As the economic environment becomes more chaotic, pre-retirees with traditional 60/40
portfolios may experience substantially better performance than those who have weighted their
matrix with riskier investments.

by Daniel Stewart

2022 is reaching its’ painful conclusion, with many seniors in a state of uncertainty and fear.
Some Americans are so afraid of making mistakes with their money that they are in near
paralysis, unable to decide what investments to make or how to orient their portfolios. Even
worse, a significant number of those making decisions are going all–in on riskier assets in a
desperate bid to outpace inflation. I’ve seen far too many people with only 2-3 years before retirement
putting their nest eggs at risk.

That’s why I am telling some clients that they may want to revisit the 60/40 retirement plan design by putting
60% of their cash into “safe money”assets such as fixed annuities, bonds, life insurance, or other
non-market-correlated products.  The remaining 40% might go into equities or alternative investments.

I am starting to feel, as some financial advisors do, that a portfolio weighted with safe money products will likely outperform an all-equities portfolio over the next ten years.
Many touting a return to the 60/40 model say that when adjusted for inflation, there is very little difference between a 100% safe money portfolio and an all-stock portfolio. And, during past bear markets, safe money products such as bonds and annuities vastly outperformed stocks and added much less volatility to retirement accounts.

Why I like annuities for inflation protection and many other reasons.

Annuities offer numerous benefits, especially for seniors within a few years of retirement. Depending on the selected type, an annuity creates income and could also help you leave a legacy for loved ones or provide funds for long-term care needs.

An annuity can benefit a 60/40 portfolio design by adding a predictable, reliable income stream that you won’t outlive to the safe money
part of your retirement blueprint.  It can also mitigating against volatility since an annuity is a non-market-correlated asset.  An annuity also removes risk by contractually guaranteeing you will not lose your principal.

While it may be true that annuities do not give you 100% of the market’s upside, you won’t lose any of the money you have gained or invested, either.
Although much of the marketing for products such as fixed index annuities focuses on their ability to create income, it is crucial to note that you can structure even those annuities with level payouts to hedge against inflation. For example, laddering is a popular approach to increasing income. A combination of different annuity types in a laddering strategy creates”income rungs” that may be deployed whenever additional money is required.

Many laddered plans have second or third rungs containing guaranteed roll-up annuities. Roll-ups help increase the possibility that your ladder will at least keep pace with inflation or even potentially exceed it. Laddering, however, is a bit complicated and requires you and your retirement income specialist
to pay close attention to the plan’s design, execution, and maintenance. If you are interested in laddering, it is worthwhile to seek advice from someone with expertise in this type of safe money structure.

Other annuity designs may also counter the harmful effects of inflation, including those with built-in cost of living adjustments or “COLAs.”  COLA-adjusted annuities often typically employ formulas based on cost of living indices such as the consumer price index (CPI.)

You should be aware that although annuities that increase income sometimes start with lower interest rates than level payout annuities, they can eventually outpace the lifetime income amounts of level products, especially for those who live longer.

Bonds vs. annuities: Is one better than the other?
Bonds are debt instruments providing regular payouts for a fixed time and the return on the initial investment. Like annuities, bonds may be used to supplement other retirement income sources and may be issued for three months to 30 years or longer.  Pre-retirees and retirees often include bonds in their investment portfolios, particularly conservative investors who value the strength and safety of  high-quality bonds.

Bonds provide predictable income for a set period and generally earn higher yields than annuities. However, unlike annuities, income received from bonds is for a finite amount of time. If you want to continue generating revenue, you will have to reinvest when your bond matures. Bonds are also less flexible in how and when you can start taking your earnings. While it is highly unusual, losing the principal invested in a bond is possible if the issuing entity defaults.

Bottom line: If you are someone close to retirement age who wants to buffer your wealth against inflation and market risks, you should ask your advisor about re-balancing your portfolio to a traditional 60/40 mix, including annuities. In particular, fixed annuities can help shield you from market risk while allowing your money to grow. Annuities also protect your principal should your guesses about the direction of inflation and interest rates prove wrong.

On a psychological level, the reduction in volatility in your portfolio afforded by annuities and other safe money vehicles can help quell emotions that can lead to money mistakes. All portfolio allocation strategies have pros and cons. Talk to your qualified safe money and income advisor to discuss whether you could benefit from a 60/40 portfolio design and which products would best help you achieve your money goals.

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