Throughout my career I have seen ongoing recommendations to ladder your investments and savings to generate consistent, long term income. Just envision each step on the ladder being an asset and you’ve got the laddering idea.
Many in the 55-plus market have used CD’s with different durations to protect against declining interest rates. Long term CD’s with interest rates in the 5-6 percent range are renewing at approximately 1.5 percent and that’s not attractive. A $100,000 CD paying 1.5 percent will generate $1,500 of taxable interest yearly. Delete your taxes and factor in inflation and you are losing ground every year.
Another strategy is to buy stocks, bonds or mutual fund shares hopefully on a buy low, sell high basis. That’s very good advice IF it’s a suitable recommendation for the individual. Many retirees or near retirees may not be comfortable with the risks involved with equities. As a general rule, your best chance of high returns will be in growth stocks and growth funds. They also have the best chance of losing money, so if you are not willing to incur and recover from market losses, this might not be the best vehicle to utilize.
Bonds, on the other hand, are designed to provide a more stable return than stocks but they are subject to interest rate risk. When interest rates increase, bond values will usually decrease. Interest rates can’t drop much further, so bond values could take a big hit with a run-up in interest rates. No less than an authority than Warren Buffet has stated in Bloomberg that “Bonds are among the most dangerous assets in inflation risk.”
It is also possible to ladder annuities for retirement income. Fixed Interest Annuities provide interest rates guaranteed for 3-10 years. Rates are currently not very attractive but there are many multi-year guarantee annuities available with rates 1-2 percent higher than CD’s.
Index Annuities can also be very useful. These annuities are not securities, but credit interest based on the performance of one or more market indicators. The S & P 500 and Dow Jones Industrials Index are the most common. Income Riders are very attractive options with Index Annuities. These Riders operate as a second account and credit guaranteed accumulation of 5-8 percent for a stated number of years. It provides a guaranteed income for life without annuitizing.
Variable Annuities are securities and the value of the annuity is based on the performance of the sub-accounts. A Variable Annuity has the opportunity for high returns, but in the absence of an underlying guarantee for a fee, there is also a chance of sustaining losses. As a general rule, there are no guaranteed returns in Variable Annuities.
Both Index Annuities and Variable Annuities could be useful planning tools for you and they will be reviewed in future articles.
Laddering could be very beneficial to you but make sure the products you use match your risk tolerance. There is no “one size fits all” retirement income planning program.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached locally at 770-786-2781.