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Retirement Savings: Now is the Perfect Time to Panic

Posted In:  retirement

Of the people who are fortunate enough to have a steady workplace in this shaky economy, only half are enrolled in retirement plans. But if there were ever a good time to panic, this would be it. The longer you wait, the worse your chances for creating sufficient income to hold you through the retirement years. The more you know, the better you can prepare yourself financially for retirement, instead of ducking out of what you think looks like a money pit. Consider these ways to guarantee a return regardless of the market.

Fixed Annuities

This is where you go when the stock market has scared you to death. They do well even when the economy has not. During the stock market crises of 2000 and 2008, they rose in popularity and held their ground where other investments floundered. Fixed annuities saw an increase of 60 percent in sales in 2008 for a whopping total of $107 billion. That kind of growth during a time when most investments have crashed is phenomenal.

They work by locking investors in at a rate between 4 and 10 percent for five to 10 years. The rate of return make seem small, but the principal and interested is guaranteed regardless of the stock market. As long as the money is tied up in the annuity, taxes are deferred.

Variable Annuities

These always pick up when economies begin to stabilize. You can pick from different kinds of investments and risk getting a varied rate of return. As long as your money is invested in a variable annuity, you can move it around to different investment groups to try to benefit as best as you can from stock market fluctuations.

There are often 10 percent penalties associated with some withdrawals and interest paid is taxed. Unlike with fixed annuities, these are not guaranteed by any government agency.

Dividend-Paying Stocks

These types of stocks are steady sources of income when the stock market behaves well. Even if you have a bad quarter, the return stays positive. The income from these dividends is not fixed of course, but it is a popular way to supplement your yearly income.

In 2008, dividends were paying 10 times more than 10-year Treasury bonds. If you do your research on past dividend payout for a company, you can roughly predict where the best place to invest is. Another bonus is that dividend yields have lower tax rates than most other forms of investment.

Stable Value Funds

These make up 20 percent of most 401(k) plans and have always been considered safe places to invest, regardless of stock market activity. Your investment is placed in a fixed-income portfolio that finances government, agency and corporate bonds, mortgages and asset backed securities. These funds benefit from contracts with insurance companies and banks that keep interest rates from shooting wildly. These are called “wrap” contracts and ensure there is a book value on investments.

Treasury Inflation Protected Securities

Commonly called TIPS, this investment vehicle provides a safe place for people on fixed incomes to protect their investments against inflation. The Treasury issues bonds of five, 10 or 20 years that guarantees a future payout that will reflect the price of inflation since the date of purchase. Being able to tell if you will be able to make this payoff is dependent on timing. No one can see 20 years into the future, but regardless of what way inflation goes you are guaranteed whatever amount is higher. It has historically been that money has inflated and you will get that appreciated value, but if there is there is deflation and your money has depreciated, you will get the face value of the bond.

Target Date Funds

These took a hard hit in 2008 and lost 25 percent of their value. They used to be extremely popular since it allowed investors to pick a retirement age and manage their risk against the length of time left until their target date. They were common in 401(k) plans since the mid-1990s, but have since dropped off drastically.

There are pros as well as cons, but the risk involved and the accusations of fund misrepresentation make this a risky way to save for retirement. The stock market has an extremely strong presence in how these funds perform.

Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email jessica@savingtools.com. Thanks!

 

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