Safe Money Solutions

What Is Safe Money?

Safe money is not a product or a specific asset class in and of itself. Instead, it is a financial philosophy that focuses on the growth of our money while also preserving our hard-earned savings against market risk. In other words, safe money is all about low-market risk growth. The goal of safe money is for our money to grow but not suffer losses. Safe money is about growing assets with minimal risk. Safe money retirement savers look for low-risk places to grow their money with PRINCIPAL PROTECTION. They may also seek safe money instruments for other reasons, including GURANTEED INCOME for a set period or for life. Safe money involves putting our money in a variety of low-risk assets that have little volatility, meaning our original investment is preserved. Some safe money assets have grown more than others, so it pays to look at their historical performance before deciding on which assets to commit our money to. Keep in mind that historical results may not represent future results as well.

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How Does Safe Money Work?

Safe money is about growing assets with minimal risk. Safe money retirement savers generally look for low-risk places to grow their money with principal protection. They may also seek safe money instruments for other reasons, including guaranteed income for a set period or life.

Safe money involves putting your money in a variety of generally low-risk assets that have little volatility, meaning your original investment is preserved. Some safe money assets have grown more than others, so it pays to look at their historical performance before deciding on which assets to commit your money to. Keep in mind that historical results may not represent future results as well.

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What Are the Pros and Cons of Safe Money Options?

For one, low risk can mean limited growth potential. You won’t see the returns that those who invest in the stock and bond markets do when the markets do well.

These sort of saving and investment options often aren’t as liquid as higher-risk assets, although many of them offer some liquidity. Most annuities will give you some liquidity via free withdrawals, which let you take up to 10% of the contract value per year. But withdrawals in excess of that are subject to surrender charges for the annuity’s maturity period.

For example, say that you put $100,000 into a fixed index annuity and the maturity period was 10 years. During that decade, you may not be able to withdraw more than $10,000 per year without paying a penalty on any amount withdrawn above this level.

With safe money options, their value may not go up and down in big swings. However, they usually aren’t as exciting as higher-return-potential investments. The trade-off for this is that your principal is protected in the years of losses.

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As you gear up for retirement, you may have heard of “safe money solutions.” Are they right for you? It’s an important question, especially since retirement planning is more difficult than it’s ever been in history.

Past generations could count on company pensions that would pay them every month without fail until they died. But the disappearance of these pensions, coupled with the increase in longevity for retirees, has left many people with more questions than answers.

While Social Security will cover at least some of their expenses, most retirees will have to rely on income from their own investments and savings to make up the difference. However, what many call a bewildering amount of financial choices in today’s market can leave people feeling frustrated.

According to the Investment Company Institute, nearly 120,000 regulated investment funds are available to retirement savers today. And what about other options? There are more annuities than hedge funds available, which doesn’t even begin to cover the universe of countless other instruments that can be tapped for retirement goals. All that being said, what if you are looking for some choices that help guard your money and maximize income for retirement? Safe money solutions might be worth a look. And what are they? Generally speaking, a safe money solution:

• Provides some protection for your principal.
• Might pay out retirement income with higher confidence than, say, an equity position might give.
• Offer some growth potential with a guaranteed interest rate or other interest-earning opportunities.

Fixed-type annuities, bonds, and Treasuries are among the asset types that can be called “safe money solutions.” But among all of these, annuities are the only instrument capable of paying out a guaranteed income stream for life.

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Annuities as a Safe Money Solution for Income for Life

One example speaks powerfully to how annuities can provide permanent streams of monthly income, often at less cost than what other asset classes might give. Dr. Wade Pfau of the American College for Financial Planning recently showed a comparison of different income-planning approaches. His presentation was at the combined Financial Planning Association (FPA) and Academy of Financial Services 2019 annual conference.

Pfau is the director of the Retirement Income Certified Professional program at the college. He showed how a 65-year-old woman who purchases an immediate annuity with a life-only payout for $172,915 would receive $10,000 a year for life at current rates. Comparatively, the same amount of money invested in savings today would produce about $6,920 per year, assuming 4% annual withdrawals.

Using Annuities or Bonds for Retirement Income

Pfau went on to compare the same annuity to a ladder of risk-free zero-coupon bonds. A 35-year ladder of bonds that would guarantee $10,000 a year for 35 years would cost $224,872.

So, the hypothetical woman in this example could put money in the immediate annuity, then allocate the $52,000 difference in an equity portfolio to guard against inflation. However, every situation has trade-offs, and this scenario isn’t any different.

While the annuity pays more, the woman is forfeiting control of most of her money in order to receive the life-only payout. If she were to pass away early, the remaining balance of money in the immediate annuity would go to the insurance company.

What might be some alternatives, then? One answer is to put the money instead into a fixed indexed annuity with a guaranteed income rider. Let’s assume that she chose an “income-today” strategy, meaning she started payments to her right away

This index annuity alternative would also yield $10,000 per year but only cost $165,070 upfront. What’s more, it would also allow the woman to retain control of at least some of her money and also possibly leave a legacy for her heirs.

Characteristics of safe money places:

• Guaranteed income for the rest of our lifetime
•  Protects our money from market downturns
• Guaranteed minimum rate of interest
• Tax-deferred growth potential
• The ability to participate in an index through index-linked interest rates

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