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Most of the time, a good map will get you where you need to go. Fundamentally, a map is a detailed plan to get you from Point A to Point B following well-traveled routes that are known to work. But even the best map can’t get you around roadblocks or navigate you through detours, and someday you may look up and not recognize where you are. When the unpredictable occurs, it’s not a map, but a compass that you need.

In 2008, the roadmap failed for many soon-to-be retirees with 401(k)s invested in the stock market. They weren’t prepared with an alternate route, and too many were forced to postpone retirement or restrict their lifestyles after losing substantial savings. Volatility is the word of the decade – the job market, the stock market and the world economy are all in flux, and the “fiscal cliff” has everyone defensively clutching their wallets. It seems like the only constant investors have seen in the past 10 years is a steady decrease in interest rates, which transforms traditionally safer investment options like CDs and bonds into slow-leaking money sieves. It’s a situation that makes storing retirement savings in a shoebox under the bed sound tempting. Why plan your retirement when it seems that all bets are off?

This is where the “Retirement Compass” idea comes into play.

Jammie Avila, Managing Partner/Co-Founder of Cornerstone Wealth Management, develops retirement plans that move in the right direction, no matter what obstacles the stock market presents. Instead of a map to retirement, he hands his clients a compass.

Where other financial planning firms give their clients plans which may work in the economy of the moment but leave investors scrambling if a major shift takes place – Cornerstone Wealth Management in Henderson and Las Vegas, Nevada, has a philosophy centered on flexibility and oriented to each client’s real purpose. Avila says many new clients come in without having thought of their ultimate goals for their money, but understanding those goals is vital to guiding their investment decisions. “When we sit down with someone, we often realize that they don’t have a plan for their retirement, even if they have money in the stock market. They don’t know how to change as the stock market changes,” says Avila.

He begins the first meeting by getting to know them, their families and their priorities, whether they be generating income, preserving income or passing on a maximized inheritance. Once the compass is calibrated to the primary goal, Avila begins to construct a plan to move his clients in that direction. But, as in Aesop’s fable of the oak and the willow, a plan that relies on its strength to withstand the storm can be blown over, while the willow that bends with the wind survives. The compass idea came out of that need for flexibility, he says: “It helps them visualize what they don’t have – and that’s a direction. By the time they’ve ended their meeting with us, they are confident in the direction they are headed.”

“When obstacles block your path, like market fluctuations, inflation or rising health care costs, our Compass will keep you on track to your retirement goals,” he says. For Avila, “true north” is preserving assets, increasing fixed income and reducing taxes for his clients, for which he uses a combination of insurance and annuities and estate planning. However, the direction Avila looks to when considering the current economic climate facing the United States is east – to Japan.

It’s been 22 years since Japan’s economic bubble busted, leaving Tokyo’s skyline a broken ridge of half-built towers, and the country’s economy hasn’t entirely recovered yet. Avila predicts the U.S. economy will follow a similar pattern: “We may have another 12 to 15 years in the same type of economy where there’s not a lot of growth. In that case, the returns aren’t going to come from the stock market – that’s not where we’ll make our money.” However, talking Baby Boomers down from leaving all their money in the stock market, which most have always done, isn’t easy.

The Baby Boomers retiring this year are those who were at the peak of their earning years during the height of the U.S. tech bubble and housing bubble, says Avila. In fact, the market that prevailed over most of the Boomers’ working lives seemed practically charmed. Some economists believe that the 1982 law that made 401(k)s available to everyone was the cause of the largest bull market in U.S. history. “The market went up close to 1000 percent from 1982 to 2000,” says Avila, adding “People thought the stock market was great! Their balance kept going up! It created a frenzied demand, and everyone wanted in.” And everyone stayed in, far past the point when they should have taken their money out, at least according to the “Rule of 100.”

The “Rule of 100” is more of a guideline, adhered to by many conservative retirement planners, in which a retiree subtracts his or her age from 100, and the difference is the percentage of their savings they can invest in the stock market with relative safety. But the Baby Boomers who fared so well in the bear markets of their working years didn’t learn the lesson of caution their parents knew from the Depression – until 2008.

That year, Avila remembers holding a workshop in which one 69-year-old woman revealed deep concerns over her portfolio. The next day, Avila visited her in her home and learned that she had retired just two years before with a 401(k) worth one million dollars. Avila recalls, “She’d been talking to her broker, and he told her she should be able to pull out 7 percent on average, so she expected an income of $70,000 per year. Then 2008 hit and her million dollars dropped to $550,000. After that, her income was reduced to $20,000 per year.” At that point, the damage to the woman’s savings had been done, but Avila says if she had followed the “Rule of 100,” she still would have lost money, but not nearly as much. “When the stock market dropped 40 percent, she would have lost on only 31 percent of her estate, but the other 69 percent would have been protected,” he says, using the story to illustrate the point that “you can’t keep doing things the same way you always have. In retirement, it’s all about timing.”

If, as Avila says, “volatility is the new normal for the next decade,” where can retirees put their money? The safe investments of the past now offer interest rates at record lows, unable to even keep up with inflation. Creating a portfolio that produces reliable income in today’s economy requires more sophisticated strategies.

Avila’s retirement plans are customized to each client, but they have one feature in common: investments designed to produce guaranteed income streams to cover vital expenses. That simple goal is more difficult than it sounds, since to create that constant income, you have to account for inflation and increased cost of living – as well as the very real possibility of needing at-home care in the event of an illness. A traditional fixed income that doesn’t change over time can’t accomplish that. However, by cleverly combining hybrid annuities with a diverse portfolio of safer investments, retirees can combine safety with potential for growth.

Hybrid annuities form the base of Avila’s plans. Within the last 15 years, they’ve developed income riders that give a guaranteed growth rate of 7 percent for future income, allowing retirees to have a pension-like income when they retire while safely growing their principal in a tax-deferred account. The limitation of the hybrid annuity is liquidity – holders can only withdraw 10 percent of their money per year and have to keep the annuity for at least 10 years or incur penalties. “That’s the big thing brokers use to scare people away,” says Avila, adding, “Don’t put all of your money in there; put the money you want safe there. The rest you can put into liquid accounts.” While losing control over a large sum of money is daunting, the upside is substantial: “You can take a guaranteed withdrawal rate that will last the rest of your life as well as your spouse,” says Avila.

The greatest fear among retirees is outliving their funds, and most are more than willing to give up liquidity in favor of safety and the potential for growth. But hybrid annuities have another strong selling-point: their long-term-care riders. If the annuity holder has a serious health issue and needs long-term care, the hybrid annuity can double its income payment for five years. “If you have $30,000 a year coming from the annuity, it will go up to $60,000 a year to help handle the high cost of long term health care,” says Avila, who adds that it’s one of his clients’ major concerns since long term care insurance policies are so expensive. With the hybrid annuity, “It’s all built into the annuity with the fees you’re already paying. You don’t pay more for that,” says Avila.

While Avila believes that hybrid, or fixed indexed annuities, should be part of the bedrock of any solid retirement plan, he regularly employs other tools also, as part of Cornerstone Wealth Management’ comprehensive retirement planning. “My office is a full brokerage; we do everything from guaranteed annuities to stocks and mutual funds. We believe all of them should be part of a financial plan, creating diversity,” he says. The foundation of each of these plans is “safe money strategies” that rely heavily on fixed hybrid annuities, but it’s what Avila does with surplus funds that sets him apart from other conservative planners.

“We have our clients investing in the health care sector, because when you think of the 10,000 Baby Boomers retiring every day for the next 20 years, the need for hospitals, long term care facilities, and rehab and dialysis clinics – all the health care sectors I believe are going to see growth,” he says. These types of investments are called non-correlated asset classes, investment vehicles that aren’t tied to the stock market. Other non-correlated platforms Avila predicts will do well are precious metals, energy and real estate – now that prices and interest rates are low. “That’s our platform, and it’s logical. People understand it, and they buy because it’s true. The health care sector will be more in demand simply because we have more customers for it. With oil and gas – energy – there are all kinds of energy sectors that we feel have potential. It’s an emerging market that we think will play a big role in the growth of any sector,” he says.

The economic forecast of the stock market is stormy for possibly another decade, and Avila urges consumers to protect themselves in case of another 2008. “Our clients are guaranteeing their principal and income through hybrid annuities and are using non-correlated investments to grow their remaining money relatively safely,” he says. According to Avila, the hybrid annuity should be the foundation for at least a portion of every retiree’s plan. For growth, he says “look at sectors of the economy that will likely be bullish over the next decade: Real estate, health care, and energy. If you don’t have those things in your financial plan today you’re going to be lost over the next 10 years searching for your missing returns.”

We’ve already been through one “lost decade,” during which retirees’ savings have been hit particularly hard. But like the Depression-Era survivors – the retired predecessors of the Baby Boomers – we can learn from these economic setbacks and conserve and protect what remains. The roadmap to riches that worked so well in past decades cannot dodge the roadblocks retirees have hit, so perhaps it’s time to fold the map, put it away and take out a compass.


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