A New Core for Retirement Savings?

David Bollinger Annuity Sales Consultant

For decades, a traditional 60/40 stock/bond portfolio strategy delivered strong results and helped retirement savers achieve their wealth-building and retirement-spending goals.  In today’s low interest rate environment current market conditions pose very real challenges for this traditional strategy, making it highly unlikely that this style of portfolio will repeat its previous performance in the years to come.  Risks are intensified for retirees who regularly withdraw money from their accounts; large market declines in early retirement years could result in a greater likelihood of running out of money. 

 Now more than ever it is extremely important for savers to use every tool at their disposal to build up their retirement accounts, with the goal of improving their potential retirement outcomes.  This includes enhancing sequence of returns through better “up/down capture”: improving a portfolio’s participation in rising markets (up-capture) while reducing losses in down markets (down capture). 

A variety of market-based solutions may improve a portfolio’s beta (its volatility relative to the market’s).  Among these solutions are annuities, and among these annuities is the Fixed Indexed Annuity (FIA), which offers return potential above that of high-quality core bond strategies without the downside risk. 

What is a fixed indexed annuity?  It’s a retirement savings vehicle that combines tax-deferred growth potential, principal protection, and the opportunity for lifetime income, backed by the claims-paying ability of the issuing insurance company.  Interest is earned by the performance of an underlying index, such as the S&P 500 Index.  Depending on the account chosen, interest may be capped at a maximum rate or adjusted by a certain percentage set by the annuity issuer.  Since assets are not invested directly into the market, the value of the FIA is not affected by market downturns, and consumers will never lose principal or the interest they earn.  For savers concerned about outliving their retirement income, there is also the option in many FIA’s to elect a guaranteed lifetime income rider that ensures payments for life – even if the account value is depleted.  Its structure provides steady income payments and the ability to diversify a portfolio, which may help reduce the impact of equity market down turns.

Based on market research and the ability for annuities to deliver better betas, substituting a fixed index annuity for a part of the core fixed-income allocation may help consumers accumulate more assets during their working years.  What’s more, for those who prioritize retirement income, attaching a lifetime income option to an FIA could improve spending rates in retirement.

Contact the experts at Wholehan Marketing to see which FIA’s would work best for your client’s portfolio today!