For the third time in a row, the Federal Reserve said on Wednesday, September 21st  it would raise the benchmark federal-funds rate – this time, by a 0.75 percentage point so that it hovers between 3% to 3.25%. Officials suggested this would not be the last time this year, and to expect the rate to jump to around 4.4% by the end of 2022.  
 
The news may seem especially unsettling for retirees, as many are living on fixed incomes. Increasing the federal-funds rate is the Federal Reserve’s attempt to combat inflation, but many Americans are trying to do that themselves – while also handling the stresses of market volatility. In recent years the economic environment has felt unnerving at times for retirees, as well as retirement savers: market volatility has pushed 401(k) and IRA balances down, which has depleted many retirees’ “nest eggs”. Additionally, rising inflation has made everyday expenses such as groceries and gas much costlier. 

The Federal Reserve said higher interest rates will also affect Americans in other ways, including a slowing economy and a rise in the unemployment rate.  
 
Watch Your Spending 
 
“The first thing to watch out for is spending”, said Kelly LaVigne, Vice President of Advanced Markets and solutions at Allianz Life. “Companies have tried to catch up by producing a lot of inventory and a slowing economy might make them competitive to sell their products with tempting prices,” he said – “those sales may be alluring, but retirees and retirement savers alike should be protective and curb any bad spending habits.”  

When there is a downward trend in U.S. stock indexes, especially after the Federal Reserve’s latest announcement of increases, retirees should be saving all they can, but it’s hard because retirees savings is also at risk.   

Americans may also want to take this time, if they can, to try to tackle any credit card debt as the rate hike will affect higher-interest debts.   Spending only cash when making essential purchases is a way to prevent credit card debt from getting even further out of hand during turbulent times.  
 
Diversify Your Portfolio 
 
Stock market volatility can be hard to stomach, especially for someone whose nest egg is tied up in at-risk investments, but retirees and near-retirees are often told to stay the course. We don’t want to have a knee jerk reaction, but in reality, we need to protect ourselves and our future. That includes developing and restructuring a retirement plan when it makes sense to do so.  This usually includes balancing risk tolerance as we age and our time horizon lessens.  
 
The “Rule of 100” is one good way to determine a healthy amount of risk in your portfolio: Subtract your age from 100 to determine the percentage of your portfolio that can be left in riskier areas, such as stocks and equities.  For example, if you are 60 years old, it is a good rule of thumb to not have more than 40% of your investments at risk. The other 60% should be placed in a safe environment.  
 
Take a Look at Your Retirement Income Streams 
 
Now is the time for anyone in or near retirement to consider multiple streams of income if they haven’t already. For some Americans, that may simply be a retirement portfolio and Social Security benefits. For others, it could be a pension, or an annuity, alongside personal retirement savings.  
 
Fixed index annuities (FIAs) are an ideal option, as they can provide a guaranteed income for life. An FIA is what we at Summerlin Benefits Consulting like to call a “safe money vehicle”, as it allows you to grow an asset (some portion of your overall retirement strategies) for the purpose of turning on income in the future, without risking it to grow it.  It allows you to create your own future fund, with a defined monthly income benefit which can supplement social security and other retirement income sources.  
 
While many retirees have re-entered the labor market as a way to bring in extra cash and preserve their investments, income planning can sometimes help prevent this “un-retirement” from occurring.  
 
Seek Help from a Financial Professional 

Retirees should take stock of how they’re feeling right now with the latest rate hike and keep it in mind if the Federal Reserve increases the rate again later this year.  Look at where you are right now, remember what this feels like, and try to plan ahead.   If you are not sure where to start, a financial professional can help you evaluate your goals to make sure you are on the right path.  Retirees and other more mature investors, however, may want to utilize a professional who specializes in “Safe Money” strategies, so that they can ensure the advice they get relates to their current circumstances and needs.   
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At Summerlin Benefits Consulting we are Safe Money Experts. We believe that helping clients protect the money they already have will go a long way to helping them protect their futures as well. If you’d like help reviewing your options for retirement income protection and/or to discuss how to best plan your financial future, please feel free to call today for a no-obligation meeting.  ​

Retiring is usually accompanied by celebration, but recent market volatility is adding a measure of doubt for those nearing or at the start of their retirement. That volatility, coupled with factors such as rising interest rates and high inflation, has many investors worried about their retirement funds and what they can do to weather the storm. 

Over the past year, an estimated 1.5 million retirees have re-entered the U.S. labor market due to such factors as more flexible work arrangements, rising costs and the inability to keep up while on a fixed income. Additionally, according to the BMO Real Financial Progress Index, 25% of Americans feel they have to delay their retirement plans, primarily due to disrupted savings resulting from increased prices and market instability. 
 
During this period of extreme uncertainty, near-retirees may be second-guessing if now’s the right time to stop working. But a down market shouldn’t cause interference with or delay retirement. By following the tips outlined below, impending retirees can stay on track with their plans, retire with more confidence and reduce the effect of a down market on their retirement portfolio. 

1. Re-evaluate your risk tolerance 

Early in one’s career, there are opportunities to take relatively more risk—for instance, investing more heavily in stocks with higher growth potential and risk, or investing in high-yield bonds. In a well-diversified portfolio, risk should primarily be measured by volatility rather than its most intuitive definition—permanent loss.

If a diversified portfolio is tailored to individual needs and objectives, its riskier portions should be diversified to minimize the risk of total loss and the negative impacts of volatility. Generally, as individuals get closer to retirement, their portfolio’s makeup may change to ensure they’re able to recover if the market goes south.  

At Summerlin Benefits Consulting, we like to use the “Rule of 100”: Subtract your age from 100 to determine the percentage of your portfolio that should be placed in risk-prone areas such as stocks or bonds. For example, if you are 65 years old, it is a good rule of thumb to keep only 35% of your portfolio at risk and place the other 65% in safer areas. 
 
“Easier said than done,” you might be thinking. But, stay with me! There are investment vehicles, such as Fixed Index Annuities (FIA) that are designed to offer a reasonable rate of return during market upswings and protect your money during market downturns. 
   
These “safe money strategies,” as we fondly call them at Summerlin Benefits Consulting, create a healthy balance between protecting what you’ve already accumulated while allowing room for future growth. Given the market’s current condition, it’s important to talk with a financial professional to determine how to adjust your portfolio to lower risk, or to simply ask questions if you’re unsure where to start.

2. Don’t put all your eggs in one basket 

Unfortunately, no one can predict what’s going to happen in the market, certainly in the short run, regardless of your level of expertise. Volatile times provide individuals the opportunity to revisit and re-evaluate their portfolios. 

Spreading your money out across several different types of assets can lessen the impact of a market downturn, since different assets usually respond differently to market shifts. When doing so, it’s important to ensure your portfolio includes diversified holdings across asset classes and styles of investing, investments that generate income and hedging strategies to provide downside protection. In other words, it’s ok to keep some of your holdings in brokerage accounts, while placing the rest in an FIA for example. That way, you achieve “True Diversification”. 

3. Review your cash reserves 

Uneasiness in markets can cause individuals to be uneasy about their overall finances. As such, individuals should assess how much cash they feel comfortable having on hand to meet basic needs and unexpected expenses in order to feel more confident when markets are uncooperative. Creating a budget system that tracks monthly expenses can help. 

It is also beneficial to have investments that offer liquidity should you need extra cash in a hurry. With an FIA, for example, they typically allow for a free 10% withdrawal each year, which gives added security by having access to your funds.  Your financial professional can help you calculate your liquidity in order to help ensure you are maintaining an adequate emergency fund throughout retirement.  

4. Try not to be influenced by your emotions 

​Market volatility creates a stressful environment for anyone with money in the stock market. For those on the verge of retirement, emotions lead many to sell when the market turns down in an attempt to avoid losses and then buy again after the market recovers and they feel optimistic. But getting the timing of those two decisions right to avoid missing a net gain along the way can be difficult.  

If you look at market trends for the last several years, you will see overall gains until just recently. Even though it’s best not to jump the gun and sell everything the moment the market turns sour, it may still be a good idea to move some of your market holdings into safer, less risky areas before losing any more money.

If you are nearing or in the middle of your retirement, it could be detrimental to lose any portion of your nest egg, as you won’t have time to make it back up.  And, quite frankly, it makes good logical sense to have some of your money safe from declines regardless of the current market climate.  

5. Plan, plan, plan—but be flexible to adjust when appropriate 

From the start of one’s retirement journey until the end, having long-term goals and a solid plan can help ease stress to a degree and keep you on course. If you’re unsure what to do next, or if you don’t yet have a solid plan, consider talking with a financial professional. Closer to retirement, there may be appropriate changes you’ll need to make to your portfolio to reduce risk, but don’t worry, the financial professional can help walk you through this to determine the best course of action for your individual situation.  
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The road to your retirement may not be as smooth as you once anticipated. It’s important to remember that there are many ways to protect your nest egg. Summerlin Benefits Consulting believes in making things simple for our clients so as to ease some of the stress of retirement planning.  With safe options, providing features like guaranteed lifetime income and long term care benefits, we help you find the path that is right for you so that you can focus on putting the celebration back into your retirement decisions.  ​

Let’s discuss retirement planning for the “average Joe”.

As an example, today we’ll use a 61-year-old teacher who plans to work 4 more years before retiring. With her teacher’s pension and her husband she can expect between $5,200-$6,000 per month in lifetime pension benefits. Let’s assume her husband is about the same age and between the two of them they have $300,000 in IRAs, Roth IRAs and her 403B as well as a small investment account and about $60,000 in cash. Combined they will also have around $3,000 per month in social security income (SSI).

Does this seem like enough? How prepared is this couple for retirement?

So, let’s also say they will have their house paid off in 3 years ad it’s worth about $275,000. Cars are paid off and they currently have very little debt. But other things to consider are perhaps the husband may not be able to work in his current job much longer due to health issues. He might actually need to retire before 65. The couple estimates that they will need about $45,000-$50,000 per year for retirement. They may also have to take care of one parent who is in their 90s.

These are all things that today’s “average Joe” might be facing as they enter retirement, right?

It’s easy to understand the concern they would feel about their security as they get closer to retirement, but at least this couple has a secret tool so many Americans wish they had: a pension outside of social security.

In this case, they have income sources and having that pension on top of social security is powerful. Quite frankly, the average wealth adviser would tell this couple they seem to be on track. But the next two to four years will be pivotal for them.

There are four contributing factors that greatly affect one’s retirement security- longevity, because the longer you live, the longer you need your money to last: the return rate on your investments, hard losses during market declines, and your spending. It’s pretty important, as you approach retirement that you take charge of your situation and take steps to help you live comfortably for the rest of your life. In short, take steps to make your money last.

So, how does someone do that? First, make sure you have gone over your spending and your estimated expenses again and again before you quit. List out every cost you think you’ll have in retirement, and pore over your current spending, such as analyzing your last few credit card statements.

You’ve mentioned how much you think you will need annually in retirement, but does that include taxes? Or healthcare, which only gets more expensive the older you get? In this example, if it is truly $45,000-$50,000 a year you’ll need, that’s great, but they must be sure of that before entering retirement, so they aren’t spending so much time worrying about paying bills.

It would also be smart to set aside some cash savings for emergencies, because unexpected things happen whether you’re retired or not. If you are only a few years from retirement like this couple, you should also consider increasing your contributions to your retirement accounts if you can.

Inflation is a big point to consider these days, and everyone should account for it in the decades to come. Social Security has a cost-of-living adjustment, although not everyone agrees it is as well-aligned with inflation of the goods and services older Americans spend their money on, but it still counts for something. If you have a pension, you should also check if it is inflation-adjusted, and if not, factor that into your future spending needs when estimating your expenses for retirement every year.

A financial professional can help you with this. Not everyone wants to work on a monthly or annual basis with a financial professional, but firms like Summerlin Benefits Consulting can go over these concerns with you and try to help you plan for the future. One thing Summerlin Benefits Consulting specializes in is fixed index annuities, which can be a great tool to establish supplemental income, prevent loss, and make your money last for life. These accounts can even help prepare you for future expenses like long term care.
 
Now, there is no right answer for when to claim Social Security, but it is important to consider all of the options. Waiting until you are older to collect can be a fantastic goal, but if it has to be taken a bit sooner, that would be OK too.

Longevity plays a huge factor in Social Security claiming strategies- people who don’t live much longer past 70 don’t get to enjoy the benefits they paid into all this time. Others use benefits from Social Security and fixed index annuities as a way to avoid tapping into their retirement savings, so that the money can continue to grow in an investment portfolio. Plenty of couples talk through strategies so that they’re maximizing their benefits for their personal situations.

Another good step is to try to estimate what you think your tax situation will be like in retirement versus now so you’re making the best decisions for yourself. Understanding what taxable income you’ll have from your retirement income sources will help with long term planning. For example, you don’t put money in a Roth if you expect to take it out in a relatively short period of time because it just doesn’t provide the same tax benefits to you. It’s often better to save your tax-free income for later down the road if you can.

Additionally, Indexed Universal Life Insurance is a great way to leave behind inheritance for loved ones and can also provide another tax-free income source that you can draw against in the form of a loan from its cash value.
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At Summerlin Benefits Consulting, we specialize in safe money strategies that not only help retirees protect their money, but also make their money last for life.  

 Blunder #1: Placing “Big Bets”

Few people would go to Las Vegas, put a big portion of their life savings on the table and make only one roll of the dice. While the reward for winning that bet might be huge, the probability of winning simply isn’t worth the risk of losing and the pain that would bring. Yet time and again, take the gamble, albeit not in such dramatic fashion.

The most common “big bet” often isn’t viewed as a bet at all. That bet is holding a large portion of your retirement savings in stock. Sure, you might like to play the market and think its prospects are good. But that may mean making investment decisions based on emotion, and that is likely not best.

Betting with your retirement savings can be tempting, especially if you feel the need to catch up on your retirement savings or if the person giving you the tip is someone you respect. But that is again mixing emotion and financial decisions, a potential recipe for regret.

Blunder #2: Not Knowing When to be Conservative

The phrase “conservative investing” implies a prudent and cautious approach with low risk and less volatility. It conjures up images of predictable income streams, the protection of principal and peace of mind. Many conservative investments can provide that and, in fact, might be the right decision for some investors or for a portion of their portfolio.

But “conservative investing” may not always be as safe and prudent as it sounds. For example, many investors associate bonds with safety. In the short term, bonds have been less volatile than stocks. But, you might be surprised to learn that over a long time horizon- 30 years or more- bonds actually have a higher volatility. This is because bonds have many risks.

One such risk is that their value can fall dramatically if interest rates go up. This is because bond prices and interest rates have an inverse relationship. For example, if you need access to your bond investments to pay for a wedding, help an adult child make a down payment on a home, deal with unanticipated home or medical expenses or if you simply want access to cash now, you could be faced with selling a bond below the price you paid for it.

​With interest rates recently near historic lows, you should ask yourself: Do you believe interest rates are more likely to go up or down in the next few years? If you believe “up”, then you’ve just proven to yourself that bonds are not as low-risk as they appear to be.

A better alternative would be a fixed index annuity (FIA). We at Summerlin Benefits like to call FIAs “Safe Money Strategies,” because they protect your money during steep market declines and allow for growth during market increases. You get to have your cake and eat it too! Retirees also find value in the fact that FIA provide just enough access to their cash to ensure liquidity needs are met when they need it most. In other words, they have the freedom to help pay for that wedding or down payment!

Blunder #3: Falling for a Ponzi Scheme

Remember the Bernie Madoff scandal? Madoff masterminded one of the largest financial frauds in history, cheating the wealthy, charities, and everyone else he could. One of the reasons he got away with it for so long was that his firm was both the money manager AND the custodian of funds. His firm controlled the supposed “investments” he was making. There’s nothing wrong with that. It’s called a managed account and it’s what most wealth managers do as well.

However, many money-management firms don’t take the actual custody of the funds, but instead use highly respected third-party firms like large banks. That means the custodian maintains custody of your investments and is independent from your advisor. This helps protect you from fraud. So, while not all money-management firms that take custody of your funds are crooked, virtually all Ponzi schemes rely on controlling custody of your funds.

Do yourself a big favor right now: if your investments are managed by anyone other than yourself, make sure you know who your custodian is and that they are an independent, distinct, and separate entity from your money manager, whose control is limited to helping you make decisions. (That is often the case with brokers who use their firm as the custodian. Just be sure there’s separation.) Having a custodian won’t prevent your money manager from making blunders or mistakes, but it will restrict the money manager’s ability to make transfers and loot your account.

Blunder #4: Paying Excessive Fees

Many retirees end up paying excessive fees, often times without even being aware of it. This makes it less likely that they can achieve their own long-term goals. Fees can cost you hundreds of thousands of dollars over your lifetime. In addition to the obvious, out-of-pocket costs, the money unnecessarily spent on fees also loses the power of compounding returns, which can add up to significant amounts over a lifetime of investing.

Even seemingly small differences in fees can make a huge difference in the amount of money you end up with. For example, let’s assume you invest $1,000,000 in two mutual funds over twenty years without taking any distributions. Additionally, let’s assume they have an average annual return of 10%, but one has annual fees and expenses of 1.5% and the other, 2.4% (both are assessed at the end of each year.) All things being equal except fees, the one with the lower fees will put over $800,000 more in your pocket over time.

Blunder #5 Ignoring the Insidious Effects of Inflation

Right now, the United States is in an inflation spike. But, why does this matter to you as an individual? First, your personal inflation rate might be much higher. Let’s say you have a spouse who requires long-term care and you have three grandchildren who will be starting college over the next few years. You have promised to pay their tuition and fees. Because the cost of these services has risen much faster than other goods and services in the economy today, these expenses could have a large impact on your retirement nest egg. Second, even a small increase in inflation barely perceptible in our weekly or monthly spending can make a huge difference in spending power over time, even if not necessarily visible today.

So, whether inflation becomes an even more dramatic problem or is simply an ongoing, steady erosion of your purchasing power, you should prepare. A conservative, fixed-income investment strategy may result in slow and steady growth rates, but that’s not necessarily a bad thing; these investments will prevent you from experiencing the losses that put you far behind inflation.
 
Summerlin Benefits Consulting, Inc. helps people identify and combat these 5 potential blunders every day. We focus on safety in retirement planning and help our clients find the best strategies to match the financial goals that are most important to them. 

Consider what you might be giving up. 

Recession fears continue to spike as major indexes are approaching bear market territory, after months of market volatility that have put a strain on retirees’ and pre retirees’ retirement portfolios. 
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Those at an age to claim Social Security may be thinking about claiming sooner than previously planned to give them a source of income and to give their portfolio a chance to recover some losses.  

There is no right answer to when to claim Social Security. An individual receives 100% of the benefits they’re owed at full retirement age, which also depends on when they were born.

Retirees can begin claiming as early as age 62, but any time before full retirement age results in a reduced benefit. Individuals can also receive more than what they’re owed for every month they delay up to age 70. Benefits are based on a formula that factors in age and earnings history. 

There’s also no right time to start withdrawing from a retirement account, or exact amount a person should take from these accounts every month. The 4% rule, which suggests individuals take 4% of their portfolio balance every year to stretch their money over their retirement, has been widely contested in recent years. Some experts state the withdrawal rate should be closer to 3% in an effort to make retirees’ money last their lifetimes.  

Market volatility and rising inflation has been a big concern for Americans of all ages, but for retirees it can be especially stressful as they tend to live on fixed budgets after leaving the workforce. Taking too much from an investment portfolio can trigger the sequence of returns risk, which is when a portfolio has fewer assets in it to grow when the markets rebound. Beginning Social Security too early, on the other hand, results in a permanently reduced benefit for the rest of one’s lifetime.  

Retirees might want to opt for taking from their 401(k) plans instead of Social Security, said Larry Kotklikoff, an economist and founder of Economic Security Planning, which has a Social Security analyzing software called MaxiFi Planner. During a Barron’s Live event, Kotlikoff said taking Social Security early to keep your investment portfolio intact, when adjusting for risk, can generate a negative return. Social Security is also inflation-protected, since there is a cost-of-living adjustment, which is a bonus for retirees whether they’ve begun claiming or not.  
 
There’s certainly interest in taking from a 401(k) in an effort to postpone Social Security benefits. In a study about a 401(k) bridge option, which is when investors use assets from their retirement accounts equivalent to Social Security benefits so that they can delay claiming, more than a third of people who were given information about this option chose to try it. This survey, conducted by NORC from the University of Chicago and the Center for Retirement Research at Boston College, was likely the first time these respondents have heard of a “bridge,” and if there were more exposure to this option in retirement accounts, more Americans may choose it in their own retirement journeys, says Alicia Munnell, director of the Center for Retirement Research at Boston College. 
 
Of course, waiting to take Social Security isn’t always the best option either. One of the many factors retirees should consider when deciding when to claim includes medical history and status as well as longevity – someone who only expects to live to their mid-70s wouldn’t enjoy the benefits they worked hard for if they only started claiming at 70. In other instances, people may use Social Security as one component of their retirement income strategy, pairing it with annuities or a pension, and would rather their retirement savings vehicles, like a 401(k) or an IRA, continue to grow for the decades to come. 

Another great option to consider is a fixed index annuity. In a fixed index annuity, a portion of your money can be set to grow with the index of the market, but never risk loss! Fixed index annuities help both savings and benefits last longer.  Ensuring an experience of lifelong savings and income which will retain its buying power both now and in the future. 

At Summerlin Benefits Consulting we want to make sure your money is safe in this turbulent time. Our team of advisors will work with you to figure out the best vehicle for protecting your retirement nest egg, so that you can feel confident no matter what happens in this bear market.  ​

It is no secret that there is a retirement crisis facing Americans.  

In a recent survey conducted on behalf of home financing and real estate website “Anytime Estimate,” Americans were surveyed on how much, or little, they have saved for retirement, and the results were not pretty.  

Less than half of those surveyed have saved $100,000. The median income in retirement is $40,000, so this savings is not even close to being enough. One out of every six have saved absolutely nothing. One out of three are currently making no contributions at all. One might discount these statistics by saying, “it must be young people who are contributing to these numbers," but that is not the case. And if it were, at least young people have decades to make up the ground. Boomers do not.  

Respondents who are still working, with a median age of 60, have average savings of around $112,000. One quarter of those surveyed, and 30% of millennials, said they were planning to rely on “cryptocurrencies” to finance some of their golden years.  

Good luck with that! This may be hard to do if the crypto bubble continues to deflate at its current rate.  

Probably the saddest part of the survey was that around 80% of people expect their standard of living to decline in retirement, while 10% feared they wouldn’t be able to retire at all. What is sad is that these people are obviously well aware of the problems they face but may not know the right steps to take.   

Financial professionals, like those at Summerlin Benefits Consulting, help people determine how they can combat this retirement crisis, regardless of their age. It is never too early or late to get help.  

For those who are young, the obvious answers are to save more, save earlier, and invest better- which usually means investing in long-term assets like stocks and keeping your costs low. But we all know how volatile the stock market can be, so even time is not always a guarantee of a healthy retirement.  

Those who are older don’t have the luxury of time at all, and in most cases, they will need to rely on Social Security providing the bulk of their retirement income. 
 
The Social Security dollars forcibly extracted from your paycheck have been poured so far this year into bonds paying interest between 1.625% and 3%. This, at a time when consumer price inflation is running at nearly 9%.  

Las year FICA dollars were blown on bonds paying just 1.4% interest, and in 2020 less than 1%. So, large chunks of that money have already gone out the window. 

No wonder Social Security is in a deepening financial crisis. The fund is invested early in low-paying U.S. Treasury bonds. Since the early 2000s, the fund has earned an average return of 3.8% per year, enough to increase an investment by only 80%. This is minimal compared to the return that other countries are seeing from their social security or “future” funds.  

If you’re thinking that sounds like an unwise investment policy, you’d be right. But it seems like Washington won’t be making moves to change the policy any time soon.  

Social Security is a “defined benefit” rather than a “defined contribution” retirement plan, so your benefits aren’t directly tied to the investment returns from the underlying assets. Instead, your benefits are set by law- but are supposed to be financed by underlying assets. The poor investment returns mean those assets are running out. This is why many people are talking about cutting Social Security benefits. 
 
Heaven forbid they should improve the returns.  

This is why many Baby Boomers have utilized products like Fixed Index Annuities (FIAs), which provide guaranteed income for life. An FIA is a safe money vehicle, where you can grow an asset (some portion of your overall retirement strategies) for the purpose of turning on income in the future. It allows you to create your own future fund, with a defined monthly income benefit that will work kind of like a pension, which can supplement social security and other retirement income sources. Boomers who haven’t set aside a huge amount of liquid savings can at least use some of what they have saved for this purpose, and it is a really good way to fill that void.  
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At Summerlin Benefits Consulting we are Safe Money Experts. We believe that helping clients protect the money they do have will go a long way to helping them protect their futures as well. If you’d like help reviewing your options for retirement income protection and/or to discuss how to best plan your financial future, please feel free to call today for a no-obligation meeting. ​

Most people think bonds are safe, but in today’s volatile climate, they are not. Interest rates are poised to rise even further, which is bad news for bonds. Investors seeking a measure of safety along with the possibility of a return have a few choice alternatives to consider instead.

In the not-too-distant past, bonds were portrayed as a secure part of a portfolio – a safer investment than stocks. Investors looked to government bonds as the bedrock of a stable retirement income. But bond yields are extremely low these days, prompting some investors to seek alternatives. This has sparked renewed interest in various investments that can generate passive income and stability.

Most people don’t remember what a bad bond market looks like because we haven’t seen one for 30-plus years! We’ve had steadily declining interest rates since the mid-1980s. Bond prices move in the opposite direction of interest rates. If interest rates rise, bond prices fall, and vice versa. The Federal Reserve has raised interest rates in 2022 and is slowing its purchase of bonds, so the climate is likely to be less favorable for long-term bonds going forward. And with bonds paying historically low interest rates, long-term bonds falling in price could mean a low-yield investment for years.

The problem with bond mutual funds

Bonds issue at par value of $1,000, and you are in effect loaning a corporation or some form of government your $1,000. There is a length of time you have to leave it there, until it reaches what is known as its maturity date, which can range from one year to 40-plus years. There will be a set interest rate for that length of time. So, as interest rates rise and bond prices fall, you can hold until maturity and get your $1,000 back.

A huge issue is that most people don't hold their bonds directly anymore; rather, their bonds are in mutual funds. And within mutual funds, there are two problems: There is no set interest rate, and there is no maturity date. So when interest rates rise and your bond prices fall, there is no date in time when you will get your $1,000 back.

Three other investments to consider instead

To avoid getting trapped while the outlook on bonds is not all that bright, here are some alternatives that can provide more security and a decent rate of return:

Fixed annuities and fixed index annuities

Fixed annuities, sold by insurance companies, offer long-term tax-deferred savings and monthly income for life. They involve an upfront payment by the owner, will grow annually at a fixed rate, and can provide either a lump sum pay out to the policy owner at the end of the policy term or a series of guaranteed income distributions from the insurance company. The insurer guarantees the owner the fixed interest rate on their contributions for a specific period of time. The value of the owner’s principal will grow based on interest applied each year.

You can also choose a fixed index annuity, where your principal is protected and the return is tied to a market index, like the S&P 500. If the market is down, the worst you can do is zero (zero is your hero!), and it will have a participation rate on the upside. So as an example, if we have a 80% participation rate and the S&P 500 is up 10%, then 8% would be credited to your account on your anniversary date and that new value is locked in and won’t drop below that value because of a market decline.  In other words, your principal and your gains are protected each and every year.

We at Summerlin Benefits Consulting help our clients use fixed and fixed index annuities as “safe money strategies” because of the manner in which they can help reduce risk by protecting consumers’ savings and growth against down markets, while still achieving a reasonable rate of return over time.

Annuities can also generate more income than bonds of similar maturity purchased at the same time.  And because annuities aren’t priced daily in an open market as bonds are, they can be better than bonds at holding their value while generating a more predictable cash flow.

Buffered or defined-outcome ETFs

Buffered or defined-outcome exchange traded funds (ETFs) offer investors protection from severe dips in the stock market. They are seen as solid alternatives to bonds because they allow more access to various investment products. In many portfolios, bonds traditionally served as a ballast, helping offset the risk of equities. But with interest rates so low, buffered/defined outcome ETFs are replacing bonds in some portfolios.

These ETFs set an exact percentage in losses – 9%, 10%, 15%, 20% or 30% – that shareholders are protected from over a 12-month period. In exchange for limiting an investor’s downside, some of the gains are capped at 10%, 15% or 20%.
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Most buffered/defined outcome ETFs are linked to the S&P 500 Index and use flexible exchange options (FLEX), which allow both the contract writer and the purchaser to negotiate different terms.

Real estate investment trusts

This is the best-known bond alternative, created in the 1960s to provide investors with a way to invest in funds that own, manage and/or finance income-generating real estate. The REIT investment space is enormous; investors can target specific real estate segments and diversify across different segments. They get 90% of the profits.

REITs are tax-advantaged as dividends and trade like stocks. And unlike bonds, which pay a fixed amount of interest and have a set maturity date, REITs are productive assets that can increase in value indefinitely. Many REITs have dividend yields between 5% and 10%. Be careful though – many REITs are not liquid if you need access to your money in the short term. If you are looking for a strategy that allows you to have access to your money, fixed index annuities may be the better route to go.

Alternatives to bonds do offer higher yield potential. But remember – that comes with risk. It’s wise to work with a financial professional to go over your options as you assess your portfolio, differentiate between safe and risky assets, and help you structure your portfolio in a way that makes the most sense for you. We at Summerlin Benefits do this day in and day out with our clients. Call us today and we'd be happy to go over your options with you!