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WEALTH MANAGEMENT Retirement Wealth Advisors Your Financial Architects www.THEHOLLANDGRP.COM 727.724.3334 2637 McCormick Drive #101 Clearwater, FL 33759 * This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal or tax advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation. Investment Advisory Services offered through Mutual Trust Asset Management MARCH APRIL 2017 | TAMPA BAY MAGAZINE 53 Retirement is just within reach, and the finish line is so close you can smell it. Before your paychecks stops, you are probably going to need an income plan in retirement. HOW CAN POTENTIALLY RISING INTEREST RATES IMPACT YOU? As retirement nears, a traditional strategy for many people has been to move from growth-seeking strategies to conservative, fixed-income investments. Investing in bonds — usually a safer alternative to stocks. Bonds can help you add diversification and stability and are considered to be less volatile than stocks. While bonds can be an attractive addition to a retirement income strategy, they are not without risk. When rates go up, a bond’s value will go down, and vice versa. How can this effect your income plan? Let’s take a look at a hypothetical example. Keep in mind that this example is for the purposes of illustration only. Meet Bob. Bob retired in 2005 with $500,000 in savings. After determining the amount of Social Security he would receive, Bob concluded that he would need to generate an additional $20,000 a year in income to live the comfortable lifestyle he desired. Seeking that additional income, Bob used his $500,000 to purchase a 10-year bond. The interest rate was 4.5 percent, which meant that Bob could generate $22,500 in annual income from the interest he earned, keeping his principal intact. This was a great solution - until the bond matured. When the 10 years were up, Bob had to reinvest his $500,000, only now interest rates had dropped to 2 percent. That meant that if he reinvested in the same 10-year bond, he’d only be able to generate $10,000 in income each year— less than half of what he was earning before. Coupled with the impact of inflation over a 10-year period, this loss in income could result in a significant change in his lifestyle. That’s just one possible scenario. What if interest rates had dropped down to 2% five years into Bob’s 10-yr bond period? Bonds generally have a “call period.” That is a period of time during which the issuer of the bond can “call,” or buy back, the bond for the purchase price plus any accrued interest. In Bob’s case, when the interest rate dropped from 4.5 percent to 2 percent, the issuer generally has the ability to call the bond in order to reissue the debt at a lower interest rate. In that case, Bob would be in the same position of having to purchase a new bond knowing it would generate less than half the income of the previous bond. The only difference is that now he would be facing this predicament much earlier than in the scenario where the bond reached full maturity. DON’T PUT ALL YOUR EGGS IN ONE BASKET !!! Do you need income? One of the features an annuity has is a guaranteed income stream. Regardless of what rates do, you continue to receive the same, steady income for as long as you live. So, let’s look back at our example with Bob. Investing his $500,000 in bonds, Bob experienced the downside to interest rate risk. What if he had instead used that $500,000 to purchase an annuity with an “income” rider? Many riders today offer a 4-6% withdrawal rate. So, if he purchased his annuity with $500,000, he could generate up to $30,000 in annual income for life. Income riders require a fee - but, they could provide a welcome income solution. One tradeoff is that, when you receive income from your annuity you may see your principal erode over time. If Bob purchased an annuity rather than a bond, he could still generate the additional income he needed, free from the unpredictability of markets. Annuities come with benefits, but benefits aren’t free! Annuities are designed as long-term vehicles, withdrawals are generally taxable and, if taken before age 59 ½, are subject to a 10% federal tax. Maybe you should consider an annuity as a supplement to your income strategy? YOU’RE ALMOST THERE!


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