When the market is up and everyone is hopeful, it’s easy to be optimistic about your retirement savings. It’s also easy to buy into the notion that buying stocks and mutual funds and holding them indefinitely is a good idea-one that will never go wrong. Dollar cost averaging, a strategy in which you invest in a stock or mutual fund repeatedly over time so that you can take advantage of any market inefficiencies and drops in price also seems like a perfect strategy to accumulate retirement savings. And variable and indexed annuities look like great opportunities to invest and gain an income through retirement.
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Strategy versus Emotion
The reason these strategies seem like good choices for your retirement plan is not necessarily because the market is up at the time you decide to implement them, it is because they often are a good idea. Buy and hold and dollar cost averaging are investing techniques that have been employed for years because they work. Just one glance at the history of many of your favorite stocks shows that, over the long term, most gain value rather than lose it. Even after a large sector-wide loss you can often pull off gains during the recovery if you are patient. Annuities offer varying levels of risk and return and the option of a guaranteed income for life. The sub-account investment options also often offer long-term growth even in rocky economic environments. Some annuities even have guaranteed minimum yields and return lock-ins.
But when the market is down all of these sensible investing decisions seem to go out the window. Investors sell low after buying high, they don’t buy stocks until they see them going up in price, they hold nothing because they are too scared to and they surrender annuities early or exceed maximum withdrawal limits-paying penalties when they do-so they can have the money in their hands immediately. This results in the permanent loss of potential gains and the permanent realization of definitive losses.
Making financial decisions in your retirement account when you are scared means giving in to emotional thinking and retirement decisions should not be made while in an emotional state of mind.
Focus on Making Goals and Reaching Them
When you create your retirement plan and the investment strategy that it will follow, you are doing so based on the goals you have for retirement. If you sell out of positions to move to cash when these positions are low in price, then you are making a move that is likely to go against the goal of your plan. Instead if you continue to invest and take advantage of market inefficiencies that create a low price on a stock that could rebound, then you are working toward your goal.
That’s not to say that there is never a time to abandon ship in your investment account. Sometimes, a company or sector might be floundering and the sale of certain positions before they fall too far is good. Sometimes, adjustments need to be made in the subaccounts of your annuities. Getting professional help and an experienced point of view can help you navigate your investment plan and make the decisions that will sustain your savings goals.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1/2, may be subject to a 10% federal income tax penalty.
Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.