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Financial Tools for Pre-Retirement

The key to the 40-60 years old's investment selection is to keep the objective, time frame and cash available to invest in mind when making your investment tool selection. If you do, you stand a good chance of meeting your retirement income needs and taking only as much risk as necessary.

The goal for 40-60 year olds is to build as large a pot of income-producing assets as you: (1) project you'll need for adequate lifetime income, (2) have the necessary cash flow or lump sum of money to apply, and (3) have time remaining before retirement to take reasonable risk.

The products this age group might use may be ones they start using currently or may have acquired at an earlier age. Typical tools are:

Cash Value Life Insurance
in the form of whole life, universal life, variable life or variable universal life (see insurance section for more information). The purpose in owning any cash value life insurance is that in addition to the death benefit the cash value part of the policy builds up on a tax-deferred basis for future income use. The cash value can be a retirement income source, and/or it may serve as a pot to pay post-retirement premiums so life-long insurance can be in place without a lifetime of premium payments.

Whole life and universal life cash values grow conservatively. Variable and variable universal life offer you investment sub-accounts that grow the cash value at whatever rate of risk you are willing to take and the sub-accounts actually perform. These sub-accounts offer investment in stocks and bonds. No matter what form of cash value life insurance you decide to own, it's always less expensive and the cash value pot for income purposes is always bigger the younger an age you buy it at.

In addition to being a retirement income source, another use of cash value life insurance is for the pension planning technique known as "pension maximization". If your employer offers a pension you can get an estimate of what that pension will be. At retirement you will have to elect whether to take a life-only pension amount or some kind of survivor pension amount. With life-only you get the biggest check but, when you die the pension stops. By matching the amount of death benefit of your life insurance policy with the projected pension benefit you can take the life-only amount and upon your death and the pension payment stops, the life insurance lump-sum payment invested can generate a replacement income stream of payments for the survivor(s).

Fixed and Variable Annuities
are issued by insurance companies. They enable you to accumulate money on a tax-deferred basis but without a life insurance benefit. When you pull money out of an annuity you can set it up such that you cannot out-live the income.

With fixed annuities the insurer agrees to pay a set rate of interest to your account for a set period of time, similar to the way banks credit interest to a certificate of deposit. Unlike a CD, there is usually a guaranteed minimum interest rate. You principal is not exposed to the downside risk of investments. The interest rate credited is usually 1% more than a CD rate.

With a variable annuity you earn a rate of return dependent on the investment success of the sub-accounts you choose. These sub-accounts invest in stocks and bonds. Your principal may decrease due to investment performance.

A hybrid annuity has become available recently called an index equity annuity. The rate of return your account earns is tied to the results of an investment index, typically the S & P 500. The rate you're credited is usually a percentage of the index's results, not the full index rate. There can be great up-side potential when the stock market is doing well. When the stock market drops and the index's results are negative you have the security that there won't be a reduction of your account.

401(k), 403(b), 401(c), 457, SARSEP and SIMPLE
plans are all forms of employer-sponsored retirement payroll savings plans. They require you to put some of your pay check into them and your employer may contribute a matching percentage (mandatory match required by SIMPLE plans). They offer a wide variety of investments into stock and bond funds. They are simply tax-advantaged savings vehicles, the actual investment accounts can be very diverse, all the way from a choice in which your money is guaranteed against loss to a choice that is very risky.

is tax-favored individual retirement savings plans.Traditional IRA's may give you a tax deduction for the money you put in and grow tax-deferred. When you pull out the money it may be all or partially taxable. The newRoth IRA doesn't give you a tax deduction for any of the money going in but, the account does grow tax-deferred and if you take the money out properly you get it income tax-free under current laws.

Nearly any type of investment can be used in an IRA except life insurance and collectibles & antiques. From a practical stand point, $2,000/year won't buy you much real estate!

Whether you're investing for retirement within an employer plan or IRA or just as an individually owned asset, the following invests are beneficial.

Mutual funds
typically invest in stocks, bonds, various forms of cash and real estate. A mutual fund is an investment company that pools your money with other investors to purchase investments in an effort to achieve a specific investment objective. The funds' objective might be growth, income or growth & income. A growth fund wants to select stocks that will cause the fund's share price to be higher in the future than it was when you bought the fund's shares. It may invest in stocks of US companies or that of companies around the world. An income fund wants to invest in certain stocks, bonds and various forms of cash in an effort to pay you currently as high an income as they can. You might find that your share price has gone up over time. A growth & income fund wants to achieve current income (at a lower rate than a straight income fund) and gain a higher share price for you in the future, although not as high as it would be if it were a straight growth fund. Growth funds carry the greatest risk.

Mutual funds are attractive to people because they can invest in the stock and bond market with small amounts and the mutual fund management makes the day-to-day buying and selling decisions on the individual stocks and bonds. Also, a mutual fund diversifies your risk because each fund usually owns shares of stocks and bonds in dozens of companies - all your eggs are not in one stock's basket.

Shares of Stock
are usually purchased by people who have a high degree of risk tolerance. When the investment community talks about risk, it is referring to the way an investment may increase or decrease in value and how volatile that change is likely to be. To buy shares of stock in an established company you typically will need $10,000 because that type of company's stock sells anywhere from $70-$100/share and the lowest sales commission comes with purchasing a minimum of 100 shares.

are purchased in certificate form and represent a company's or government's debt. Purchasing a bond is lending money. At the end of the loan (maturity of the bond) you get your bond purchase price back. During the term of the bond you get paid a fixed rate of interest. If you hold your bond to maturity you will not lose money. The value of your bond while you hold it may go up if current interest rates go down or the value of your bond may go down if current interest rates go up. The interest from bonds may be taxable (corporate) or tax-free (city, county or state in which you live).

Whenever you buy individual shares of stock or bonds, be aware there are unique risks involved. Be sure your investment advisor or stockbroker discloses all the pro's and con's.

Real Estate
is most commonly owned on an individual basis, usually in the form of a house or a commercial building that's rented. These properties are held until you determine, you've made a good profit or until you have to sell for some reason. Buying individual properties requires good cash flow and high risk tolerance. If you're successful the gains can be great. For those people who do not want to be rent collectors, there are Real Estate Investment Trusts (REITs). These investment companies pool investor money and purchase real estate around the US and even around the world. The funds pay you a current income and when properties are sold you get paid a capital gain on any profits.

Other investments
that you may have heard about or may know about could contribute to your goal of building a retirement income pot, although typically they are not relied upon. These investments are precious metals and precious coins, antiques & collectibles (ah, Beanie Babies!), futures, options, etc.

The key to the 40-60 years old's investment selection is to keep the objective, time frame and cash available to invest in mind when making your investment tool selection. If you do, you stand a good chance of meeting your retirement income needs and taking only as much risk as necessary.


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Allison Easterling
305 Carpenter Road
Fort Collins, CO 80525


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