Show #428 Airing Sunday 4/6/08
Have your investments fallen down a deep hole during this down market? Our next guest will explain how an “income ladder” can empower you to climb out of financial trouble. Here to explain is Concord Advisor’s Jonathan Herbruck.
Question: Jonathan, last time you were here, we were talking about difficult markets and what investors should do. We didn’t have enough time to talk about retirees who are pulling money from their investment portfolio. What do they need to be careful of during a difficult market?
Answer: Well I have talked about it before that retirees need to establish a distribution rate. You cannot spend what you earn, because what do they draw in a year they have loss? Nothing? They need something to live on.
Question: How do you plan for these different market scenarios when retirees are taking money from their portfolio?
Answer: We create an income ladder that shows a client’s worst-case scenario.
We have found that this format is easy for people to understand, and follow along.
It also helps our office to stay on track with the next step in a retiree’s financial plan.
We update the numbers each year with the client.
Question: So let’s see this income ladder you are talking about.
Answer: This income ladder shows several buckets for the retiree’s money. The first bucket is cash because that is what we expect to spend the next 2 years.
We also set aside some emergency money and something to offset inflation if needed later on.
In year 3 we start pulling from bucket number 2, which has had 2 years to grow. There are different methods for making this last 10 years.
After this bucket runs out, we pull from the last bucket, which is a variable annuity. Variable annuities allow you to invest in the market while an insurance company promises you some guarantees. A lot of people have heard of several annuity companies promising at least a 7% compounding rate which by calculation means your money will double in 10 years and 2 months. This may be your worst-case scenario because if your investments do better, then you can take income from the higher amount.
Question: A 7% guarantee sounds like a good deal.
Answer: There are things to look out for when you invest in one of these products.
Remember, it is the insurance company offering the product making the 7% guarantee. So you want to make sure you go with a big insurance company who will be able to keep their promise.
Also, to add these riders it costs extra money. Is it worth it to you to pay more money for some piece of mind while you stay invested in the market?
To get to that guaranteed amount, you have to start taking income. You can’t just walk away with it after the waiting period.
Question: Can our audience get to these products on their own?
Answer: Not usually, they need to go to an advisor who is licensed for both securities and insurance.
I would also caution folks to purchase these products as part of a financial plan, not just an arbitrary investment.
And you should also pay attention to the surrender charges, because sometimes you can get locked in for a long period of time. And you certainly wouldn’t want to lose liquidity on your entire savings.
Annuities have gotten a bad wrap in the press, but we believe with practical planning, annuities can provide income security during difficult markets.
Are you up to the challenge of a down market? To learn more about income laddering, or to receive a free fact sheet, give Concord Advisors a call at the number that’s next. My thanks to Jonathan Herbruck.
