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Generate Income During Markets Ups and Downs

Tad Majerek | Thursday, January 7th, 2010

If you are like many investors, you most probably have been noticing and keeping up with the recent market fluctuations. During these times, you may be looking for opportunities to help protect your investments and possibly generate some income from your portfolio. The good news is there are several strategies investors can use to help increase the income generated from their investments and help protect your portfolio during turbulent markets. Let’s take a look at some of these strategies:

Dividend paying stocks or ETF’s.  Not all stocks are created alike and investors often overlook this strategy of generating income.  Investing in a diversified group of stocks that pay dividends may be a good strategy for those looking for potential price appreciation and income stream.  You will be able to use the dividend payments as income or reinvest them into your portfolio as you see fit.  With this strategy, it is important to evaluate the companies you may be investing in before making your selection and verify that the fundamentals are strong and that they are likely to continue paying dividends to investors. 

Mutual funds.  Another strategy for generating income while maintaining proper portfolio diversification is mutual funds.  You may be able to take systematic withdrawals from your mutual funds.  These can serve as an “income stream”, while enabling you to enjoy the benefits of diversification. While mutual funds are a popular investment for many different types of portfolios, you may not have thought of them as a potential income source.     
Laddered bonds.  Staggering bonds with different interest payment and maturity dates has been popular for many income investors.  By laddering the interest payment dates, you’ll be receiving the interest income throughout the year at different times instead of all at once.  And by staggering the maturity dates, the bonds will mature at continue the laddering process if desired. 

Variable Annuities.  A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. Variable annuities let you invest in the stock market through mutual fund-like accounts. When you are ready to take income from your annuity you can convert to a lifetime income stream.  The major drawback with the older annuities is that you lose control over those assets once you convert and in most cases the payments stop upon your death.

There is a new breed of Variable Annuities that can provide income for life and there are two popular kinds of guaranteed payouts. With guaranteed minimum withdrawal benefits, you can take out up to a certain amount every year — 5% or 6% of your initial investment had been typical — no matter how your investments perform or how long you live. Some annuities let you boost the annual guaranteed withdrawal amount if your account value increases.  If there is money left in the annuity you can pass it on to your heirs.

The other variation, a guaranteed minimum income benefit, also allows you to withdraw up to a certain amount each year (again, 5% to 6% had been typical). Plus, you always have the right to convert to a lifetime income stream based on the original investment amount, even if the balance in the account falls below that level. Although you give up control of your money, you may be able to increase your annual withdrawals to 8% or more. The older you are when you annuitize, the higher your payouts.

Fixed annuities. In simple terms, an annuity is an agreement between you and an insurance company.  With a fixed annuity, your assets earn a fixed interest rate and can accumulate tax-deferred.  Also, the issuing insurance company guarantees* the interest and your principal against loss so you won’t be as affected by market fluctuations. Fixed annuities also allow you to exchange the money you accumulate in the contract for a fixed income stream for a specified time or as long as you live.

Life insurance.  Purchasing a life insurance policy has many benefits including an income tax free payment to your beneficiaries upon your death.  In addition, many life insurance contracts offer cash value buildup.  This cash value accumulates tax-deferred.  Contract owners seeking income can access the cash value, in many cases, without taxation.

Keep in mind, not all of the above strategies are appropriate for every investor so it is vital that you work closely with your financial consultant in order to develop the best plan for your financial situation.  Be aware that the value of some investments will fluctuate and may be worth more or less than the original investment when redeemed.  Also, as your situation changes or new developments occur, you’ll want to revisit your portfolio to ensure the changes are reflected in your allocation of investments.

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