As a Nobel Prize winner and professor of finance, emeritus at Stanford’s Graduate School of Business, William Sharpe is a big deal in the world of finance.
He has spent the majority of his life thinking about financial risks. He was instrumental in developing the capital asset pricing model and the Sharpe ratio, which measures risk-adjusted investment returns. In other words, when he has some things to say about retirement, that means it’s worth paying attention to.
An equity indexed annuity is simply a dated name for a fixed indexed annuity. Fixed index annuities came about in the mid-1990s.
They were intended as an option for retirement savers looking for alternatives to low-interest CDs and low-paying fixed-interest instruments, such as Treasury securities.
How the “Equity Indexed Annuity” Came About
Life insurance companies used different names in marketing fixed indexed annuities to the public. Since they are fixed insurance contracts and therefore under the authority of state insurance commissioners, the term “equity indexed annuity” eventually went out of vogue.
It made people think that a fixed index annuity was a securities product. However, it still remains a fixed insurance product regulated by the states to this day. There is no “equity” component at all to a fixed index annuity.
How can a fixed index annuity help you with health costs, specifically certain long-term care expenses? Nowadays, many fixed index annuity contracts come with a provision called a wellness benefit.
In some situations where you need certain kinds of long-term care, the income from your annuity can be “enhanced” for a certain time period. Your annuity income can increase, often double, in order to help you pay for long-term care and its high costs.
This enhanced income generally lasts for a certain period, such as up to 60 months (or five years). The benefit can vary from indexed annuity contract to contract, so your financial professional can go over the details, pros, and cons of any contracts you may be considering.
How Likely Is It that Someone Needs Long-Term Care?
Statistics show that over 50% of those aged 65 or over will need some form of long-term care at some point in retirement. Couples in this age group have over a 50% chance of one of them needing this type of care at some point.
The costs of long-term care can be staggering in many cases. A year of home healthcare can easily cost anywhere from $50,000 to $55,000 per year.
Yearly residence in an assisted living facility costs around the same. Then a semi-private room in a nursing care facility can cost as much as $90,000 to $100,000 per year, depending on where you are in the country.
Annuity laddering is a strategy in which someone buys or staggers several annuity contracts over some years. The goal is to maximize the benefits that you receive from the annuities, like guaranteed income streams, while managing risks such as interest rate risk.
Strategies for laddering annuities can give you more flexibility in your retirement plan. You can crack down on potential downsides, such as locking yourself into a reduced annuity payout while interest rates are low. That can be a helpful guard against inflation.
When you buy multiple annuities and then wait for some years to turn some of those contracts on, that gives them time for their contractual benefits to grow. You can have more higher lifetime income, or higher interest earnings for your money, as a result of this drawn-out strategy.
Depending on your situation, you may want to tap more than one annuity as part of a laddering strategy in order to maximize your benefits over time. Here are a few different laddering strategies that you can use with annuities to achieve this goal.
If you are at least 65 and aren’t covered by an employer health insurance plan, then you will probably need to enroll in Medicare.
Every year, there are copays, deductibles, and premiums to be paid. These numbers usually rise slightly each year, so you don’t have to be caught unprepared when they increase this year in 2022.
Part of the increases for this year have been at least somewhat offset by the large COLA jump in Social Security (the largest increase since the 1980s). Here are the critical numbers that are important to know regarding Medicare benefits in 2022.
Most people would be thrilled at the prospect of 10% average annual returns or higher in retirement. But now that folks are living longer, they face more challenges than just adequate returns. With decades of retired living on the horizon, people must ensure their portfolios last as long as they might need them.
Sequence of returns risk can affect your long-term income the most in your early-retirement years. That is the timespan just before and right after you retire. You may have heard of that period called the “retirement red zone,” or generally the 10-year spread prior to and after retirement.
It’s true that average returns (including dividends) for the S&P 500 from 1928 to 2021 have exceeded 10%. But averages can be deceiving for long-term income planning. What matters just as much is the order of returns, or the actual timing of when a portfolio grows or loses value. As we will see, losses in those early years could make or break your income goals, setting up the risk of running out of retirement money.
This potential hazard is called sequence of returns risk, or just sequence risk. To illustrate it, we will talk about it in two formats: by analogy and then through two hypothetical portfolio scenarios. Read More
Bonds and other fixed-interest assets play a valuable role in modern retirement planning. They help balance market risk, create retirement income streams, and keep overall volatility in a financial plan at bay.
Bonds assure that you will be paid interest during their term. Then once the term is over, they repay the original investment, or principal, back to the investor. The ability of a bond to meet these obligations is backed by the financial strength of the bond issuer.
In this article, we will go over different types of bonds offered by a municipality or a corporation. Before going into further detail about different kinds of bonds, here is a quick sum-up of a bond’s basic features.
Bonds are a core staple of many financial strategies today. They are among the different types of fixed-interest instruments that can be used for generating retirement income, balancing out risks held by other assets, and smoothing out volatility in general.
With a bond, someone has a guarantee that they will be paid interest during its term. Once the bond matures, the principal is paid back to the bondholder. The ability to meet these obligations is backed by the financial strength of the issuer of the bond.
For this reason, government bonds are generally considered to be a type of bond with lower risk than others. After all, the government has the authority to raise taxes and print money to meet its obligations.
There are different types of bonds, and they vary in a number of ways: length of term, interest rates, and the type of issuer, to name a few. It’s helpful to know at a high level about these different bond types and how they might play out.
Here is a breakdown of the different types of bonds and what they involve. In this article, we will go over various types of government bonds available.
As you near retirement, it’s important to talk to your financial advisor about retirement. After all, you need to know that they can competently guide you on your retirement goals, build a plan that lets you maintain your preferred lifestyle, and help your money last as long as possible.
This begins with having a conversation around your unique situation, and it pays off to ask your advisor some questions that help put everything in context. Here is a high-level list of questions to ask your financial advisor about retirement:
Tell me about what you do to help people with retirement planning.
How long have you worked as a retirement financial advisor?
Why do you do what you do, and what are you most passionate about in this field?
When do you think that I can retire, and what are my options?
Do I have enough money to retire?
What should my retirement goals be?
What do you think of my current financial plan for retirement?
How much can I spend in retirement? Will I be able to keep up my lifestyle?
How will I fund my lifestyle once I have retired?
What will taxes be like for me in retirement?
How long will my money last before I run out of income?
What can you do to help me be ready for major financial risks in retirement?
I have a pension. What could happen if something happened to my old employer or if my pension benefits were cut?
When should I take Social Security benefits?
What should I know and do about Medicare and health coverage in general?
What can healthcare cost me throughout my retirement years?
What do you do to help my retirement plan keep up with inflation?
What can happen if I retire in a recession or market crash? How do we plan for that?
What are some other ‘bad situations’ to keep in mind, and how can you help you plan for those scenarios?
Say I choose to delay retirement or keep working. What are the advantages and disadvantages of doing that?
What can we do to ensure that my spouse or I have sufficient financial resources in place should one of us pass away?
How much could long-term care cost us in retirement? How likely are we to need some sort of long-term care support?
What sort of life changes have you seen other people experience in retirement?
Start a Conversation About Your Retirement What-Ifs
Start a Conversation About Your Retirement What-Ifs
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