Low Yields All Around; Where Can You Find Income And Lower Volatility For A Stress-Free Retirement?

Chances are your parents had a nice, fat (defined benefit) pension to live off of when they reached their golden, retirement years. If a worker from the ’40s through the ’70s worked at the same company for a certain number of years, they were probably rewarded handsomely with monthly pension income upon retirement. Add to that a monthly Social Security payment, as well as savings accumulated over their working lives, and income was certainly NOT an issue. 

Fast forward to today. Not only do most people in today’s workforce work an average of 12.3 jobs during their career (those born between 1957-1964, per US Dept of Labor Statistics), but in most cases, a pension is not offered. Instead, since 1978, the 401k has been the “go-to” financial vehicle for retirement planning for employees. Using tax-deferred savings to fund the plan, it is often invested in funds, which are open to stock market volatility. Whereas a defined benefit pension plan is managed by the employer (contributions primarily come from the employer, although employee contributions might be made as well), a 401k is primarily funded by the employee (an employer match may be involved as well). As expected, when stock market returns are favorable, 401k balances grow, hopefully leading to a substantial nest egg when entering retirement. But what happens if an employee is scheduled to retire when the economy starts to fizzle, leading to a contracting stock market/401k balance? Situations like 2008 come to mind, when double-digit stock market contractions led many to hold off on their retirement plans in order to rebuild their portfolios. If for whatever reason they were unable to continue working, the income they were counting on was probably substantially less than what they had planned. Hence, the missing income. 

Today, not only could we find ourselves in the same predicament with the stock market at all-time highs (ripe for a possible downturn), but another obstacle has reared up as well; low bond yields. Again, more potential missing income. Traditionally, upon entering or approaching retirement, an investor will allocate a certain percentage of their portfolio to individual bonds or bond funds. Doing so “smooths out” the volatility of a portfolio by limiting total exposure to the stock market. Additionally, the yield from bonds generates an income stream the investor can use as income. The total portfolio would generate income (bonds), while offsetting inflation (stock market growth). 

But with today’s low yields, where is an investor/retiree supposed to look to get the income and lower volatility needed for a stress-free retirement? One answer is a Fixed Index Annuity (FIA). An FIA is a tax-deferred retirement vehicle, which is not invested directly in the stock market, but does offer investment “strategies,” which generate interest, based on an index (usually the S&P 500), on an annual contractual basis. If there is growth in the index during a contract year, interest is credited to the contract. Conversely, if there is no growth in the index, then no interest is credited to the contract. If the index declines over the contract year (think 2008), the contract does NOT participate in the decline. The volatility factor is thereby addressed. 

If volatility is addressed, how about the missing income factor from low bond yields? Most FIA’S offer (for an additional charge) what’s referred to as a “Living Benefit” (LB). The LB is a separate account within the FIA, which grows at an annual percentage for a certain number of years, depending on the product. When the client decides to start the income stream, the LB account value is utilized to calculate an annual payment (which can usually be taken monthly), which covers their lifetime and, depending on the product, may also cover their spouse’s lifetime as well. The benefit is derived by knowing in advance (via illustration) what the annual income stream could be at a given point in the future, as well as not having to rely on the moving target of bond yields. 

However, as with everything in life, there are caveats. First and foremost, FIA’s are long-term retirement vehicles, of which most have surrender charges attached to them. This can mean they are not the most liquid investment in the event a large withdrawal is needed, since the charge is applied after the “free annual withdrawal amount” is surpassed. Additionally, the cost of the Living Benefit rider varies among carriers and should be considered. Further, since all benefits are based on the guarantees of the carrier, insurance ratings of each carrier should also be weighed in any decision. 

So, how does all this tie together? The FIA’s growth potential, lack of stock market volatility, along with Living Benefit accumulation/future lifetime income stream, could be the ideal solution for investing a portion of a client’s investable assets for peace of mind retirement. With today’s low bond yields, the sustainable income stream an FIA’s living benefit can provide can give income reassurance. Also, by moving a portion of their investable assets to an FIA, any future volatility can be minimized as well. 

As always, thank you for reading. Please let me know if you’d like more information or to talk about your specific situation and how I can help you “Find The Missing Income”. 

The above article reflects the opinions and thoughts of David J. Babecki. The information contained in this material is believed to be reliable, but not guaranteed. It is for informational purposes only and is not a solicitation to buy or sell any products which may be mentioned. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.

Please note: all guarantees and/or promises are based on the claims-paying ability of the respective insurance company.