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Retiring in Risky Times Requires Protection from a Volatile Market and Interest Rates

If you had planned on retiring now, or you just retired, you’re probably nervous about the current economic climate. But with the right plan, it shouldn’t hold you back.

We’re starting to hear that ugly “r” word again – recession. It’s not officially here yet, and hopefully it won’t happen, but the possibility is permeating the media. For those hoping to retire soon, or those who recently did, the word “recession” can cause apprehension. While we aren’t in a 2008-like meltdown situation, when the global financial crisis pushed the U.S. into recession, we deal with numerous negative factors that affect our economy and many retirement plans. These include rising inflation, rising interest rates to combat inflation, a global pandemic that won’t go away, Russia’s invasion of Ukraine, and the likelihood of higher taxes down the road.

Back in 2008, people near retirement had to make financial adjustments to secure the fixed income they would depend on. Now the scenario is similar as another wave of retirees face concerns about safeguarding their finances. But fear not: Retiring in a recession or in economic times that cause concern on many fronts can be done. If you’re planning to retire soon or you’re in the early stages of retirement, here are some key points to consider and options to protect your money.

2 Ways to Protect Yourself from Market Risk in Retirement

An indexing strategy can help you counter your risk during a stock market downturn. The idea is to put some of your money in accounts not affected by a market decline and draw from those accounts in your first few years of retirement. Two vehicles that reduce market risk are indexed universal life insurance (IUL) and a fixed index annuity.

Indexed universal life is a type of permanent life insurance with a cash-value component and a death benefit that your beneficiaries will receive tax-free. The money in your cash-value account can earn interest based on the performance of a stock market index chosen by your insurer, such as the S&P 500 or the NASDAQ Composite. But unlike investing directly in an index fund, you won’t lose money when the market falls. That’s because a guarantee applies to your principal, insuring it against losses.

The catch is there’s usually a cap on the maximum return you can earn. Also, IUL policies can come with numerous fees and other costs. On the positive side, IULs have unlimited contributions, tax-free growth and tax-free distributions.

Fixed index annuities also offer growth potential while protecting your principal from market volatility. Potential for additional interest is linked to the return of a market index, such as the S&P 500. The interest rate is guaranteed to never be less than zero, even if the market index goes down. But like with indexed universal life insurance, these investments limit how much you can earn with caps.

Fixed indexed annuities offer a steady stream of income and tax-deferred growth; taxes are not owed until a withdrawal is made. It’s important to know, though, that once you purchase an annuity, you’re locked into it for a certain number of years, and if you withdraw money during that surrender charge period, you’ll be subject to a surrender fee. Usually you can withdraw up to 10% each year without surrender charges.

Both of these financial tools could be used for consumers to be extremely efficient when they want to retire. Having the liquidity of the indexed universal life could always be helpful while battling the ups and down of the market. Having a fixed indexed annuity is a tool as we see right now with people losing money in their 401Ks, or any correlated asset to the market is a asset in which you can transfer qualified and non-qualified money into and protect from losing the principal while gaining some market growth depending the sub-accounts chosen in contract.

If you have any questions or need someone to just take a look at what's going on with your current plan, please contact me today.

Matthew Barks

Managing Partner/Founder

Two Economic Powers Approach to Retirement Planning

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