Podcast Center
Video Center
Webcasts
Resource Center
Events
April 01, 2013 at 10:26 AM
We’re all well aware of the standard allocation strategy – subtract your client’s age from 100, invest that percentage of their portfolio in stocks and the rest in fixed-income – to help reduce risk as retirement draws closer. Then, a disciplined withdrawal rate is used to create retirement income.
While that rule of thumb may have worked well for some, it’s been challenged by a volatile stock market and historically low interest rates.
Now there’s a new risk for people who piled into bond funds looking for more principal stability. Clients in these funds have certainly benefitted from the decrease in interest rates over the past few years. However, due to the inverse relationship between interest rates and bond prices, when interest rates begin to rise, retirees and those nearing retirement are at risk of seeing those gains evaporate losses they may not have time to recover.
It’s these kinds of market dynamics that are adding to the challenge of creating and maintaining a sustainable source of retirement income. It’s no surprise that Americans are worried about their future1. When asked about their biggest fear in retirement, a recent Genworth survey of 1,000 Americans revealed the top three fears:
- Not having enough money to live comfortably (36 percent)
- Outliving their savings (18 percent)
- Lack of a stable form of income in retirement (11 percent)
Fortunately, if a client is willing to trade some short- to medium-term liquidity for stronger principal protection and growth guarantees, solutions do exist. One accumulation and retirement-income option is a fixed indexed annuity (FIA). These types of annuities provide principal guarantees with upside potential that your clients may be looking for, but include surrender charges and may be subject to market value adjustments during the surrender period.
Many use an interest crediting strategy based on index performance, such as the S&P 500® index, to take advantage of the potential for positive market returns while protecting the principal from downside market risk. Relative to holding cash and other traditional, conservative options such as CDs and money markets, the growth potential of FIAs can help offset inflation risk. And, to further enhance returns, innovative new interest crediting strategies are becoming available that provide the opportunity for even more growth potential.
