Advice on Investing in a Variable Annuity?

I am 67, retired, drawing Social Security of $800 month which is adequate. Cashed in my 401(k) of $14,000 but now need to place it in an IRA somewhere within the next 30 days. I was advised by a Financial Planner of a local bank to put it into a variable annuity, but I am not sure after reading all the pros and cons. Any advice?

Your posted comments on this and other questions are welcome.
If you have a question for Jeff an answer is just a click away.
Find a wealth of information at Jeff’s website.

Why Retirees Must Focus On What They Financially Control

I can’t tell you how many retirees that I talk to that are scared by all the uncertainty in the world. They literally find themselves lying awake at night because they are afraid they are going to run out of money.

It doesn’t have to be that way—it SHOULDN’T be that way. And this First Common Sense Core Principle of Retirement Investing is that you need to focus on what you CAN control and not worry about what you can’t.

          

Your Retirement Investing

I believe people become scared because they feel they are in a situation where they don’t have any control of the outcome. The 24-hour news media has to fight for your attention so they use headlines designed to cause fear. There’s a saying in the media that ‘if it bleeds it leads’ which means they want to start with stories that make someone feel afraid. It’s to THEIR benefit, not yours.

So you watch the evening news and night after night they are talking about the crisis in Europe or our country’s deficit or of the latest dive in the stock market. They show scenes of thousands of people waiting in lines just to get a chance to try and get a job. There are stories of middle-class people now having to resort to food banks to feed their family. 

No wonder people are scared! Fear can be paralyzing.

We are afraid when we sense there is something threatening us and we can’t do anything about it. There’s nothing you and I can do to solve our country’s deficit. There’s nothing we can do to solve the crisis in Europe. We can’t keep the stock market from crashing.

But here is the key. We CAN control what we will do in each of those situations. For instance, we can control how we will adjust our investments to protect us from the threat of the U.S. Dollar declining in value because we have such a large deficit. We CAN control the risk associated with different outcomes in Europe by identifying the possible outcomes, determining the impact each might have on our investments and knowing ahead of time what we should do.

Successful people recognize they can’t control events, but they can control what actions they will take if an event occurs.

Having a plan for each of the various situations that might arise will make you feel more in control and less at the mercy of Fate. Focusing on what you can control will get rid of the paralysis and enable you to regain your confidence. You can do this. You can develop an understanding of the various potential economic threats that exist and determine the best way to overcome each one. All it takes is a little bit of time and effort…and I’ll help you along the way.

So, what are some of the things that you find yourself worrying about? Fear tends to be nebulous and that makes it hard to overcome. Think through what is causing your worry and try to identify the specific ways that the situation or event will affect you. What can you do to help prepare in case that does happen? Are there things you can do to could prevent it from happening or mitigate the effects?

Let’s Look At An Example…

One of the biggest fears most retirees have is running out of money. 

What is causing that worry? Is it that you’ve seen the value of your nest egg take a big hit and you aren’t sure there is enough left to last as long as you need it to? Is it that your expenses keep going up? 

If that’s the case, the first thing you need to do is to get the facts. Instead of just worrying whether or not you will have enough money, do the math so you can find out. There are different free calculators available on the internet that can help you see how money your money will last. 

By the way, you don’t have to do all the work yourself. It’s about getting the information you need, not personally crunching every number. I have a process where I have identified 54 different threat scenarios. I can then use statistical testing to determine the probability of success that someone will have of reaching their goal.

The point is that you find out the facts. Based on the facts, then you can develop different plans of action. Let’s say that testing shows that you will have a better margin of safety if you either reduce your expenses or increase your income.

• What are steps that you can take to reduce your income?
• Where can you cut costs?
• Would selling your home and moving to something smaller help?

Or maybe it would be easier to try to increase your income. Is it possible to get income from doing consulting work or taking a part time job? Is there a way to make money from hobbies that you enjoy?

Get the idea? This is just an example, but can you see how engaging your mind, getting the facts and then brainstorming solutions puts you back in control? We all feel better about a situation when there is something we can do about it. 

So this first Common Sense Core Principal is to focus on what you can control instead of what you can’t.

Real-Life Example From One Of My Clients.

My job as a portfolio manager is to put my clients back in control so they can sleep at night. A few months ago, a wonderful lady in Florida contacted me because she wasn’t completely satisfied with her current advisor. I’ll call her Sue. 

She was tired of worrying about what might happen if there was another big dip in the market. She found herself worrying when the evening news would report on riots in the streets of Greece. She would become afraid when she’d get emails or information in the mail that our country was going to collapse and that she should buy gold.

Instead of just worrying about things she couldn’t control, she decided to focus on what she could. She started doing research and found out that her worry was justified because the way her current advisor was managing her investments, there wasn’t anyone really watching her money from day-to-day. So she knew that if the market dropped several percent so would her account.

That research led her to contact me.

She ended up becoming a client because of the way that I approach managing investments and the well-defined risk management processes I have in place to prevent significant losses. 

That was about 3 months ago. At the time the markets were doing fine.

Then the markets started to drop. This was leading up to and shortly after the 2012 elections and the markets would surge one day and plunge the next. They were a real roller coaster. In the midst of all that uncertainty, a time when the clients of most advisors are calling them because they are afraid, Sue sent me an email and this is what it said:

“Jeff, I just thought you’d like to know that I am no longer squeamish as the markets continue to tumble up and down.  Just knowing you are aware of my risk tolerance and that should the market go to “Hades in a hand basket”  action will be taken to protect my assets from falling below that tolerance.  No more (as you say) buy, hold, and suffer!”

Sue doesn’t lying awake at night anymore because she realizes that there are plans in place regarding how the portfolio will be adjusted based on which of the various threats we may be facing. She feels in control because she knows there is someone that is working with her to plan how we will respond to what lies ahead, prepare for the various possible outcomes and that is ready to quickly execute those plans as needed.

Sue took the time to analyze why she was worried and found out that her worry was justified. She got the facts. Then, armed with the facts, she figured out how the situation could be remedied and she took action. 

If Sue can do it, so can you.

I want you to be successful and to be able to sleep at night. Focusing on what you can control and not worrying about what you can’t is the first Common Sense Core Principles of Retirement Investing.

Sometimes we allow advertising messages to unduly influence the way we think. That can easily happen with all the commercials and information about investing that bombards us. I’ve noticed a subtle shift in investors attitude toward their money…they seem to lose sight of one very basic fact—a fact that needs to guide all of their investment decisions.

The second Common Sense Core Principle of Retirement Investing addresses this shift and brings you back to basics. Keep an eye out on this blog for the next posting.

In the mean time please leave any comments you have below and feel free to share this article on social media.

Protecting Your Equity from Lawsuits

In today’s lawsuit-happy society, investors are anxious to protect their assets from litigation. As a result, there are many professionals in the business of helping investors meet this need. But consumers need to be very careful about the advice they receive and the path they choose.

A recent reader’s question illustrates this point perfectly. He and his siblings own a debt-free commercial property and this is his story:

“My brother was told by someone he implicitly trusts that mortgage-free properties are “sitting ducks” for liens resulting from lawsuits; that unless we “borrow” [most of the equity] we could very well lose the entire property to “thieves” looking for mortgage-free or low-mortgage properties. Our adult son is currently going through a non-related legal battle that has cost him [tens of thousands of dollars] so far. If his case goes to trial and should he LOSE this trial, my siblings and I are being told we very well could LOSE our co-owned property. Is that true?”

I can sure understand the reader’s concern. Either the ‘implicitly trusted’ person didn’t understand the situation, or the brother didn’t understand what that person said.

There are two issues that need to be addressed in this situation. First, the risk to the siblings’ equity in this property due to lawsuits, etc. Second, whether borrowing all the equity is the proper way to mitigate that risk.

We live in a very litigious society and anyone can sue someone else for just about any reason. That doesn’t mean they will be successful. There has to be fault. For instance, if one of the siblings above killed someone in a car wreck then he/she will probably be sued. Any assets he/she owned can be targeted. If the ownership in the above property is tenancy in common then the portion owned by the other siblings is not at risk. If, however, the property is owned via joint tenants, meaning that they all own the property jointly, then the whole property would be at risk.

But what about the legal troubles of our reader’s adult son? Does that put this property at risk? No, it doesn’t. If the son doesn’t have any ownership in the property then it is not an asset that can be pursued by the other party. Even though the son may be the beneficiary, he doesn’t own it until his father dies.

So it is true that assets like real estate equity, as well as stocks, bonds, and mutual funds can be subject to loss in a lawsuit, but only where an asset holder is at fault. To reduce that risk, I’m not sure borrowing out the equity is the best solution.

Borrowing the equity is just going to transfer the asset from one place to another. If one borrows against the building, they have to put that money somewhere else. Usually, it will be exposed in the new place as well.

The risk of loss can be reduced through insurance. There is liability insurance that can be used, but the protection isn’t complete.

The most secure method, in my mind, of protecting someone’s assets is for them to be owned by an irrevocable trust. An irrevocable trust protects the assets from the claims of creditors.

An irrevocable trust protects its contents from outside threats, but not from inside threats. Think of it as a bubble. The trust bubble protects what’s inside from being affected by a lawsuit arising from something outside the bubble—like an automobile accident. On the other hand, if a rental property is in the trust bubble, that rental property is exposed to lawsuits dealing with that property. If someone slips and fall on the property and sues, that property can be lost.

That’s why it is recommended that there be separate irrevocable trusts for each property. That way, each is isolated from the risks associated with the others.

Of course, you can see that this can become very involved. That’s why not too many people do it. Also, irrevocable trusts can’t be changed so it’s very important that they be set up correctly.

The bottom line is that even though real estate equity may be at risk to a lawsuit, borrowing the equity to invest in something else doesn’t seem to me to be the best remedy.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

Investing In Life – With No Regrets

At the start of this New Year, I’m often asked what I think the best investment for 2005 will be. Investors are always looking for financial guidance to steer them through the uncertainty of the future. While it’s important to keep up with trends and cycles in the markets, there’s one very important investment that most people fail to make – investing in life. In our pursuit of high-returns and increasing income, most of us forget that money is merely a means to an end, not an end of itself. Today’s retirees have patiently built their nest eggs with decades of hard work and self-restraint. They knew they couldn’t live beyond their means and still provide a secure retirement lifestyle. After all those years of saving and sacrifice, they’ve entered their golden years having met their financial goals. But having met those financial goals, many find it hard to let go and enjoy life. They’ve always dreamed of taking that European vacation or going on a cruise. Others want to remodel their kitchen or start a new hobby. Those with strong religious beliefs might desire to go on a short-term mission or be more involved in charity works here at home. But in every case, money concerns often hinder us from pursuing our dreams. When I talk to a new client, I always ask them about their life goals. One of the most common financial conversations I have with retirees goes something like this: “Jeff, we’ve always wanted to travel. And now that Bob has retired, we finally have the time. But I’m just afraid we can’t afford it.” Nine times out of ten, the couple has more than enough set aside to follow their dreams. They just needed the reassurance that it was OK. While it is important to plan for the future and to spend wisely, it is also important that you pursue your dreams while you still have the time, ability and health to do so. I don’t have to look beyond my own family for a poignant story to illustrate this point. My father and step-mother had always planned on traveling—some day. My dad, a type A if there ever was one, has kept busy pursuing business development projects. Then about three years ago, my step-mother developed heart problems and soon after, macular degeneration started in one eye. At one eye appointment, the eye doctor asked my step-mom what her dreams were. She mentioned traveling up to Canada. The eye doctor took my father aside and gave him a major wake-up call, telling him, “Take her to Canada while she can still see it.” My dad began planning their Banff vacation the next day. Recently, macular degeneration has started in her ‘good’ eye and her sight is failing fast. There are many plans and dreams that will never be realized now. It’s simply too late. Who would have guessed that life could change so quickly? The same was true for my wife’s mother. Health problems had plagued her for years, but she’d made it to retirement and looked forward to spending more time in her garden, traveling, and spoiling her four grandchildren. But only a year out of retirement, she was diagnosed with breast cancer and passed away less then two years later, at the young age of 63. Don’t let life pass you by. Enjoy the fruits of your labors while you can. Here at the beginning of 2005, take a moment to make a list of one, two or three things that you want to pursue this year. Be specific and make the goal doable. Then, as one famous ad says, just do it! Husbands, your wives have waited for years for some of their dreams to come true. If you can’t think of ways to enjoy life, I guarantee that your wife will have a list prepared and ready for you to consider! I can’t think of a better way to start the New Year than with a fresh, renewed commitment to enjoy our blessings and spend more time with the ones we love. If you would like free, clear, unbiased advice send your questions to jeff@guardingyourwealth.com today, you’ll be glad you did. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com.