Saving for retirement is an inexact science. Economic swings can set back retirement goals, and it can be frightening to watch your portfolio shrink. Deteriorating economic conditions can also increase prices and even leave you unemployed.
Not surprisingly, working households tend to focus more on day-to-day expenses than on retirement in during tough economic periods. Fortunately, there are simple ways to save for retirement even in a turbulent market environment.
Here are seven investment vehicles to help.
1. Fixed annuitiesInvestors fleeing a volatile stock market should look at fixed annuities.
These investment vehicles boomed when the stock market took a beating in late 2000, and sales surged in the first quarter of 2001. Seven years later, they gained popularity again during one of the worst recessionary periods ever; sales estimated for fixed annuities were at $107 billion in 2008, up 60% from 2007, according to the Beacon Research Fixed Annuity Premium Study.
With an annuity, an investor can put in a lump sum and lock in a fixed interest rate of 4% to 10% for a period of time -- typically from five to 10 years. Annuities provide investors with either immediate or deferred payments. Payments can occur for a set number of years or until the investor's death. The money is tax-deferred, and the principal and interest are guaranteed. The payout is commonly 5% of the principal each year. (To learn more about how they work and their benefits, check out "An overview of annuities.")
It's important that investors stay attentive to "teaser rates," because once they end, the reset rate is dependent on market conditions.
2. Variable annuitiesAs the market begins to stabilize, investors tend to focus on a different annuity: the variable annuity. This vehicle allows people to pick from a group of investments, such as mutual funds, stocks and bonds. As a result, an investor's rate of return varies. The lump sum of money initially invested can be moved among investment portfolios to take advantage of a strong stock market or to preserve gains.
Keep in mind that with annuities, some withdrawals prior to age 59 1/2 can result in a 10% tax penalty and a surrender fee. Also, once payments are received, interest is taxed. In addition, these annuities aren't guaranteed by government agencies.
3. Target-date fundsTarget-date funds are geared toward people who have a retirement date in mind. Investors put their money into a diverse mixture of stocks and fixed-income securities. The fund manager automatically shifts away from riskier investments to more conservative investments as the target date approaches.
Assets held in these funds have grown in popularity since they emerged in the mid-1990s. This led to their designation as a qualified default investment alternative, making them much more common in 401k plans.
However, these funds were hit hard during the 2008 recession. Their unpredictable performance led to significant losses, which varied based upon how the assets were allocated. The average loss for funds with the target date of 2010 was nearly 25%.
When it comes to target-date funds, investors aren't always well aware of the risks and differences among the funds. The way the funds are marketed has also become a contentious issue.
Despite the potential volatility of these funds, target-date funds are still considered a growth industry, and many experts are working to make more, and better, disclosures.