Alternative investment vehicles for retirement planning

December 10th 2012

The volatile nature of the economy is something which is surely causing sleepless nights for millions of people all over the country. Working hours and subsequently, wages are also decreasing and credit conditions are tight as a result. Even though spending has decreased, most of the working people are finding it seriously tough to cope with the slow economic growth, especially when it comes to retirement planning and savings.

Moreover, according to the Employee Benefit Research Institute, more than 54 percent of the work force tends to participate in employee sponsored plans like the 401(k) and over the last couple of years, they have witnessed their portfolios shrink. Although the market forces are acting unpredictable and generally turbulent, there are certain investment vehicles which might be able to help you get on track with your retirement planning.

Fixed annuities

These annuities were a big hit during the economic problems at the end of 2000. After almost 7 years, when the economy was faced with the worst financial downturn in more than half a century, fixed annuities continued to gain popularity among investors as a ‘safe’ investment vehicle.

Generally, a lump sum is locked in for a certain period of time, between 5 and 10 years, at a fixed interest rate. The return income can be immediate or deferred and the income trickle may flow for a certain number of years or till death. Moreover, there are tax benefits to be gained and there is also the tempting offer of guaranteed principal plus interest.

Variable annuities

Smart investors generally tend to keep their portfolio diverse in order to reap profits in case the market takes a sudden upswing as a result of decreasing economic volatility. Variable annuities make good investment vehicles in such cases. However, there are tax liabilities and withdrawing funds in some cases before the age of 59 ½ years may result in a 10 percent tax penalty.

Investors are free to choose from a set of investment options such as stocks, bonds and mutual funds and as such the rate of return subsequently becomes variable. Moreover, capital locked within the annuity can be moved between options to take advantage of market gains. Keep in mind that the interest received with payments is taxable and moreover, variable annuities are not guaranteed by any government agency.

Treasury Inflation Protected Securities (TIPS)

Fixed income earners are at the greatest risk of losing substantially if the market fluctuates and the effect starts to snowball. In order to hedge against inflation which could be a direct result of a speeded economic recovery, investors have started opting for TIPS. The bonds come with a maturation period which may be 5, 10 or 20 years. The principal carries a fixed rate of interest and both are adjusted against the consumer price index (CPI).

Therefore, if the economy is being pulled up or pushed down by inflation, the capital as well as the interest rate grows or recedes accordingly to adjust for changing capital value. The principal returned at the date of maturation of the bond depends on which is greater, the original principal or the adjusted principal. Investors are at a small risk though since inflation and deflation forces are somewhat difficult to predict.

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