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Tag: Investments

Your Changing Definition of Risk in Retirement

 

During your accumulation years, you may have categorized your risk as “conservative,” “moderate,” or “aggressive,” and that guided how your portfolio was built. Maybe you concerned yourself with trying to find the “best-performing funds.”

 

What occurs with many retirees is a change in mindset – it’s less about finding the “best-performing fund” and more about consistent performance. It may be less about a risk continuum – that stretches from conservative to aggressive – and more about balancing the objectives of maximizing your income and sustaining it for a lifetime.

 

You may even find yourself willing to forgo return potential for steady income.

 

A change in your mindset may drive changes in how you shape your portfolio and the investments you choose to fill it.

 

Let’s examine how this might look at an individual level.

 

Still Believe. During your working years, you understood the short-term volatility of the stock market, but accepted it for its growth potential over longer time periods. You’re now in retirement and still believe in that concept. In fact, you know stocks remain important to your financial strategy over a 30-year or more retirement period.

 

But you’ve also come to understand that withdrawals from your investment portfolio have the potential to accelerate the depletion of your assets when investment values are declining. How you define your risk tolerance may not have changed, but you understand the new risks introduced by retirement. Consequently, it’s not so much about managing your exposure to stocks but considering new strategies that adapt to this new landscape.

 

Shift the Risk. For instance, it may mean that you hold more cash than you ever did when you were earning a paycheck. It also may mean that you consider investments that shift the risk of market uncertainty to another party, such as an insurance company. Many retirees choose annuities for just that reason.

 

The march of time affords us ever-changing perspectives on life, and that is never more true than during retirement.

 

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are normally taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

 

To further discuss the level of risk that is suitable for you and your plan, contact a CapSouth advisor at 800.929.1001 or visit our website at https://capsouthwm.com/contact/

 

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

Global vs. International Mutual Funds

For investors who are looking to diversify their portfolio with exposure to companies located outside the U.S., two common choices are a global mutual fund or an international mutual fund.

 

By definition, international funds invest in stock of companies domiciled outside the U.S., while global funds may invest in U.S. stocks alongside non-U.S. stocks.

 

Keep in mind that diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline. Also, international investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater price volatility.[i]

 

Make a Choice. The definition may seem clear, but what may seem less clear is why an investor might select one mutual fund over the other.

 

An investor may select a global mutual fund in order to give her portfolio manager the latitude to move the fund’s investments between non-U.S. markets and the U.S. market. This may give the manager the flexibility to take advantage of shifting opportunities that could be present at any given moment.

 

By investing in a global fund, the challenge for the investor is that they may not know at any point in time their total exposure to the U.S. market, within the context of their overall portfolio.

 

An Inside Look. Some investors choose to manage their risk by setting the desired asset allocation for their portfolio and then identifying funds that are within those asset classes. For these investors, an international fund may make more sense, since it allows them to maintain a greater adherence to their desired domestic/international stock allocation.

 

As you consider a global or an international mutual fund, you should also be aware of the fund’s approach to the inherent currency risks. Some funds choose to engage in strategies that may mitigate the effects of currency fluctuations, while others consider currency movements – up and down – to be an element of portfolio performance.  To further discuss mutual fund options, contact your CapSouth advisor at 800.929.1001 or visit our website at www.capsouthwm.com 

 

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences. Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

 

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.world-exchanges.org/news/articles/world-federation-exchanges-publishes-2018-full-year-market-highlightspressrelease

Life Insurance as an Asset Class

By J. Scott Fain

July 2019

Viewing life insurance as an asset class provides an additional benefit to consider when evaluating the purchase or continuation of an insurance policy.

 

What do I mean by asset class?  Traditional asset classes might include equities, fixed-income securities, cash equivalents, and real estate.  These categories organize various financial tools into groups that have similar characteristics, primarily in terms of risk.  Equities are generally considered to provide the greatest return over time, but also can carry the greatest amount of risk and volatility.  Advisors and portfolio managers typically strive to diversify clients’ portfolios to manage the amount of risk taken while still achieving acceptable rates of return over time.

 

Through the types of investments referenced above, what circumstances are needed for you to make money?  (Hint:  We’ve mentioned two big factors twice already…)  That’s right, you need returns and time.  We all hope for long, prosperous lives, but what if death occurs prematurely?  Now we have removed the element of time.  Though our money may have been invested well, those investments may not have had time to perform.

 

So what options do we have available to provide a greater return in the short-run?  You guessed it:  Life Insurance.  What if we had sufficient liquidity for our lifetime needs, and took one portion of our assets and invested in a life insurance policy?  Let’s look at an example:

 

Charlie is a 42 year-old male in good health.  Charlie is married to Sara, and they have two children, Larry and Mary.  Charlie and Sara currently have $750,000 in assets, and Charlie has an annual income of $85,000.  We will utilize sample average rates of return for the typical asset classes, and guaranteed internal rates of return for the life insurance death benefit based on a sample Nationwide illustration.

 

Charlie plans to contribute an additional $7,500 per year to his investments.  Using a $1,904 annual premium for a $250,000 permanent life insurance policy guaranteed to Age 121, let’s look at potential outcomes:

 

 

 

 

Under this simplified example, if all typical investments average the assumed rates of return, the portfolio diversified with insurance is more favorable if death occurs any year through age 76.  Following that age, investing the full $7,500 annually in equities would’ve generated a higher asset value.  Note:  These figures do not provide an adjustment for the tax savings.  The $250,000 death benefit generated by the life insurance policy pays to Charlie’s heirs income tax free under current law.  It is also important to note that the return generated by the life insurance policy is guaranteed, subject to the claims paying ability of the insurance company.

 

Might it be time for you to consider insurance as an asset class?

 

Contact CapSouth at 800.929.1001 for more information on this concept and how it might apply to your particular situation.  Also visit our website at www.capsouthwm.com 

 

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

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