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Tuesday, July 26, 2011

Stocks Versus Annuities for Retirement Portfolios

I’ve been reading a lot lately about how retirees should reduce stock exposure to 5-25%, putting more in annuities. True statement? Maybe.

If stocks do well, our retirement portfolios smile. Poor results, and we start worrying about running out of money. The question is – over the next 10 years, will stocks do well or poorly? Consensus is that stocks may not do as well as we would like over the next decade (but nobody knows for sure).

How about annuities? Annuities promise guaranteed income. The trouble is not the guarantee, it’s the income. Current interest rates are, let’s be gracious, terrible! In order to get a decent amount of income, you need to invest lots of money in annuities. At a 5% interest rate, every $100,000 provides about $8,000 annual income (over a 20-year period, with nothing left at the end).

Unfortunately, the annuity payments mentioned above, won’t increase (unless you pay for an inflation rider). So you’re in danger of losing your ability to keep up with the cost of living . . . which brings us back to stocks.

Retirees have to balance between guarantees and risk. Risk, in moderation, is what can help a portfolio keep up with cost of living increases. We all prefer absolute safety of retirement income. Unfortunately, there’s a downside to almost everything. Safety’s downside is low income. Stocks can help increase that income.

This is another example of the need to wisely evaluate your specific situation and make choices based on that evaluation. Take a look at your needs and goals, and make portfolio adjustments based on that evaluation . . . not because a report or reported said you should.

Blog posting provided by:

Michael Snowdon, CFP ®

Michael is president of WealthRidge, a wealth management and financial planning firm, and is a professor emeritus of the College of Financial Planning. His focus in financial planning is to coach people in the process of meeting their goals and achieving their dreams.