Annuities in Colorado: A New Approach to Risk Management
As you approach retirement, you’ll probably be discussing with yourself – perhaps on a regular basis – how much of your money should be in stocks as compared with bonds.
It’s an age-old question, and today many advisors are addressing it in a new way.
Traditionally, advisors have assessed asset allocation by evaluating a client’s risk tolerance, meaning the client’s ability to hold onto stocks even when the market is volatile.
If your risk tolerance is low, you’d allocate less to stocks; it it’s high, you’d allocate more.
However, the financial crisis made clear that many investors have little understanding of their own risk tolerance. Because of this, an increasing number of advisors are now recommending a new approach: That is that investors should avoid taking any risks with the money they will need for essential expenses in retirement.
Author William Bernstein explains this theory in his book The Intelligent Asset Allocator, Bernstein believes that investors should think of their portfolios as divided into two parts.
The first part should cover at least 20 to 25 years of basic living expenses and should be invested in stable vehicles such as annuities.
The second part should be invested in a way that is based on when you’ll need the money. If you’re saving for a purchase next year, for example, you would invest more conservatively than you would if saving to buy a vacation home in 15 years.
Annuities can form an important part of your portfolio. Depending on your needs, they can be simple or complex, but more important, annuities can be the backbone of the first part of your portfolio by providing an income stream for living expenses over a set period of time.
If this appeals, you may want to consult your advisor, who will review your options and help you make the right choices based on your individual circumstances and goals.
Purchasing an Annuity Can Affect Your Whole Portfolio
Annuities can provide an appealing stream of guaranteed income for investors who are concerned they might outlive their assets. But before purchasing one, it’s a good idea to consider how it might affect your portfolio.
An annuity is a financial product sold by an insurance company. You pay the insurance company a sum of money now, and the insurance company guarantees you a stream of income for a set period of time, even for life.
True, annuities offer stable income, but with that stability some purchasers may feel they can handle more risk in other parts of their portfolios.
If you’re looking for more portfolio growth, this is a good thing. Diversification – mixing unrelated assets such as annuities and stocks – is widely considered a key strategy in managing portfolio risk.
But not all annuity holders should increase their exposure to stocks. The decision depends on the investor’s risk tolerance – the ability to weather the ups and downs of the stock market.
It also depends on the types of annuities the investor owns. Fixed annuities are generally considered more stable than variable annuities, but they could also involve risk if, for example, the annuity lacks automatic increases to protect against inflation or if the issuer is unstable.
It’s a good idea to consult your advisor when deciding whether or not to purchase an annuity. He or she can help you make asset-allocation decisions based on your individual circumstances and select suitable investment vehicles, which may or may not include annuities.