How Can You Safeguard Your Lifestyle From Inflation and Market Risks? Retirement Question No. 4
Aiming for a comfortable retirement entails maneuvering through the difficulties presented by both inflation and market risks. Traditional safety-based financial tools, such as fixed and indexed annuities, often offer protection against market volatility, but their growth potential might be limited, especially when inflation comes into play. Market-based investments like stocks, mutual funds, and exchange- traded funds (ETFs) can provide considerable growth and may help sustain your purchasing power, but they are accompanied by their own set of risks. 2 WAYS TO PLAY IT SAFE First, let’s consider fixed indexed annuities (FIAs). These financial instruments are celebrated for their ability to shield your money from market downturns while having the potential to deliver a steady income stream. However, their growth potential without an income rider can be somewhat lackluster, particularly when pitted against inflation. FIAs can be attractive for those who prefer a guaranteed rate over a period of time as well as tax deferral options. Of course, each annuity has its own set of policy specifications that are important to understand. Another popular “safe” choice is certificates of deposit (CDs), which typically offer a lower yield than FIAs. Again, while they may provide stability, inflation and taxation can undercut their returns over time.
within your overall financial plan investment strategy before purchasing an annuity and committing to a long-term contract.
‘RISKY’ OPTIONS THAT MAY PAY BIG DIVIDENDS Having weighed the “safe” options, we now shift our focus to more “risky” market-based options including stocks, mutual funds, and ETFs. While it is possible to have market-based investments that are more conservative, there is always risk in the market. So, even the most conservative asset type, bonds, still have risk. The terms risk and return typically go hand in hand. The more risk you take, the higher the return you might expect. However, it also means the greater chance you have for loss. It is important to understand your tolerance for risk, then focus on a diversified portfolio that will optimize your return for the amount of risk you are willing to accept. One of the key advantages of ETFs — pooled investment securities that are similar to mutual funds but can be traded like stocks — is the ability to diversify your investment across various asset classes and sectors. ETFs are designed to mirror specific indexes or groups of securities. This provides broad exposure to the market, thereby reducing the inherent risks linked with investing in individual stocks. The best way to leverage ETFs effectively is by working with a financial advisor like Krista. A professionally managed portfolio can help improve your risk-adjusted return, reduce or avoid overlap within your portfolio, increase your yield, and help with tax efficiency. If you’re not already working with our team, reach out today! We can recommend a strategy that aligns with your risk tolerance and goals. If we’re taking care of your retirement already, you can also send your friends and family our way for advice — we’re here to help. THE SECRET TO BALANCING SAFETY AND GROWTH Protecting your lifestyle from both inflation and market risks requires a balanced approach. “Safe” options like FIAs and CDs can shield you from market risks but may not deliver desired growth. Conversely, focusing solely on market-based investments without a financial plan or understanding of your risk tolerance, investment strategy, and diversification can also bring substantial risk. However, a carefully curated portfolio can provide a comprehensive solution combining diversification, growth potential, and risk management. By precisely selecting and managing ETFs according to your risk tolerance, liquidity needs, and time horizon, you can craft a financial strategy that helps safeguard your lifestyle against inflation and market risks.
Both of these products can be a great addition to your portfolio. However, we suggest that you understand the product’s purpose
2 McBeathFinancialGroup.com
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