For the last eight years, we’ve been in what economist call a bull market. The outlook has been optimistic, stock prices have been going up, and investors have been more afraid of missing out on the good times than they have been of losing money during the bad. But as the song goes, times are a changing.
Industry experts have already announced the beginning of the bear market for bonds and we are already experiencing some severe market volatility. Is the bull market over? Are we headed for a bear? Here is a smart way to prepare for volatility so that either way, you can rest easy at night without a care.
SHIELDED FROM THE BEAR
A bear market by definition is when the prices of securities fall, causing widespread pessimism among investors who then sell to avoid losing too much money. Taking a loss during the five years before or after retirement can seriously damage the ability of your portfolio to produce a long-term, sustainable income. If you’re planning to rely on an investment portfolio for the bulk of your income during retirement, then it might be time to rethink your strategy.
One way to shield yourself from bear markets is something called principal protection.
Investment vehicles that have principal protection are able to guarantee that the amount of money you put into the investment will still be there when you go to take the money out – even if the market takes a hit. Security investments such as stocks and mutual funds can’t give you this protection. Not even all bonds can give you principal protection. To get principal protection in with returns better than a savings account, investors basically have two choices: bank CDs or deferred annuities.
Let’s take a look at the pros and cons of each:
Bank CDs: Bank certificates of deposit are easy to purchase. Sold by banks and credit unions, they offer a range of terms, anywhere from three months to 10 years in duration, with rates that range from 0.30 to 2.55 percent. The downside is that these rates don’t even keep up with the average rate of inflation at 3.22 percent, which the Federal Reserve says will rise again this year. Furthermore, you have to pay income taxes on the interest earned by your returns whether you spend the money or not, so you don’t get the benefit of triple compounded growth.
Deferred Annuities: Life insurance companies offer deferred annuities as a place to grow a portion of your portfolio where it may be shielded from bear markets. You can choose to earn a fixed or variable rate of return. If you choose a fixed rate, then your principal will be guaranteed. Most fixed annuities earn higher rates than bank CDs, so investors may at least keep up with inflation. If you choose a variable annuity, then your principal may not be guaranteed because variable annuities participate directly in the stock market. However, there is another type of deferred annuity that can give you the best of both these options.
RUNNING WITH THE BULLS
Perhaps you’ve heard about the newer hybrid or indexed annuities that offer principal protection combined with market-linked gains. They’re able to earn returns without direct market participation by linking to a market index such as the S&P 500. These gains are usually capped so you don’t get the full effects of the market return, but neither do you get the full effects of market loss.
For example, if the market index gains by 12 percent and you’re returns are capped at 7 percent, you would earn a 7 percent return. If the market falls by 12 percent, your account balance would stay intact and you would not lose anything.
If you’re facing a pension-less future, then protecting the income you need to rely on becomes even more important. Most fixed indexed annuities also have a feature known as “annual reset,” which means the gains once earned are locked-in for the year. This allows your account to grow during the deferral period so you keep moving forward with the bulls.
Losing money in the market hurts at any age. By working with an advisor who takes the time to help you shop around, you can find out what your options are for adding an element of principal protection to your portfolio before it’s too late.
Reach out to one of our income planning experts. As the #1 provider of independent annuity reviews in the nation, we are 100 percent independent and 100 percent committed to you. Don’t wait until the market takes another hit. Protect what you have today. Fill out our simple form or call our hotline at (888) 440-2468. We’re here to help.