Protecting income and lifestyle -- Part II

Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters. Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

Last week’s topic discussed the role the investor may play in managing their assets. This included creating the allocation between asset classes, monitoring the markets to adjust this allocation and then the selection of the actual funds within each asset class. For some investors, this may be right up their alley, and thus they enjoy the challenges, stress, and process of managing their own portfolios. For others, this could be the most painful job they have.

To assist in creating allocations and ultimately the selection of funds, there are several other choices to consider. Still within the do-it-yourself plan, there are lifestyle funds and target funds. Generally, the lifestyle funds are based upon risk and once a questionnaire is completed, the responses will provide guidance to the most appropriate fund based upon the answers given. To increase flexibility, if the risk questionnaire resulted in “growth” as the most appropriate lifestyle fund, the option remains to allocate a small portion of the investment portfolio to a more conservative allocation. This might be the funds needed within the next year or two.

The second type of funds is the target funds. These are based more upon when the money is needed than risk. The reasoning is that if the value is not needed for 20 years, then they can be invested more aggressively. Most of these funds are targeting some year in the future, thus as the target year approaches, the allocations generally change automatically. Clearly, this may sound like it might be the magic solution. Unfortunately, with every new wrinkle, there is still an issue behind the scene.

Target funds have two primary concerns. Between the investment date and the target date, most of these funds ignore current economic conditions. Thus, during the past year, few if any of these funds were reducing risk in light of the train wreck that occurred. So target funds do not manage the changes in the investment environment very well. Secondly, few investors need all of their funds on a single day. Just because retirement age is 65, does not mean all of the retirement assets need to be in cash and ready to be spent on that day. Most retirees today may need income from their investments for 10 to 20 years or more. At the very least multiple target funds may be needed.

For lifestyle funds, the same issues affecting target funds may impact lifestyle funds as well. Some of the lifestyle funds may have services which include frequent adjustments to the allocation. This will be beneficial when slight changes to the US and world’s economies occur. But, significant reduction of equities most likely will not occur and therefore their performances can be impacted when sudden or unexpected events happen in our economy.

Today, most investors want their cake and eat it too. The most desirable solution would be the product that provides market rate returns, some access to account values, produce income during retirement and growth until then, never run out of income and the highest account values are protected for the heirs. Oh yes, not cost anything and always beat the market!

Many insurance companies have tried to create this perfect product. Some in my opinion have come pretty close. They do have expenses, because features and benefits are never given away. And while there is no guarantee they will always beat the market, they do offer guarantees that will provide income for life regardless of the impact the markets may have on the investments, and they often also protect the highest account value for the spouse or heirs. (Before I proceed, I must provide a word of caution. I am not referring to Equity Index Annuities. And before any annuity is purchased, make sure sufficient liquidity remains in the portfolio and surrender penalties are reasonable.)

The newest generation of variable annuities offers many of the features investors are seeking. This includes income for life and the highest contract value is protected for the spouse or other heirs. The investments can be managed and various allocations used, or many also include target and lifestyle funds as some of the available selections. The advantage, when the allocation or investment selection does not produce the best result, unlike many other investment products, the contract guarantees may still provide much of the desired income. I will conclude this discussion next week.

For help with managing investments contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.

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