Fixed Income Complement

Client Scenario

Eileen and Dave

Relative to most Americans, Eileen and Dave are saving well for retirement. Their sons, Eli and Isaac are still in high school, but beginning to look at colleges. In spite of their preparations, Eileen is concerned that they’ll have to raid some of their retirement savings to help the boys meet rising college costs. She doesn’t want her children to graduate from college saddled with immense debt.

They work with a very practical RIA named Maureen recommended to them by a friend at church. In their annual meeting, Maureen broached the topic of college financing—informing Eileen that ‘borrowing’ from their retirement accounts to pay for college could be disastrous. Their preparations, while ‘ok,’ leave them somewhat vulnerable to being under saved for retirement.

Maureen is concerned that as the couple’s earning power begins to decline, they’ll not be able to make up for any lost opportunity to compound their growth if they take from their retirement accounts. Plus, the boys will be better positioned to meet those debt obligations over time as their earning power grows.

Maureen’s bigger concern for the couple is the threat of a bear market in the near term, as markets correct. Their portfolio has benefitted a great deal from what has become the longest bull market in history. With interest rates artificially low, and potentially rising, fixed income is no longer the attractive buttress in client portfolios that it once was.

In her research to find complements to her clients’ fixed income investments, Maureen discovered a relatively new product on the investing landscape: the no-load fixed indexed annuity. Fixed indexed annuities don’t invest directly in the market. Instead, they allow investors to ‘follow’ an index like the S&P 500 by crediting a percentage of the S&P’s performance to the investor, without any risk of losses.

Because this new generation of fixed indexed annuities charge no commissions, surrender periods are shorter than traditional FIAs, and participation rates are often better. Maureen is able to illustrate with a planning tool that allocating a portion of their fixed income investment to a fixed indexed annuity may bolster portfolio performance.

Eileen is relieved that they are able to model some bear market scenarios. Navigating volatility by effectively ‘insuring’ a portion of their assets from losses, and taking advantage of the compounding power of tax deferral may ultimately improve the odds that they won’t outlive their retirement savings.

Eileen and Dave

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