Diversifying Your Retirement Assets – and Your Income
We’ve all heard the saying, “don’t put all your eggs in one basket.” While this idea can relate to many facets of people’s lives, perhaps the most important application is in financial planning. A recent Forbes Magazine article describes and reinforces the value of investment diversification. If you have money invested in the stock market either through your employer’s 401(k) or perhaps managing your own IRA, it’s certainly prudent to spread out your funds to reduce your risk.
One way to diversify funds is by spreading them among many companies and industries. The stock market is full of companies that were full of promise but not necessarily profitability. Let’s go back in time for a moment. In 2000, if you were a pet lover convinced online pet supply ordering was the thing of the future, would you have sunk all your money into Pets.com stock? Hopefully not; it went public in February 2000 and folded by November 2000, and therefore, you would’ve lost your money!
Another diversification method is through different asset classes. Examples of asset classes are stocks, bonds, real estate, commodities, and cash. The financial market landscape can be complex, and when one asset class has increased, it’s possible another has decreased. Spreading out funds among different asset classes allows a person to even out the risk, thereby helping to avoid significant losses.
One other diversification method is through Life Path portfolio planning. As a person gets closer to retirement age, this concept allocates an increasing amount of funds into lower-risk investments, thereby reducing the risk of a catastrophic loss at a time when funds are needed the most to support a comfortable retirement.
Regardless of how you’ve saved up for retirement and how diversified your funds are, there will be bills to pay and what matters most is the distribution of these assets – the income you can draw from your accumulated funds. Important sources of income for many retirees include drawing on investments or cash. But what happens if there’s a significant downturn in the value of investments and/or you’ve used up your cash? This situation can lead retirees to run short of income or, at worst, run out of money.
Leading up to retirement, there is much emphasis on the accumulation of funds through a diversified portfolio of vehicles such as stocks, bonds, commodities, etc., all of which, unfortunately, can lose value. But what about after retirement when those funds need to be distributed as income? Isn’t it also important to diversify your income sources between those that can lose value and those that can’t?
Of course, it is, and the good news is there is an often overlooked vehicle that provides many benefits, including safe and guaranteed lifetime income: annuities. Unlike an investment that can lose value, an annuity is a contract in which you pay a premium to an insurance company in exchange for the peace of mind of guaranteed lifetime income and other benefits, just as you insure your vehicle, your house, and other essential belongings, with annuities you are buying retirement insurance in a sense.
Annuities offer benefits, including safety, tax-deferred growth, guaranteed lifetime income, and legacy benefits for loved ones. Guaranteed sources of income remove the worry from retirement and provide other important benefits based on an article published by Kiplinger that states “Retirees with a Guaranteed Income are Happier, Live Longer.” Talk with a licensed agent about how incorporating an annuity can be a way to diversify your income sources and lead to more happiness in retirement.
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