The Right Balance Can Help Your Money Last a Lifetime

by Joe Pailin
215-441-3281
jpailin@ft.newyorklife.com

We often read about how important it is to maintain balance in different areas of our life, whether relating to career and home, or physical and mental health. It’s equally important to maintain balance in one’s financial life. Both short-term and long-term goals are crucial components of a thorough financial strategy. So is your risk tolerance, which will affect the type of products you’re willing to put your hard-earned money into. Ultimately, the right “mix” of financial products can provide the balanced solutions you seek.

A BALANCED EQUATION

There are many ways to achieve balance in your financial planning, and they all come down to one word: “diversification.” One of the earliest lessons you probably learned was “don’t put all of your eggs in one basket.” Your financial portfolio should embody the same philosophy. To help achieve your goals, it’s important to make sure you allocate your investments according to both your liquid and taxdeferred needs, and distribute them over fixed as well as variable or equity products. You’ll also want to take into account both short-term goals—perhaps buying a house in the near future—and long-term goals, such as retirement.

FIXED INTEREST VS. VARIABLE PRODUCTS

There is a key difference between fixed and variable products. Fixed products earn a guaranteed rate of return, typically adjusted on an annual basis by the financial institution backing the product. The guaranteed rate is usually comparable to that of bank accounts and CDs1. Variable products, on the other hand, are subject to the ups and downs of the market. With variable products, you can see a high return on your money—and just as easily a loss. There are valid reasons to want both types of products in your portfolio, especially when planning for the long term. A way to enjoy the benefits of such products—and perhaps make your money accumulate faster through the power of tax-deferral—is an annuity. Tax-deferred annuities can offer an excellent way to diversify your portfolio and meet long-term goals. Since your money grows tax-deferred, you only have to pay taxes as money is withdrawn. Because of this, tax-deferred money may accumulate faster than it would in a taxable product.

FIXED ANNUITIES: A GUARANTEED RATE OF RETURN

Everyone wants their financial products to perform well. But not everybody wants to put their money at risk. Especially when it comes to retirement money, many individuals prefer a financial vehicle that offers stability and safety, as well as a guaranteed rate of return. That’s where a fixed annuity comes into play. With its guaranteed fixed rate of return, a fixed annuity can offer financial security. Furthermore, the money in the annuity contract accumulates tax-deferred and can eventually be used to provide income at regular intervals for a specified period of time, or even for life.

VARIABLE ANNUITIES: EASILY DIVERSIFIED

Variable annuities are popular vehicles for people looking to save for retirement, because they combine the growth potential that comes from investing in the market with many of the benefits of a fixed annuity. Like a fixed annuity, the money in a variable annuity accumulates tax-deferred and can be used eventually to provide an income for life. The added benefit is that variable annuities allow you to decide where to place your money among a variety of investment divisions—including a fixed interest account.

The cash value in variable annuities is easily diversified. In addition to the fixed account, you can invest in a number of professionally managed investment portfolios, including stock, bond, money market and specialty portfolios. You can allocate your money among any number of these accounts, depending on your investment objectives and your tolerance for risk. Allocating your assets among several investment options may help reduce your risk and maximize your opportunity for higher potential returns over the long term. (The performance of investment portfolios is not guaranteed and the value of your account could go down.) Many variable annuities also offer features that can help you rebalance your holdings as your risk tolerance and needs change.

A LITTLE PLANNING GOES A LONG WAY

Before you start investing your money in insurance and other financial products, it’s vital to take into account the need for balance. Fixed annuities can provide a guaranteed-interest anchor in an otherwise equity-heavy financial portfolio. Variable annuities are diversified products in and of themselves, so they may offer the best of both worlds for your needs. You have worked hard to make saving for retirement a priority. Don’t neglect your financial health. Make sure your investments are balanced.