With the recent losses in the market, now may be a good time to address a little-known fact among most retirees and investors:
Losing money in the market is optional.
It’s true, you do not have to participate in the losses of the market ever again, if you choose not to. Many of my clients use a completely “Market-Less” portfolio.
“I lost money in 2008 but I’ve made it all back again”
is something I hear monthly, maybe weekly in my practice. The question to ask yourself is
“How long did it take to lose the money and then get it back?”
All of that lost time, in which your money was not compounding, is extremely costly. Another important question to ask yourself is
“Did I enjoy that process of losing money and earning it back over 4-7 years?”
There are really only two choices you have as far as growing your money:
- Risk the principle (Stocks, Bonds, Mutual Funds, Real Estate, Gold etc.)
- Commit to a time frame and allow someone to use your money (CDs, Annuities etc.).
I mentioned that Market losses are optional so let’s look at an example of an Indexed Annuity.
With Indexed Annuities, you are allowing an Insurance company to use your money for a time frame of ten years. For this post, I will not explain HOW they earn interest for you but rather, what the end result is. The insurance company measures the market when they issue your annuity and then they measure it again 1 year later. Some go 2, 3 and 5 years but let’s keep it simple and just look at the Annual Point to Point with a Reset.
The insurance company measures the market when they issue your annuity and then they measure it again 1 year later. Some go 2, 3 and 5 years but let’s keep it simple and just look at the Annual Point to Point with a Reset.
See the chart below: if the S&P 500 is valued at 2000 when the annuity is issued, and at the end of that year it’s valued at 1500 that’s a 25% loss. In an Indexed Annuity, you would not lose ANY money at all; your account stays exactly the same size. Any money you put in and any earnings from previous years are protected from losses. You would not earn any interest that year but have also not experienced any losses.
As wonderful as not experiencing loss, let’s talk about the really exciting part.
In order to decide if you make any money for the next year, the S&P 500 starting value is RESET to 1500. If at the end of year 2, the S&P 500 is valued at 1650, that represents a 10% increase from 1500 where it started. There are ways to do a lot better than what I’m about to show you but let’s just assume your annuity had a very low cap (the amount of growth you are allowed to have) of 4%. Your money would have grown by 4% over two years while those invested directly in the market would still be trying to get back all of the money they lost when the market went from 2000 to 1500.
Some current Indexed Annuities not only experience no loss, but they have no fees and average between 4% and 7% annual compounding. Like all financial tools Indexed Annuities are not the answer to everything but they do provide safe growth with no fees, which many of my clients enjoy.
If you have questions or are interested in considering this option for your future, please don’t hesitate to contact me!