement plan

This type of scenario is very common for our clients. People often plan to make the most of their first 5-10 years in retirement and then consider cutting back. We illustrate how spending and inflation affect our clients’ financial situations so that they can make informed decisions about their retirement plan. 

Inflation is a factor you need to take into account when planning your finances for retirement. However, it’s often not an issue to stress over. If you’re concerned about how it will impact your retirement, do reach out to your financial advisor or get in touch with us.

We offer a 15 minute complimentary call and can help put your mind at ease about inflation, saving for retirement, or any other questions you may have about preparing for retirement. Book your call with one of our advisors here.

What is a Fiduciary and Why Is It Important?

When searching for a financial advisor, you may have come across the term “fiduciary.” But what does it mean? And is it something you should check for before agreeing to work with a particular company or individual?

Choosing a financial advisor can be tricky. You want someone who will work hard for you, sourcing the right products and offering advice that you can rely on.

A fiduciary could be that person. They’re legally bound to put your interests first, regardless of how much they’ll make in return.

But that isn’t the complete picture. Not all financial businesses are fiduciaries, and that doesn’t mean you shouldn’t trust their advice.

In this post, we’re taking a detailed look at fiduciaries, including what they are, how they work, and why they could be the best option for your retirement plan.

You can watch the video on this topic above, or to listen to the podcast episode, hit play below. Or you can read on for more…

What is a fiduciary?

A fiduciary is a person or company that has a legal and ethical relationship of trust with another person. It’s a legal standard that holds financial advisors to account in their interactions with clients and customers.

The most important thing to remember about fiduciaries is that they must always act in their client’s interests. That means finding the best options based on the client’s requirements, regardless of the rate of commission they’ll receive for selling a certain product.

Fiduciaries are held to these standards through licensing and certification, including CFP (Certified Financial Planner) designation. So, when you see a financial advisor with these letters, you know they’re held to fiduciary standards and would lose their accreditation if they breached them.

By now you may be thinking, why aren’t all financial advisors fiduciaries? Shouldn’t they all act in the best interests of their clients?

Well, unfortunately, it’s not that simple. Fiduciary standards don’t work for every type of financial business, for reasons we’ll set out below.

What is suitability?

Suitability is the alternative to fiduciary. Think of it as a diluted version, wherein financial businesses aren’t held to the same strict standards.

Where fiduciaries always act in the best interests of their clients, suitability places more control in the hands of financial businesses. They don’t need to give the best advice and can recommend products based on commission, even if they’re not the best for the client.

That’s not to say financial advisors working within the suitability criteria are unethical. They still take into account a client’s requirements, and the products they recommend must align with their client’s financial goals.

But what kind of businesses and individuals would choose to work within the suitability criteria? And why do they choose not to adhere to fiduciary standards?

Typically, commission-based financial businesses are most likely to work to suitability standards. That’s because they need to make a certain rate of return, and so recommend products that are of more benefit to them than their clients.

This might sound questionable, but suitability is necessary to keep some businesses afloat. It’s also worth remembering that those working within the suitability criteria must consider their customer’s requirements; they can’t recommend poor products and bad deals.

For this reason, many suitability advisors take the stance of: “I’m not bound by the fiduciary law, but I treat my clients like I am.” This is a common practice but something you should take with a pinch of salt. After all, there’s a high likelihood that they’re benefiting from a sale as much as you are.

How do fiduciary and suitability compare?

To help you understand how fiduciary and suitability differ, here’s a helpful analogy showing how each model works in practice.

Let’s say you want to buy a new car for your family. The first dealership you visit recommends large saloons, station wagons, and SUVs, all at different price points. There’s no pressure to buy from the dealer, and you make a choice based on the information they’ve given.

Then, you visit another car lot. Here, the dealer recommends a car that, though suitable for a family, is slightly over your budget. However, they convince you that it’s the right car and you buy it even if it’s not the deal you were looking for.

Can you guess which was the fiduciary dealer and which was the suitability dealer?

That’s right, dealer one was a fiduciary. They offered lots of options that were suitable for families and didn’t recommend any cars that were over your budget to make more commission.

Dealer two was the suitability model. They had one or two suitable cars and used salesmanship to convince you to spend more, making more commission for themselves in the process.

Again, this might sound questionable, but it comes down to how a business is set up and the type of industry they work in.

A final word on fiduciaries and suitability

After reading this guide, you might be thinking that suitability advisors are all bad and fiduciaries are the only way to go – but don’t. Sure, you should be cautious about taking suitability advice at face value, but it doesn’t mean you’ll get a bad deal that doesn’t work for you.

At Peace of Mind Wealth Management, we choose to stay within the fiduciary arena because we believe it’s the best fit for our practice and our clients. Both Radon and Murs are accredited CFPs and are licensed investment advisors, meaning they’re legally bound by fiduciary standards.

If you’re looking for wealth management advice with the assurance of fiduciary accreditation, we can help. Putting your needs at the heart of everything we do, our financial services can help you on your retirement journey.

We hope this guide on fiduciaries helps you think differently about your financial decision-making. Remember, if you need any advice or expertise, our financial specialists are here to help. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.

Reverse Mortgages Explained

Reverse mortgages are a hot topic among retirees. Some retirees want to have access to a reverse mortgage for financial security, while others are still unsure of how they feel because of some of the practices in the industry in the 60s, 70s and 80s that gave these types of mortgages a bad name.

If you’re considering a reverse mortgage, it’s important to know what these mortgages offer you, their benefits and your obligations when taking out a reverse mortgage.

Traditional vs Reverse Mortgage

A traditional mortgage is what you likely used when you purchased your home. You’ll go through a mortgage company that has a lien on your home and will have to pay the mortgage note for 15, 20 or 30 years (terms can vary).

When you make a payment, you’ll be paying down your principal and interest.

Reverse mortgages are different because there are no payment obligations, but there will be a lien against the property. The loan will be paid at some time in the future where interest and principal are repaid, but the loan has no monthly obligation.

Since a reverse mortgage is only allowed for someone 62 or older, the lender often only recuperates their money when the last borrower passes away and the home is sold.

Reverse Mortgage Example

Confused?

Let’s look at an example:

  • You own a $500,000 home.
  • You own the home outright and no longer have a mortgage.
  • You want to take money out of the home through a reverse mortgage.

In this scenario, you’ll typically opt to take out money via a line of credit. You’ll likely be able to take out $275,000 if you’re 70 years old. You can take money out of this line of credit where the repayment is made at some time in the future.

With a reverse mortgage line of credit, there’s no repayment obligation, and these lines of credit cannot be:

  • Frozen
  • Reduced
  • Cancelled

A reverse mortgage line of credit can only be cancelled if the borrower doesn’t meet their obligations. During COVID-19, a lot of home equity lines of credit were frozen, leaving a lot of older homeowners unable to access money that could have potentially helped them navigate the pandemic.

Scenarios Where a Reverse Mortgage Makes Sense

A lot of people choose to do a reverse mortgage when they’re in retirement and still have a mortgage payment to make. The mortgage payment causes a cash flow problem, which causes a lot of people to take out a reverse mortgage to free up some cash.

Other people want to create a new source of income, while others open a line of credit for when they need long-term care insurance. Need to make a down payment for a continuous care retirement community? A reverse mortgage can help you generate the cash to make this payment.

There are also others that want to downsize, so they’ll use this mortgage to make a second or vacation home purchase.

Using the previous example, let’s say that you a $500,000 home and want to take $200,000 out for the down payment on a continuous care retirement community buy-in with the expectation that you’ll be able to move into the community in two years.

So, in two years, you’re able to move in and take out $200,000 in a reverse mortgage line of credit,

What happens?

  • Closing costs were rolled in.
  • Interest accrued for two years.
  • Loan balance is $240,000.

If the home is sold for $500,000, you would have net proceeds of $260,000 leftover. The sale of the house pays off the reverse mortgage, which doesn’t require any payments during the two-year period.

Baby Boomers Transitioning Into New Homes

Over a million baby boomers have decided to transition into a new home. The transition may be because the homeowner wants to:

  • Avoid having to do maintenance and move into a retirement community.
  • Downsize because their home is too big for them now.

A reverse mortgage can also be used in this scenario. The homebuyer can choose to use a reverse mortgage to invest money or to pay for the down payment for the new home. You can also opt to use the reverse mortgage money as a down payment, move into the retirement home and then sell off the other property to repay the reverse mortgage.

There are a lot of options to use the reverse mortgage to make money.

Now, when you’re reaching end of life and pass away, what happens to your heirs? Your heirs will have to pay the loan balance. Traditionally, the home’s appreciation will outpace the reverse mortgage loan balance interest growth.

The heirs would sell the home at the appreciated value and pay off the reverse mortgage.

Let’s assume that over a 10-year period, the home’s value rose $80,000. The loan value will, in most cases, rise less than this amount, allowing the heirs to sell the home with a net profit.

Using a Reverse Mortgage for Cash Flow When You Have Investments

COVID-19 is a prime example of when investors can use a reverse mortgage line of credit when the market’s conditions aren’t optimal. At the start of the pandemic when the markets dipped, a lot of people relied on their reverse mortgage because it’s:

  • Tax-free
  • Doesn’t require the sale of assets
  • Made more sense to use at the time

You don’t want to sell when the market is on a dip because you’ll be losing money. Instead, a lot of people used their reverse mortgage to allow the market to rebound before selling off the investments you have.

If you need $500 a month to pay your bills, you can draw from the line of credit much like an annuity.

#1 Misconception About A Reverse Mortgage

If you’re considering a reverse mortgage, the largest misconception is that the bank now owns the home. You still own your home, but the reverse mortgage lender has a lien on the home that allows them to be repaid when the home is sold.

Practices in the 60s through 80s did foster this misconception, but times have changed for the better.

Once you sell the home, you will receive 100% equity you have in the home minus the reverse mortgage repayment. So, once the reverse mortgage is repaid, you or your heirs will receive all of the remaining equity.

Can the Home Be Underwater?

No. The loans are backed by the FHA and insured for the borrowers and their heirs. For example, if a market collapse occurred and your $500,000 home is now worth $200,000 and your reverse mortgage was $300,000, you or your heirs would:

  • Sell the home for $200,000
  • Repay the $200,000
  • Not have to repay the remaining $100,000 balance

Essentially, your heirs would not be inheriting a debt that they cannot afford to repay with a home that has a reverse mortgage.

The heirs nor the estate would have to repay any excess debt beyond the price of the home at the market value at the time of sale of the home.

Steps to Taking Out a Reverse Mortgage

If you’re thinking about a reverse mortgage, you should sit down with a local representative of a reverse mortgage broker who can discuss your goals with you. Local representatives can see where you live and better understand what your needs are.

Local loan officers can run calculations to see if a reverse mortgage is a good option for you.

Counselors will request a meeting with you, which lasts about an hour, and ensures that the loan officer walked you through all of the steps in the mortgage process. If you decide the mortgage is a good option for you, an appraisal is done, and then closing takes about 30 days to complete.

Your money is then available for you to access after closing.

When you meet with a counselor, they do not have an opinion on the mortgage. Instead, the counselor answers all of your questions and provides you with all of the fine details relating to the reverse mortgage. These individuals make sure that you understand a reverse mortgage 100%.

Credit history is considered, but the lender wants to reduce the risk that you’ll go into default rather than make sure you have a high credit score.

A lot of homeowners want to enjoy a better retirement, and a reverse mortgage can help fund this goal. Yes, your heirs will not receive the full value of the home because the mortgage needs to be repaid, but you’ll be able to enjoy a better retirement.

And a lot of children are happy with their parent’s decision to take money out of their home to fund the retirement that they envisioned.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

 In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

When Is the Right Time to Take Social Security?

If you’re getting ready for retirement, one of the most important questions you’ll want answering is: when should I take Social Security?

This is the most frequently asked question by all of our pre-retiree clients. There’s lots of information out there that dives into when the right time to take Social Security is, and, usually, people already have an idea of when might suit them. However, what this information fails to take into account is your own personal situation.

In this post, we illustrate the long-term impact taking Social Security at different times can have on your assets. So, if you’re considering taking it early, at full retirement age (FRA), or waiting until you’re 70, it’s important to know the long-term effects it can have.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

When can you take Social Security?

The earliest age you can take Social Security from is 62. The latest is age 70. That’s an eight-year window where you can choose to start taking Social Security.

Each year that you wait, the amount of Social Security you’ll get increases. So, if you take it earlier, you’ll receive less, but if you wait until the upper age limit, you’ll get the maximum amount possible. This is why a lot of the information says you should wait and take your Social Security as late as you can. However, we don’t believe this is the best option for everyone.

Many people choose to take Social Security at full retirement age. The IRS and Social Security define when this is, and currently, it’s contingent on the year you were born, making you either 66 or 67 at full retirement age.

Now, if you reach full retirement age and decide not to take Social Security right away, that’s going to draw on your assets. Those who retire at 66, and wait to take Social Security when they’ll get the most bang for their buck, have to face 4 years of withdrawals on their assets first. In this case, you have to live for a long time to truly reap the benefits!

Our approach to taking Social Security is to evaluate what works best for your individual retirement plan. Perhaps waiting until you’re 70 doesn’t make sense for you. In which case, taking it earlier could preserve your assets in the long run.

On the other hand, if you take Social Security after age 62 but before full retirement age, you need to be aware of some limitations.

Social Security penalties

If you’re still working between age 62 and full retirement age and choose to take Social Security, there’s a limit to the amount you can earn, otherwise, you will face a penalty.

In 2021, the maximum that a person age 62 can make and still take Social Security penalty-free is $18,960 a year. If you earn less than this, your Social Security will not be penalized. But what if you earn more?

As an example, say you’re planning on consulting and making $35,000-$40,000 a year at age 62. The math quickly tells us it does not make sense for you to take Social Security yet. If your Social Security benefit is $10,000 a year and you earn $10,000 more than the $18,960 limit, you’ll be penalized 50% of your Social Security. That means you’ll lose $1 for every $2 you earn over that limit. Now, instead of receiving $10,000 a year in Social Security, you’ll only get $5,000.

So, if you’re earning above this limit, then it’s highly unlikely that taking Social Security makes financial sense for you. To avoid these penalties, be clear with your financial advisor about how much you’re expecting to make at age 62. If you want to work part-time, or in a low-paid position, it could still be possible to take Social Security penalty-free. But you need to be aware of the numbers.

But what if you’re not planning on working at age 62? If you’re hoping to retire at this age, is taking Social Security a good option for you?

When is the right time to take Social Security?

We’re going to use a fictional person to demonstrate the differences between taking Social Security at various ages. In three example scenarios, we have Mary. She is 60 and planning to retire at age 62. We’re going to use our system to work out when would be the best age for Mary to start taking Social Security.

Before we dive into this example, it’s important to note that Social Security typically rises every year with a cost-of-living adjustment. To keep this example as straightforward as possible, the Social Security amount will not include any increases.

At age 60, Mary has an IRA with $1.2 million in retirement savings, that’s making a rate of return of around 6%. With two more years of work ahead of her, and the interest rates’ growth, Mary can expect to have around $1.4 million at age 62. This is when she hopes to retire.

One thing that Mary needs to know going into retirement is how much money she’s spending each month. Let’s say her expenses are $5,000 a month, with an additional 3% inflation rate.

Scenario 1: Taking Social Security at full retirement age

So, what happens if Mary chooses not to start taking Social Security until full retirement age (67)? For the first five years of her retirement, she will need to draw $5,000 each month on her own assets to cover all of her expenses. When Mary reaches full retirement age, she will start receiving $3,500 of Social Security a month. This now reduces the draw on her assets down to $1,500 each month.

If we look forward to Mary’s assets at age 90, we have some significant changes. Due to inflation, her expenses have increased to $12,000 a month. But thanks to a good rate of return, Mary’s assets have grown to $1.6 million. This is a good outcome for Mary, she can comfortably maintain her lifestyle well into retirement and has more money leftover than she initially retired with.

Scenario 2: Taking Social Security at age 62

But what if Mary took her Social Security when she retires at age 62? We know that she would receive less in Social Security each month because she’s taking it early. So, in this scenario, Mary receives $2,450 instead of $3,500. This means that while she won’t receive as much Social Security each month, she won’t need to draw as much on her assets as she’ll have support throughout her retirement.

In this instance, at age 90, Mary has $1.75 million left over. That’s over $100,000 more than if she waits until full retirement age.

So, you can see that while it might be tempting to hold off taking Social Security early to get more each month, that might not be the best decision. In Mary’s case, it’s more beneficial to take the lower payments long-term.

Scenario 3: Taking Social Security at age 70

Finally, let’s take a look at what happens if Mary waits until age 70 to take Social Security. Because she’s waited until the upper limit, Mary will now receive $4,340 a month. This may instantly look more appealing than taking it early at the lower rate of $2,450, or even in comparison to full retirement age at $3,500.

However, Mary will now have to draw on her assets from age 62 until she’s 70 to cover her expenses. This is a long and sizeable draw. If we look forward to age 90, Mary now has around $1.5 million left over in her nest egg.

So, even though she’s receiving more money on a monthly basis, that initial period of withdrawal has had a big knock-on effect. Looking solely at Mary’s assets at age 90, Mary’s best option will be to take Social Security at the earliest possible age, 62.

What does this mean for you?

This example isn’t reflective of everyone’s situation. If Mary wanted to continue working, had other sources of income, or there was a spouse involved, it may change the outcome. So do not take this example as individualized advice.

What we want you to take away from this article is, if you’re researching when to take Social Security, it’s likely that you’ll get a mass answer that won’t translate to your own situation.

If you want to find out more about when you should take Social Security and how your retirement decisions affect this, reach out to us. We offer a completely free, no-obligation 15-minute phone consultation, where we can run through your numbers and give you an idea of when is right for you to take Social Security. Book your call now.

Continuous Care Retirement Community – Understanding Your Options

Becoming a member of a continuous care retirement community (CCRC) is something people nearing retirement should be considering. These communities are often called life plan communities because you’re making a decision today for your future living and healthcare needs.

What is a Continuous Care Retirement Community?

A CCRC is a community that you enter when you’re still in good health but getting older. The idea is that you join these communities and effectively secure your spot as your care needs increase.

Perhaps you’re in the community for 10 years, but then your hips or knees continue to get a little worse, and you could use some additional care.

As a member of the community, you would be able to secure one of these care spots as they become available so that you can get the care you need. You’ll have peace of mind that as a resident, you can be confident that your care needs will be met for life.

5 CCRCs Contract Types

1. Extensive

An extensive contract has a higher upfront price, but no matter your care needs, the costs never increase. You’ll be buying into a contract, and you can be confident that your costs will remain the same despite potentially increasing medical concerns and needs.

2. Modified

A modified contract has an entrance fee, which is typically smaller than an extensive contract, but the costs will change as your care needs change. So, if you need a skilled nurse, you will have to pay for the care.

The care may be offered at a discounted rate, or you may receive a certain number of care days for free each year.

The modified contract does have an upfront cost, but you will risk potentially higher medical costs as you age.

3. Fee for service

This contract has an entrance fee, but it’s typically cheaper. This option allows you to secure your CCRC, but you will pay a standard fee for any service that you do need.

4. Equity

An equity share is a very important type of CCRC because you’ll actually purchase the property in which you reside. The equity share differs from a contract because you own the property, which will then become an asset.

5. Rental

As a rental, you’ll rent the home, and care may or may not be provided to you. This option is the most affordable, but you’re also taking a major risk because there may or may not be care available when you need it.

One of the things that is important to understand is that all of these options have risks. If you pay more, you reduce your risk in most cases. High upfront costs allow you to have the comfort in knowing that your risks are rather low.

For most people, they’ll often choose:

  • Modified
  • Fee for service

Rental properties are also rising in popularity, as people are considering their options when retiring.

Wait Lists and Continuous Care Retirement Communities

Every community has a different commitment to join a wait list for a community. The population is getting older and living longer, so the demand for CCRCs is very high. Joining one of these lists will vary from community to community, but it will typically require:

  • Application
  • Deposit

The deposits are often refundable or will go to your costs if you do decide to join a community in the future.

With waitlists being long, it’s important to consider joining one as soon as possible. The waitlist can be years – sometimes 4 to 5 years. It’s worth considering joining a waitlist early, especially when you’re in good health, so that you can secure a spot if you want to join in the future.

Good Health and Qualifying for a CCRC

A continuous care retirement community will often recommend joining when you’re in good health. The term “good health” can be subjective. What usually occurs is that when you’re ready to join a community, you’ll be asked to have an exam to better understand what your health needs are today.

Communities are only able to provide a certain level of care, and they safeguard members by ensuring that their care needs can be met.

As a general rule of thumb, if you can live independently, you’re in good health.

Members may be able to join a community if they need assisted living or skilled nursing. Each community is different, so it’s important to ask the community upfront what options are available for new members.

CCRCs are built to help independent members, those that pay a lot upfront, if they have medical issues. A lot of CCRCs don’t allow people that are not independent to join because the commitment is to the independent individuals that joined the community when they’re healthy.

When Should You Join the Community?

A CCRC is a community that you can join and be amongst like minded people. While a lot of members are over 70, this figure is starting to come down. Many communities have a minimum age of 62.

When it comes to couples, one person may be older than the other, and this can cause some conflicts. There is often a lower age requirement for one spouse, but it’s only a few years, making it difficult for couples to enter into a CCRC.

Some people join waitlists in their 50s in preparation that they’ll have a spot available in the community when they need it.

Understanding Entrance and Monthly Fees

A continuous care retirement community will often have an entrance fee and a monthly fee. The entrance fee is sort of like an insurance that allows you to become a part of the community. This fee will have some potential medical costs rolled into it.

The monthly fee is for all of the additional perks, such as:

  • Meal plan
  • Housekeeping
  • Utilities
  • Amenities
  • Fitness center
  • Classes
  • Transportation 
  • Maintenance, etc.

Monthly fees cover virtually everything with the exception of Internet. The monthly service fee at a CCRC covers everything so that you can relax and not worry about fixing a roof or mowing the lawn.

Specific Situations Within a CCRC

CCRCs have had to adapt with the times. There was a time when everything was standard, and meal plans couldn’t be adapted based on a person’s dietary needs or desires. Today, a lot of these retirement communities are offering made-to-order meals to adhere to the dietary differences of their members.

In addition to food concerns, another concern is how the fee structure may be different for couples when one is healthy, and one has higher care needs.

If a community can serve these individuals, they’ll often work with you. Members are different because if they enter as an independent, these communities understand that one individual may have more needs, while others don’t.

One spouse would move into the assisted living while one remains in independent living.

There are also options where an outside agency may send someone to care for the spouse so that the couple can stay together for longer.

A continuous care retirement community is a great option for anyone that wants to cover their bases as they age and grow older in a community that is more like a resort than a traditional retirement home. If you need additional care in the future, the CCRC can offer you the care you need at a place that you’ve long called home.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

 In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

The Difference Between Asset Allocation and the Strongest Assets

When working with a financial planner or advisor, it’s important that you’re aligned on how you want your money invested. There are many different investment strategies and what you might be comfortable with may not be your advisor’s preference. So, how can you ensure that your money will be managed how you like?

The first step is to have a basic understanding of investment strategies. This way, you’ll know what’s more suited to your personality and how you want your investments taken care of.

In this post, we’re explaining the differences between two investment strategies, asset allocation and strongest assets. We share the fundamentals of each, why people choose them, and how to figure out if they’re appropriate for your money management style.

You can watch the video on this topic at the top of this post, to listen to the podcast episode, hit play below, or read on for more…

What is asset allocation?

Asset allocation is the most common way of investing. It’s a preferred method for two reasons.

  1. Asset allocation is relatively easy to do
  2. There’s very little maintenance, unlike other investment strategies

If you’re familiar with the buy and hold strategy or buying a well-diversified portfolio, then you’ll already have an idea of how asset allocation works.

For example, if you have money to invest, and decide to put it in the stock market, you might distribute it to more than one area. You may want to put a portion of your money in stocks, such as large cap stocks, like Apple, Amazon, Google, or mid cap or small cap stocks. There are also sectors that you might want to get involved in. Financials, healthcare, technology, and energy are all popular sectors that many people invest in. Finally, you could decide to buy up some bonds and fixed-income investments.

When you add all of these investments together, you get an investment pie. You can use this to visualize where all of your slivers are in the market, as they may all be in different areas. Essentially, this investment method is asset allocation.

Why asset allocation is a long-term strategy

With asset allocation, you’re advised to hold these investments for the long term. The idea is, if you hold these investments for 5, 10, 15+ years, then the market will go up, and so will all your different pieces of the pie.

Now, let’s look at how this method performed in a tumultuous year, such as 2020. Overall, large cap stocks did well, but mid and small cap stocks were greatly affected. So, if you held a mixture of large, mid, and small cap stocks, the increase in large cap stocks may make it look like your portfolio performed adequately. If you hold a diversified portfolio, you’re always going to have slivers that outperform others. The aim of this strategy is to wait long enough that, eventually, the pie as a whole increases over time.

Many of us first encounter this kind of strategy when we get our first job and 401(k). Often, people pick different investments in this scenario. A popular choice is target-date funds, which create an asset allocation based on how much longer you have to work. This will then adjust according to your age.

In terms of maintaining an asset allocation, it requires very little attention. Your advisor may rebalance the account quarterly or even once a year. This strategy is an easy way to “set it and forget it.”

Understanding your investment risk tolerance

It’s important to note that you can still lose money with an asset allocation strategy – even if you have a very conservative portfolio. The idea is that if you stick with it and stay invested, then you will make your money back. The question is, can you stomach the negative?

This is where understanding your risk tolerance comes into play. Knowing what downside number you’re comfortable with can help you figure out what investment strategy is right for you. We demonstrate this by using real figures. For example, instead of theoretically asking you if you’re happy with a 20% loss, we’d ask if you’re happy to lose 20% of $1million, so, $200,000. This puts your loss into perspective.

Remember that if you’re using an asset allocation strategy, you do not sell when the market is crashing. You have to be able to withstand the financial impact of a pandemic, a financial crisis, or anything else that might be thrown at you. If you sell when the market goes down, you defeat the purpose of this strategy. Your advisor will tell you to hang in there.

What is the strongest asset strategy?

A strongest asset strategy differs from asset allocation because it allows you to sell whenever those assets are no longer strong.

When you’re thinking about investing using this strategy, you need to picture the entire stock market world. This includes equities, stocks, companies, bonds, fixed income, cash options and then you’ve got some alternatives. Once you’re looking at them altogether, you can start to see who’s winning the race.

Now, usually equities win the race because they have growth. Bonds are stable and make a good rate of return, but they may not always be the strongest option. Cash, on the other hand, hardly moves. However, if there’s a scenario where the market is crashing and equities and bonds are pulling back, cash could be the front runner because it’s not moving backward.

You then use this analysis to see where the strongest area is to invest. You could invest 100% of your portfolio in equities, but it doesn’t mean you have to stay there. You could move that 100% from equities to bonds, and again from bonds to cash, depending on market performance.

Strongest asset: a more active approach

If you decide to invest 100% of your portfolio in equities, you can take the same approach again. This time looking at the top performers in the equity world. In 2020, for example, large cap technologies were winning the race. This sector thrived during the pandemic, with mid and small caps struggling. So, we shifted all of our portfolios to accommodate this. In January 2021, mid and small caps started to come back, so we shifted again.

A strongest asset strategy does require more maintenance than asset allocation. You need to be actively managing your portfolio and prepared to make changes. We want to make a good rate of return for our clients, so we watch the market every day. If the market starts to change, then we make decisions, such as selling, to protect our clients’ investments from a downturn.

Which strategy suits your personality?

So, if you’re building out an investment portfolio or considering your investment options, think about which strategy suits your personality more. Do you prefer the idea of buy and hold (asset allocation), or do you want to keep a closer eye on your money and how it’s performing (strongest asset)?

When you decide which option is for you, the next step is to find a financial advisor who can help you manage your money this way.

To learn more about preparing your finances for the future, check out our complimentary masterclass, 3 Keys To Secure Your Retirement. The free interactive webinar gives you more information on how to build a retirement income plan and shares valuable money management tips and advice. Get it here.

How to Implement an Annuity into Your Portfolio

You understand what an annuity is, how it works, and what the advantages are, but do you know how to implement it into your portfolio?

In this eighth and final installment of our “Annuities – Why Ever Use Them series, we’re sharing how to use an annuity as part of your retirement portfolio.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

A quick summary

Before we dive into how you can incorporate an annuity into your portfolio, there are some things to be aware of. We’ve already covered these points in detail in other articles within this series, so do visit our blog to find more information about anything covered below.

Here’s a quick recap:

  • Our focus for the “Annuities – Why Ever Use Them series is on fixed index annuities only.
  • We prefer fixed index annuities over variable annuities because you can lose money in a variable annuity.
  • Fixed index annuities protect your principal, so your investment is guarded against market volatility.
  • Fixed index annuities are linked to an index, such as the S&P 500 – they earn interest depending on how the index performs.
  • You can choose from a range of strategies for how you want to receive interest, for example a cap or a participation rate strategy.
  • If you use a cap strategy set at 5%, for example, and your index earns 10% over an annual point-to-point reset, your annuity will earn a maximum of 5% interest.
  • If you use a participation strategy set at 50% and your index earns 10% over the reset period, you’ll earn 50% of the index’s 10% growth (5% interest on your annuity).
  • There are liquidity restrictions, so we recommend using an annuity as part of a more diverse portfolio.
  • Most annuities allow you penalty-free access to 7-10% of your money in any given year.
  • Annuities often have a surrender charge that applies for a set number of years.

Why choose a fixed index annuity?

Most people use an annuity as part of their retirement portfolio for two reasons. First, a fixed index annuity gives you complete safety and still grows your investment at a good rate of return. A fixed index annuity is not affected by market downturns and is protected against risk. So, if your main concern is safety, an annuity would be a good option for your portfolio.

The second reason is income planning. There are a few ways to get guaranteed income in retirement, including taking a pension and Social Security. A fixed index annuity is a straightforward addition you can make to your guaranteed income sources that lasts for the rest of your lifetime.

Implementing an annuity in your portfolio

We’re going to use an example to demonstrate how to build an annuity into your retirement portfolio. In this example, we’re going to be using hypothetical figures and a fictional retiree, Mary. Please bear in mind that while these figures are representative of fixed index annuities, these are not accurate rates.

Mary is 60 years old and has $1 million of IRA/401k savings. She wants to retire in 7 years time, at the traditional retirement age of 67. She’s calculated how much she spends on her essential needs, wants, and legacy money each month, and discovered that she needs $4,000 of guaranteed income a month to cover her essential needs alone.

Social Security will give Mary $3,000 a month. She doesn’t have any other forms of guaranteed income, so Mary is looking for a way to get an extra $1,000 a month.

What is your risk tolerance?

One thing we talk to all of our clients about is risk. Knowing what your risk tolerance is can help you make decisions about your portfolio that you’re comfortable with. So, before we can advise Mary about finding that additional $1,000 per month, we need to understand how much risk she’s willing to take.

There are a few different ways that you can make a return and manage risk. Banks, for example, have essentially no risk, but the rate of return is very low. Money markets in general are well below 1% currently. So, while there is no risk, there is also hardly any return.

However, if you look at the stock market, this is the complete opposite. There is potential for incredible returns, but also huge losses. Annuities, on the other hand, give a good rate of return, but there are liquidity issues. Your total investment won’t be easily accessible to you. This is something to be aware of in case liquidity is a concern for you.

Let’s go back to Mary. To find out Mary’s risk tolerance, we’d have a conversation with her about how much she’s prepared to lose. Take her $1 million, for example. If we’re talking in percentages, a 10% gain or loss might be something Mary is willing to accept. But if we convert that into dollars, a $100,000 loss may be too much for Mary. In this case, we would keep discussing figures until we land on a percentage that Mary is comfortable with.

Once you understand how much risk you’re prepared to take, then you can decide how to build a portfolio that suits you.

How to construct your portfolio

Mary’s risk tolerance helps her decide that she wants to invest 50% of her $1 million in the stock market and 50% in a fixed index annuity. This gives her roughly $550,000 of liquidity. Mary still needs that extra $1,000 of guaranteed income a month, so she puts $150,000 into an income-based annuity. At age 67, this will start providing her with a lifetime monthly payout of $1,000. Now, she has complete peace of mind that her essential income needs will be covered when she reaches retirement age.

In terms of Mary’s portfolio, she still has $850,000 left. So, to achieve that 50/50 split, Mary could invest $350,000 into another fixed index annuity. She’s got the guaranteed income coming from her first annuity, the second one will be to give her that risk-free growth that she wants. The remaining $500,000 will go towards the stock market as she wishes.

So, where will Mary’s portfolio get her by the time she retires? If the $350,000 in her annuity earns 4%, it will grow to around $480,000. Meanwhile, if the $500,000 that she invested in stock market earns 7%, it will have grown to over $1 million.

The final piece to this portfolio is her remaining annuity, which will start generating $1,000 a month of guaranteed income to add to the Social Security payments of $3,000.

However, one thing that we need to consider is inflation. Mary’s expenses are now $6,500 a month. So that original $4,000 of guaranteed income no longer completely covers her essential income needs. But, thanks to Mary’s growing investment portfolio, she can afford to withdraw from her accounts to cover that extra cost.

Inflation and other costs can drastically impact your retirement plan, but we can use our system to adjust numbers and show you exactly how your funds could play out in different scenarios. We can illustrate what happens to your money if you want to withdraw more at the beginning of your retirement than you do later on, or if you want to purchase a second home, for example.

Overall, Mary’s retirement plan shows that her funds last throughout her retirement, and well into her 90s. Constructing a portfolio that’s safe, liquid, and has income, can give you this same security and peace of mind that you don’t need to worry about your retirement finances. But, please remember, this is based on an illustration only.

If you want to learn more about using an annuity as part of your portfolio, please do reach out to us by booking a complimentary 15-minute call. We can give you individualized advice about annuities and constructing a portfolio that’s right for you.

Documents for Estate Planning and Retirement

Documents Every Person Needs for Estate Planning

     Is Estate Planning on your priority list? A common misconception about estate planning is that it is only necessary if you have a big estate, many assets, or a complicated family situation. 

The reality is, estate planning ensures that decisions that would be difficult to make in the moment are made in advance to make things easier in the future. 

    By making these decisions in advance and setting them out in writing or in some other way, you can ensure that the wishes of you or a loved one are preserved and that there is a concrete plan for what happens if someone needs to make a decision on your behalf after you die.

     Estate planning also governs what comes next after you die, from what happens to your property to how your funeral will be handled. At its core, estate planning is giving yourself the peace of mind that the people you leave behind will know what to do and will be taken care of, a concept that is very comforting for many. This can be part of your Retirement Planning Checklist.

Estate Planning Documents

      A number of legal documents must be prepared as a part of the estate plan. It is important that these documents are prepared correctly to ensure that your intent is reflected, that nothing slips through the cracks, and of course, that your will and other related documents are validly executed so you do not die intestate. 

      When Preparing for Retirement with estate planning, there are generally three main documents that attorneys advise families to prepare: A will, a durable power of attorney, and a healthcare power of attorney with a living will component. These three documents allow others to legally act for you, which is a powerful, invaluable tool when it comes to managing your end-of-life affairs.

  • Will
  • A will is a legal document that tells readers your wishes after your death, from the distribution of your property to the management of your estate to your intentions for how your children will be raised, in some situations. 
  • While, in some states the law recognizes handwritten/holographic wills, working with a seasoned estate planner or attorney will ensure that your estate is distributed exactly as you would like it to be. 
  • Some wills benefit from the inclusion of specialized clauses that allow for others to act on behalf of the estate, which can come in handy if the language of a will is unclear or if the way a certain property is set to be distributed is impracticable. 
  • For example, wills can include a power of sale provision, which allows the executor of the estate to sell a given property and distribute the funds among the will’s beneficiaries. 
  • Healthcare Power of Attorney
  • A healthcare power of attorney is a legal document that allows an established person to make healthcare decisions on the behalf of another. 
  • This kind of estate planning document is particularly helpful in situations where you or a loved one are unable to make healthcare decisions on your own behalf, like if you are in a medically induced coma or experience a lack of capacity. 
  • A living will is often part of the healthcare power of attorney document. The living will expresses what a person wants, while the healthcare power of attorney states who is authorized to be a decisionmaker.
  • Durable Power of Attorney
  • Durable power of attorney is similar to the healthcare power of attorney but is much broader. Durable power of attorney allows a person to entrust another with virtually all legal decisions. 
  • Someone who has durable power of attorney can make healthcare and financial decisions and even sign legal documents on behalf of another in the event that the person who gave them the power is incapacited or otherwise cannot act on their own behalf. 
  • Power of attorney is a powerful tool to entrust someone with, and can be used to make changes and allow access to bank accounts, various assets, and even change the beneficiaries of a will or similar legal document.

      With the help of these three key estate planning documents, you can feel confident that your loved ones will be taken care of and that it will be as simple as possible for your wishes to be respected after you die.

      If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

      In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

The Retirement Planning Checklist

As you start to think about retirement planning, you might quickly feel overwhelmed or unsure about what to plan for. Retirement is made up of many different elements, and you’re going to have to make decisions about all of them – but where do you start?

We realized that many people approaching retirement don’t know what they should be thinking about or what questions they should be asking. So, we’ve put together a checklist of the nine most important things you need to consider before retirement.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

In this post, we walk you through each of these nine elements and help you better understand some key retirement planning aspects. You can make notes on these yourself, use them to talk to your financial advisor, or even see them as retirement planning conversation starters between you and your family. Let’s dive in.

List your retirement goals

You only retire once, so make sure you’re prepared for it! You might have lots of big plans and ideas about what you want to do in retirement. This might include going on a trip, spending more time with grandkids, or anything that you’re initially very excited to do. But often, people don’t plan beyond their first year of retirement. We call this the “retirement honeymoon phase.”

You need to think about what you want to be doing in retirement long-term. We’re talking for 10-20 years! After that first year or “honeymoon phase,” what would you like to be doing regularly, or what would you like to accomplish? Take a pen and paper and write some ideas down in a list or create a retirement journal. Here are a few questions to get you thinking.

  • Do you want to work part-time or volunteer? Are there any organizations that you’d like to work with?
  • Where do you want to live? Perhaps you want to downsize, move into your retirement transition home, or look into other retirement accommodation.
  • Do you want to travel? If so, will it be one long trip, annual vacations, or frequent getaways to places nearby?

Having a list of all the things you want to do in retirement is a great way to get excited about your future. It can also help you make the right choices so that you get to live your dream retirement.

Know your numbers

You may have opened many different bank accounts throughout your life. Perhaps you have multiple 401ks or have various assets. One of the first steps to preparing for retirement is gathering up all of this financial information.

When you’ve consolidated these accounts, you’ll be able to see how much you’ve got, and start building your financial retirement plan. From here, you can find out how much guaranteed income you can expect to receive when you retire.

Your incomings are one thing to know, but you should also be aware of your spending. If you’re working, you may be less worried about how much you’re spending month-to-month, but after you’ve retired, you’ll no longer have money coming in the door. It’s important to know what your fixed expenses will be so you can budget accordingly.

Ideally, your guaranteed income (e.g., your Social Security and pension) will cover all of your fixed expenses. But remember, the unexpected can happen. Sudden healthcare costs or inflation, for example, can affect your retirement plan. So, while we can make illustrations and help get your finances in a good place, we can’t predict the future.

Social security: look at the big picture

People usually want to know how they can get the most money from Social Security. While this is completely understandable, we want to urge you to look at the big picture.

If you wait and start taking Social Security at age 70, then you will receive more money in total – if you live into your 90s. However, if you’re withdrawing more on your assets because you’re not taking Social Security yet, this could have a massive impact on your finances 10-15 years down the road.

It can be easy to fall into the trap of wanting more from Social Security, but we strongly advise you to look at what waiting will do to your assets in the long-term. A comprehensive, written retirement plan can show you and help you understand how something like this will affect your overall finances.

Take an interest in your investing

You don’t need to be a stock-guru, but we recommend that you find out what strategy best suits your money goals and risk tolerance. There are many different ways to invest, but we break these down into two main categories: passive and active.

The passive, or buy-and-hold strategy, is more suited to those who want to invest their money and leave it. This is typically a long-term strategy, where you’ll invest over many years and (hopefully) your money will accumulate. However, when the stock market is volatile, you need to have a high-risk tolerance to weather the storm.

For those approaching retirement, we advocate a more active strategy. This is where you make adjustments depending on market shifts. It’s more suitable for those with a lower risk tolerance, as it attempts to protect against any downturns or crashes that may have a big impact on your retirement savings.

If you’re not sure where to start, consider what your risk tolerance is. If you lost 5% of your invested money today, for example, how would that make you feel? What percentage would you be comfortable with losing?

Understand your Medicare options

You will start receiving Medicare at age 65. However, there will be many, many options to consider. We suggest that you don’t wait until the last minute.

A year before you’re due to receive Medicare (around age 64), start finding out what options will be available to you and get an idea of what to expect. This way, you won’t be as overwhelmed when the time comes. We also recommend speaking to an expert, if you can.

On the Secure Your Retirement podcast, we spoke to Medicare specialist Lorraine Bowen about navigating its complexity. To hear Lorraine answer some of our questions, please listen to the podcast episode “Navigating Medicare in Retirement.

Get your legal documents in order

It’s imperative to update all of the legal documents you may have before you retire. There can be complications if your documents don’t match up or if there is conflicting information in them, so make it a priority to get these in order.

Check that your power of attorney, will, and account beneficiaries are all correct. If these are not aligned with each other, one may usurp the other in case of an event. For example, a beneficiary form can be more powerful than a will – so it’s necessary to make sure that these are all in line with your wishes.

If you have trust documents or think you may need a trust, you should also start having a conversation about if this is a good option for you.

Plan your long-term care options

You may already know that you need long-term care insurance, but, again, there are many options, and it can be complicated.

You could opt to self-insure, or you could purchase traditional long-term care insurance or hybrid insurance. Traditional long-term care insurance has previously presented problems with sharp rate increases making it less affordable for many. Meanwhile, hybrid insurance premiums do not increase, but the insurance model itself can be a combination of many things. It could be part annuity, part life insurance, and part long-term care.

To learn more about long-term care and the differences between hybrid and traditional insurance, read our post “Long-Term Care Insurance: Traditional vs. Hybrid.”

Understand your taxes

Taxes will always be a part of your finances, so you need to plan for them. When you’re consolidating your accounts, it’s a good idea to note how each one will be taxed.

Many account types are taxed differently. For example, if you take withdrawals from a pre-tax IRA, that will be considered taxable income, so you’ll need to plan for this. If you have a Roth IRA, this will grow tax-free and can be a big tax advantage in the future. Annuities and brokerage accounts are taxed differently again – it’s up to you to find out the implications of each on your retirement plan.

Get your retirement income plan in writing

Finally, we strongly recommend putting your retirement income plan in writing. This can give you peace of mind about your financial freedom in retirement. It can show you an estimated projection of multiple scenarios and help you decide how you’re going to approach your future.

We often have clients approach us who feel uncertain about what’s possible for them in retirement. After seeing their “what ifs” played out and how we take different parts of your finances into consideration, they leave feeling far less stressed and optimistic about their future.

So, those are the nine key things you should think about when planning your retirement. We hope that this checklist comes in useful and helps you on the road to retirement.

If you want to learn more about preparing for retirement, consider getting our complimentary online masterclass, 3 Keys to Secure Your Retirement. You’ll learn how to create your own Lifetime Retirement Income Plan and start your journey to a confident financial future.

Retirement Planning Checklist to a Worry Free Life

Retirement should be worry-free, but many in the United States don’t have any retirement savings. Your goal should be to retire with as little stress and worry as possible.

It’s possible, but you’ll need to make sure that you begin securing your retirement today.

We’re going to outline an eight-point retirement planning checklist to help you retire worry-free.

8-Point Retirement Planning Checklist

1. List All of Your Retirement Goals

You can’t know where you’re at in reaching your goals if you haven’t defined them yet. Planning starts with your goals. Make a list of answers to the following questions:

  • What is your definition of a happy retirement?
  • Want to travel? Which destinations will you go to?
  • Want to spend time with family? How often will you travel to see them?
  • Would you like to move closer to family?
  • How much money do you want to spend or give away during retirement?
  • Will you help pay for a grandchild’s college education?

While this step may seem tedious, it can really put your retirement into perspective.

2. Know Your Numbers

Retirement is all about numbers. Money is a number’s game, and throughout your lifetime, you likely have made and contributed to a lot of accounts. You need to know how to access these accounts, how much money you have in them and where your money is allotted.

You may have an IRA, 401(k), annuity, brokerage and several other accounts.

When you have all of these accounts available and know their numbers, you need to consider your spending. Spending habits will typically have three main parts:

  1. Needs, or money to live
  2. Wants, or money to use for vacation, etc.
  3. Legacy, or money you would like to give away

You’ll need to consider that your money will come from your IRAs and 401(k)s, and then consider your income from Social Security, pension or other income streams.

Inflation will also play a role in your retirement planning because you’re not earning anymore, yet prices are still going up. All of these numbers will help you better know your financial situation when retiring.

3. Social Security’s “Big Picture”

When’s the best age to retire? Most places will tell you 70 – that’s a long time to wait. You can retire at 62, 67 or 70. Sure, the earlier you retire, the less you’ll receive. There’s a lot more to consider.

The moving parts may mean taking your Social Security earlier is more beneficial.

4. Educate Yourself on How to Invest Your Savings

Retirement savings should be invested. You’ll find two main forms of investing: active and passive. The main differences are:

  • Passive. You’ve likely been doing this for a long time. A 401(k) is passive in that you buy, hold and don’t do anything else. People that bought into Amazon back when it IPO’d, for example, have likely held on to it and reaped the benefits. Rebalancing may occur where you change up your asset allocation slightly, but it’s not on the level of an active investor.
  • Active. You manage the portfolio daily based on the current market. This is a time-consuming strategy, but you can hedge your losses and control your risk tolerance best.

Educate yourself on these two methods of investing your retirement savings, and you’ll have greater control of your retirement planning.

5. Understand Medicare

An integral part of your retirement planning checklist is to understand Medicare. Your health is so important, and we recommend talking to a Medicare expert. You need to have a plan to take care of Medicare.

There are a lot of options available, and they’re very complex with gaps.

At least one year prior to retirement, sit down with an expert that can help you understand your Medicare options, what’s covered, what’s not covered and how you can cover some of these gaps.

6. Put Your Legal Documents in Order

Estate planning is an essential part of retirement planning. Sit down and look over your estate planning documents. We’re talking about your:

  • Wills
  • Trusts
  • Power of Attorney, etc.

Have an attorney overlook your will. Have things changed since you’ve had these documents drafted? Update your legal documents to have the beneficiaries up to date. Do this with all of your documents.

7. Long-term Care Planning

People are living longer. Hopefully, you never have to go into a long-term care facility, but if you do, it’s a major expense. There are different layers of expenses:

  • Assisted living
  • Nursing care

You can self-insure these expenses, or you can take out an insurance policy that rises throughout your lifetime. Hybrid plans also exist, which will have long-term care plans and possibly life insurance in one.

Deciding how to cover the costs of long-term care will help you sleep well at night knowing that you can have a basic plan if you need help in the future.

8. Write Out a Retirement Income Plan

A written retirement income plan seems daunting, but it’s an integral part of every retirement planning checklist. Your retirement relies on your plan. There are a lot of items included in your plan that you’ll outline:

  • Retirement accounts
  • Expenses
  • Future expenses
  • Renovations
  • Car purchases
  • Inflation
  • Paying for your grandkid’s childhood expenses

When you think through almost everything that you can before retiring, you’ll have a plan to refer to and update as needed. You’ll also be able to see how your current actions are impacting your retirement.

If you follow these eight points, we’re confident that you’ll be on the path to a worry-free retirement. 

Need extra help or want to follow a proven program for retiring with peace of mind. Our 4 Steps to Secure Your Retirement mini course can help.

Click here to learn more about our course and how we’ll help you secure your retirement.

What Limitations Are There to an Annuity?

Annuities can be a safe way to grow your money – but they’re not without their limitations.

In our “Annuities – Why Ever Use Them series, we’ve talked a lot about the advantages of using a fixed index annuity. However, there are always drawbacks. So, what do you need to be aware of?

If you’re thinking about purchasing an annuity, there are two main limitations to consider. The first is how liquid your annuity is, and the second is surrender charges. In this post, we’re going to explain how both of these limitations work, how to avoid them, and what you can do to balance your portfolio.

You can watch the video on this topic at the top of this post, to listen to the podcast episode, hit play below, or read on for more…

Annuities: the need-to-knows

Here’s a quick review of what we’ve covered about annuities in our series so far:

  • There are two different types of annuities, deferred and immediate. Immediate annuities can provide you with income from the moment you set them up, whereas deferred puts your money aside to grow. In this series, we’re talking exclusively about deferred annuities.
  • Deferred annuities can be either variable (where you invest in mutual funds, so there is risk involved) or fixed (principal guaranteed with no risk). Our focus is on fixed annuities.
  • You can get a traditional fixed annuity, similar to a CD, where the insurance company gives you a fixed rate for a set number of years.
  • Or you can get a fixed index annuity. Here, your interest is linked to the performance of an index, such as the S&P 500.
  • A fixed index annuity earns interest through a cap or a participation rate.
  • If you use a cap, and set it at 5%, for example, then if your index increases to 10% over an annual point-to-point reset, your annuity will increase by your cap amount of 5%.
  • If you use a participation strategy and set it at 50%, then, if your index increases by 20% over the reset period, your annuity will increase by 50% of the index’s 20% growth (so, 10%).
  • There are three reasons why people choose a fixed index annuity: safe accumulation, guaranteed income, and death benefit.

We’ve explained these points in greater depth in previous episodes of our “Annuities – Why Ever Use Them series. To find out more about any of the points above, read the posts on our blog, listen to the episodes on the Secure Your Retirement podcast, or watch them on our YouTube channel.

How liquid is an annuity?

When an annuity is part of your portfolio, you need to know how accessible your money is. An annuity should never be the be-all and end-all of your portfolio. It should be one part that’s helping your money grow safely and securely, while other parts give you access to your money if you need it.

Annuities are not entirely restrictive. Most annuities allow you a penalty-free withdrawal. For the majority of annuities we recommend, this is usually between 7-10%, but it can vary. So, if you have $100,000 in an annuity, up to 10% of that ($10,000) is easily accessible to you.

But if 10% of your annuity isn’t enough to cover you in an emergency or you need frequent access to more liquid funds, what are your options?

We never suggest that you put all of your savings into an annuity because of their limited liquidity. Having unrestricted access to a fair amount of funds is paramount in retirement, so instead, we suggest splitting your money as part of a wider strategy. You could put 50% of your savings into an annuity, and the other 50% into stocks, bonds, ETFs, mutual funds, or another completely liquid asset.

So, if you have $1 million of savings and split it equally between an annuity and a fully liquid asset, you could have $550,000 of easily accessible cash. This equates to your $500,000 as a liquid investment and 10% available from your annuity.

How surrender charges affect your annuity

If you need more money than your penalty-free withdrawal amount allows, you may be subjected to a surrender charge. This is a period where you will have to pay a penalty to withdraw more than your limit. Let’s use an example to demonstrate.

Say you have $100,000 in your annuity, with a free withdrawal amount of 10% (so, $10,000), but you need access to $11,000. The 10% that you withdraw will be penalty-free, but that extra $1,000 will be subject to the surrender charge.

Insurance companies use surrender charges because they’re giving your investment guaranteed protection against market volatility. This comes at a cost to them as, to do this, they have to make long-term investments of their own. If you need to withdraw more money than they’ve prepared for, they will incur penalties. In essence, a surrender charge is a way of passing this penalty to you.

Most annuities that we work with have a surrender charge schedule lasting anywhere between seven and twelve years. Typically, these charges decline over time until they no longer apply, but this means they will be much higher in the initial years. So, if your annuity has a 10-year surrender charge schedule, you might face a surrender charge of 12% in the first year, 8% in the seventh year, and 0% in the eleventh year – as you’ll be out of surrender.

Your overall portfolio must ensure you have enough liquid assets so that you don’t have to worry about accessing cash or these surrender charges impacting your finances. There are pros and cons to every investment and limitations to how they work. So, how can you build a balanced portfolio?

The three elements to investing

There are three main elements to any investment strategy, safety, liquidity, and growth. No investment can suitably provide you with all three, but most investments give you two. So, how can different investments satisfy each element?

  • If you’re concerned about safety and liquidity, then a money market might be the right investment for you. Bear in mind that it will not give you substantial growth.
  • If you want liquidity and growth, the stock market could be a suitable solution. It has lots of growth potential but isn’t going to give you safety because there’s also the chance that you could lose money.
  • If you prefer growth and safety, we recommend fixed index annuities. As we’ve seen in this post, they have limited liquidity, so it would be wise to use an annuity alongside another type of investment in order to give you a better amount of liquidity.

Remember that every investment has its limitations. But by thinking about these three elements, you can decide what is most important to you. You should keep these elements in mind when picking your own investments or work with a financial advisor to build a portfolio that covers all three bases.

If you want more information about preparing your finances for the future or retirement, check out our complimentary video series, “4 Steps to Secure Your Retirement. In just four short videos, we teach you the steps you need to take to secure your dream retirement. Get the free series here.