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3 Things 8-8

08/08/2022 Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it. Thing One A Reminder About Annuities We’ve spoken at length about annuities through this newsletter but have been asked about them by several new readers recently so we thought we’d revisit a prior post. Please see below for a reprise: Why Annuities Are A Bad Idea For Almost Every One The title above was taken verbatim from a Marketwatch article published a few years ago. Before we summarize, let us first describe what an annuity is with some help from An annuity is a financial product that pays out a fixed stream of payments to an individual, and these financial products are primarily used as an income stream for retirees. Annuities are contracts issued and distributed (or sold) by financial institutions, which invest funds from individuals. They help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time. Now, why does the article say they’re bad for almost everyone? Well, “bad” is a relative term here. So, relative to the returns that could be made investing in equities (either individual stocks or low-fee funds), annuities come up short. The typical annuity sales pitch is, no downside risk with modest upside potential. In a fixed indexed annuity, for example, if the stock market goes up 20%, the annuity holder might get to participate in 4% of that while, if the market went down by 20%, the annuity holder would not see any reduction in his principal balance. That sounds like a good idea in bad times, and there are definitely bad times, but the market has tended to go up over time and, in fact, the S&P 500 has only been down seven times in all the 10-year periods since 1940. It should be noted that the target annuity customer is someone at or near retirement who may be more sensitive to the near-term volatility that is inherent in the stock market. The author suggests that a reasonable alternative to an annuity, in that case, would be to invest in perpetual dividend raisers. We suggest you consider your options carefully and get help if you think you need it.

Thing Two Another Annuity Alternative If running out of money in retirement is a concern but the high fees and inflexible contract language of annuities leave you cold to the idea of purchasing one, there is another alternative, Retirement Income Funds. RIFs are essentially annuities without the restrictive contracts and excessive fees. Actually, there are no insurance companies involved at all. Companies like Fidelity and Vanguard typically administer them. Usually, there are no up-front fees and there are no surrender fees. So if you ever decide you want out, at any time, you can do so without incurring any financial penalty. But while you’re in, you’ll receive monthly payments that initially come from your beginning balance but will eventually, assuming positive returns, also include money generated from capital gains and dividends. The way the funds pay out is flexible so you can either set them up using the widely adopted 4% rule, which says that on average, retirees should be able to withdraw 4% of their invested assets each year in retirement and reasonably expect to have their money last 30 years, or you could customize your income stream to suit your varying needs. In addition to the above features, most RIFs annual fees range from .4% to around 1% (versus 5% or more for traditional annuities), making them both more flexible and more desirable than annuities. But what you gain in flexibility you give up in guaranteed income because, unlike most annuities, there is downside risk – and the fund owner (you) bears all of it. So, if the market goes down and you’re invested in a RIF that is heavily stock-weighted, you will see your balance shrink as well. The same is true in the opposite direction, of course, and stocks tend to go up over time, but they don’t go up in a straight line. Holding time is definitely a key factor. The more time you can afford to patiently hold your selected fund, the better off you will be – that is, assuming history is a valid indicator. So, to recap and state the obvious, RIFs aren’t for everyone, nor are individual stocks, nor are annuities. You should examine your specific circumstances carefully in determining which, if any, of the options is right for you. If you need help with that, let us know.

Thing Three Just A Thought "Seek freedom and become a captive of your desires. Seek discipline and find your liberty." – Frank Herbert

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