Dale Suezaki and Taylor Easley are financial advisers at Morgan Stanley, 329-7979.
The first principle is to go into retirement with a plan. Retirees should answer the following questions:
c What, if anything, do I wish to pass on to my heirs?
c How long do I need to make my money last?
Only when these questions are answered will it be possible to plan for success and successfully deal with obstacles along the way.
The danger of good fortune
The first obstacle is longevity risk. This is the risk that you will run out of money before you die. You may consider putting a portion of your nest egg in an annuity, which guarantees a certain amount of income for life. All annuitization guarantees are subject to the claims-paying ability of the insurance company that issued the contract. The downside, though, is that if you die early, you don’t get to pass on your annuitized assets to your heirs.
Outrunning inflation
The second major risk is inflation, which will eat away at your buying power over time. Most people use an inflation estimate of 3 percent to 4 percent for planning purposes. Inflation rates during the 1970s topped 7.09 percent, however, resulting in significant erosion to savings during that period of time, according to www.inflationdata.com, September 2006. To help beat inflation, consider the following options.
c TIPS, or Treasury Inflation Protected Securities. These are U.S. bonds whose yields are adjusted to reflect inflation.
c Stocks. Remember, a 65-year-old retiree in good health can expect to live another 20 years or more. So it still makes sense for many retirees to invest a portion of their portfolio for growth. Although past performance is not indicative of future results, no one who has held the S&P 500 for any 20-year period since 1926 has ever failed to beat inflation, according to www.brill.com, September 2006.
Annuities are designed for retirement purposes. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59 1/2, a 10 percent federal tax penalty may apply. Withdrawals generally reduce the guaranteed benefits and account value.
Bonds, if held to maturity, provide a fixed rate of return and a fixed principal value. If an investor sells the bond prior to maturity, there is a possibility of capital loss. Because the return of TIPS is linked to inflation, TIPS may significantly underperform vs. fixed return treasuries in times of low inflation.
The value of equity securities may fluctuate in response to specific situations for each company, industry, market conditions and general economic environments.
Articles are published for general information purposes and are not an offer or a solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives. Morgan Stanley does not render advice on tax or tax-accounting matters. Individuals should check with their tax and legal advisers before engaging in any transaction involving IRAs or other tax-advantaged investments.
Dale Suezaki and Taylor Easley are financial advisers at Morgan Stanley, 329-7979.