John Jamieson from Daily Finance talks retirement preparedness: Part I

The Indexed Annuity Leadership Council recently interviewed DailyFinance contributor, John Jamieson on preparing for retirement, the importance of a balanced portfolio and the benefits of fixed indexed annuities. This interview has been split into two parts. The opinions expressed in this articles are those of the interviewee, John Jamieson and do not necessarily reflect the views and opinions of the IALC.

Part I: Balancing Your Portfolio

What is the most important element to a balanced portfolio?

A balanced portfolio is actually called “modern portfolio theory,” which is basically having your money in different sectors of the stock market using mutual funds to balance risk. An important thing to understand when building a modern portfolio is how the money in your portfolio is invested and how each fund is growing.

A traditional financial planner will always ask, “What is your risk tolerance?” In other words, how much and how often can you afford to lose a lot money?  This will help the financial planner determine what funds match your risk tolerance. Additionally, it is essential to understand things like average rate of return and how it differs from a compound growth rate of return.

It should be noted that there are programs and products out there that guarantee the principle against loss, as well as guarantee a compound growth rate of return.  These products are in the insurance world, and there are many conditions and terms on these insurance products. Therefore, it is important to deal with people that have expertise on the subject. There are also other investments outside of the stock market and mutual funds, like real estate and private lending. These investments can have risk, but they can be mitigated depending on the strategy used to invest.

What should millenials entering the workforce do to start preparing for retirement?

Save early and save often.  Educate yourself on other alternatives to the standard 401(k) or IRA route that is so massively promoted in the media and the general financial world.  Those programs have many downsides, and there are alternatives that I believe are a better fit.  Millenials also need to understand true compound interest and put it to work in their favor as early as possible.

What are the three most important questions a person should ask when purchasing a fixed indexed annuity?

You should always ask what the fees are, what riders are available and what the fees are for those riders. Just like anything, it’s important to understand the value of your purchase. So, ask about the value, or benefits, you will receive for any fees.  For instance, one value might be a lifetime income rider, guaranteeing you monthly income for you and your spouse’s lifetime – no matter what becomes of the actual cash in the annuity. Other benefits could be: guaranteed growth, guaranteed principle protection, home health care or long term care protection. For benefits like that, I am willing to pay a reasonable fee.

You should also find about the early withdrawal penalties.  Almost all of these products have these kinds of penalties, and it’s important to know the exact terms.

Another really important question to ask is what kind of guarantees are included and what caps are on the product. Many products might cap the amount of growth your cash account will be credited.

It’s important to consider: Just like most retirement savings, you should not put in money you will want for other purposes in the next five to 10 years.

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