During periods of economic uncertainty, conventional advice for those nearing retirement has often been to adjust their investment portfolios to minimize risk. Traditionally, many have turned to bonds as a way to mitigate risk while also providing additional sources of retirement income. However, recent volatility in the bond market has led many financial experts to suggest Fixed Indexed Annuities (FIAs) as a more suitable alternative.
An Overview of Bonds
Purchasing a bond involves lending your money to an entity, such as a corporation, municipality, or the federal government, for a specific period. In exchange for this loan, you receive regular interest payments until the bond reaches its maturity date, at which point your initial investment is returned. Bonds can have maturity dates as short as three months, after which you must decide whether to reinvest in another bond or explore other financial products.
However, bonds come with certain risks:
- The income from a bond ceases when the bond matures.
- There is a risk of default; if the bond issuer fails to make payments, you could lose your initial investment.
- Bond prices tend to decline when interest rates rise, and when combined with rising inflation, this can negatively affect a bond’s performance.
An Overview of Fixed Indexed Annuities (FIAs)
A Fixed Indexed Annuity (FIA) is an insurance product that establishes a contract between you and an insurance company, guaranteeing a steady income stream for life. FIAs offer a minimum guaranteed interest rate, combined with an interest rate linked to the performance of an external index, such as the S&P 500. Because they are not directly invested in the stock market, FIAs protect your principal during periods of market volatility. Income from an FIA can begin as early as 30 days after purchase or at a future date of your choosing.
Additional advantages of FIAs include:
- Historically, FIAs have outperformed bonds and offer a better rate of return than bank CDs.
- FIAs are tax-deferred, meaning your earnings are not taxed until they are withdrawn or paid out as retirement income.
- FIAs provide the option to leave a cash inheritance to a beneficiary, bypassing probate court.
- Various riders can be added to FIAs, offering additional benefits such as living and death benefits or long-term care insurance coverage.
Ultimately, the choice between bonds and FIAs depends on your risk tolerance and long-term financial objectives. To explore these options further and make an informed decision, consider consulting with an FRC® trained advisor.
