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FEATURE – Not so long ago, investors expected government bonds to be the foundation for a stable retirement, and bonds were the first choice of older, more conservative investors within a few years of retirement.
Employees looking to bolster their employer-sponsored plans often turned to bonds.
Although they do have some degree of risk, bonds are usually viewed as a safe money product. Government bonds and Muni bonds have repeatedly proven to be a safer means of generating growth while reducing risk.
However, in our current zero-interest environment and record-breaking equity markets, bonds have lost some of their luster. Investors who are concerned about risk but need profits are now looking for reasonably safe alternatives to bonds.
In addition, the soon-to-be-retired and already retired people are looking for alternatives to bonds that will allow them to grow slowly and steadily without too much risk. Given the current low bond yields, there is an understandable move away from government bonds.
Could annuities be an alternative to bonds?
Annuities are financial instruments that provide guaranteed, predictable streams of income when you stop working. Investment advisors who are inexperienced in the sales phase of their lives sometimes turn down annuities and other safe money products.
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Most of the time, that’s because they don’t understand how annuities work and what powerful portfolio component they can be. However, once a person learns more about pensions, they usually want to add one to their retirement plan.
But can annuities help you diversify in a turbulent economic environment?
Most investors understand that investing all of your money in a single asset is not a good idea. On the other hand, the idea that you can diversify your portfolio can be a myth.
According to a 2018 report by Statista, a leading provider of market data, there were only 5,424 actively traded companies in the United States. However, in the same year there were around 8,094 mutual funds.
If you think about it, it means over 8,000 funds were competing for the same 5,424 stocks. There has to be some overlap. How do you know exactly which of these 8,000 funds to put your money in?
Unfortunately, the answer to this question often depends on what funds your employer offers in their 401 (k) plan. Out of 8,000 funds, your employer plan is likely to have 25 or 30 options at most.
Out of over 5,000 traded companies and 8,000 different funds, an employer plan gives you only a handful of options. If you rely solely on an employer plan for your retirement, you will most likely miss out on diversification and proper asset allocation.
Could fixed index pensions be the answer?
A fixed index pension could be the solution for risk averse retirees. With a fixed index annuity, you pass your money on to an insurance company that invests these funds in a general fund. The annuity then makes investments in order to obtain the highest possible profits without undue risk.
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A minimum interest rate hedge for fixed index annuities means that your capital is protected from market volatility, which is increasingly important when planning your retirement. For those familiar with a certificate of deposit-like returns, indexed annuities could be a great addition to your “safe money” part of your portfolio.
You should be aware, however, that an indexed annuity does not take full advantage of the gains in the stock markets. In most cases, you will not receive dividends, and what is known as a “participation rate” can limit profits. On the plus side, however, depending on your contract, you still get a guaranteed minimum interest rate even if there is a market downturn. These products are not exposed to any market risk.
Sum it up
Before making any decisions about your wealth, you should consult a qualified age and income specialist. If you are considering adding annuities to your pension mix, do your research first and speak to a safe money specialist who understands the pros and cons of the product.
Copyright © Lyle Boss, all rights reserved.
Lyle Boss is a member of Syndicated Columnists, a national organization that advocates a fully transparent approach to money management. As an asset protection educator, he has helped thousands of seniors manage their financial retirement options. Its clients include government employees, teachers, doctors, farmers and executives, to name a few. Boss has been actively teaching advanced estate planning and wealth preservation for more than 20 years in locations like the University of Utah and in over 200 Senior Retirement Consumer Education Workshops in Utah, Idaho, and Wyoming. Boss and his wife Deanna live in South Ogden and St. George, Utah.
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