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Amid Difficult Stock and Bond Markets, Here is Some Financial Guidance for Retirees

By , with Annuity FYI

Investments in MYGAs, FIAs and structured annuities make sense today. At least they have a good shot at faring better than average today, in their respective categories, and that’s about all a savvy investor can ask for.

What investors should not do at this time is wring their hands amid uncertain prospects and sit on the sidelines.

If you have been distressed lately about your financial investments, you’re hardly alone. Both the stock and bond markets are in a downward spiral, and there is no reason not to expect more of the same. The Federal Reserve has made it abundantly clear that it will continue to increase interest rates for a prolonged period of time, likely well into 2023, to combat a 40-year high in the inflation rate.

Barring a near-miracle, this makes bonds a poor investment because bond prices decline in tandem with rising rates. The stock market could fare better because corporate earnings continue to grow in many cases. And while the market is currently being hurt by rising rates, it might at some point snap out of it, as it has in past inflation cycles.

But there is clearly no guarantee that it will follow that script this time around, and there is mounting chatter that the stock market may have to confront a recession down the pike, sparked by persistent Federal Reserve rate-tightening. A recession would have a significant negative impact.

A Solution

So what should investors – especially retired investors – do? Select types of annuities, while arguably not perfect solutions at this juncture, may nonetheless be the best scenario. In some cases, such as fixed annuities, they provide more guaranteed income than you can find elsewhere and, in other cases, offer partial or complete guarantees against losses in stock market downturns.

It’s also conceivable that one category of annuities – structured annuities, which have recently enhanced their terms – could actually beat the stock market over time.

What investors should not do at this time is wring their hands amid uncertain prospects and sit on the sidelines, waiting until interest rates move higher and/or the stock market appears to be bottoming. While sitting in a cash-equivalent, such as a money market fund, they are earning close to nothing, and it’s hard for them to know when they will feel comfortable about investing again. In fact, they may end up avoiding fixed-income investments, such as fixed annuities or bonds, until interest rates peak and start to decline.

“In this case, an investor would make out even worse,” says one financial advisor. “Regardless, there is typically an opportunity cost in waiting.”

MYGAs Make Sense for Some Folks

The most conservative investors today would likely benefit from investing in a MYGA (Multi-Year Guaranteed Annuity), which have always paid materially higher interest rates than bank CDs and lately have further increased their rates. They can now get a 3.5% rate on a five-year MYGA, up from 3% earlier this year, and a 3.50% rate on a three-year MYGA, up from 2.5% to 2.7% earlier this year. Seven-year MYGAs are now paying up to 3.85 percent, up from 3.35 percent to 3.4 percent in recent months.

Those who favor this type of annuity today should seriously consider buying a ladder of MYGAs with different maturities, which offer relative flexibility and respectable income while hedging, in part, against the risk of rising rates. One good path utilizing a MYGA ladder would be the assembly of a three-year, five-year and seven-year MYGA. Longer-term MYGAs pay more. And if rates are higher in three years, a likely outcome, the three-year MYGA will mature and can be re-invested at a higher rate.

Regardless of the outcome, ladders often fare better than individual annuities in a rising rate environment and aren’t hurt if they do not.

It’s important to note that MYGAS aren’t an optimum investment today, ladder or not, because interest rates currently are materially higher than MYGA payout rates. That means their real return – their return after inflation – is negative. But among investors who are highly conservative with their money, this may satisfy them given their aversion to risk.

FIAs and Structured Annuities

Other relatively conservative investors can still mitigate risk, albeit less so, by investing in fixed indexed annuities (FIAs) or so-called structured annuities. Both products have also enhanced their terms lately. In exchange for collecting only a piece of a market index increase in a positive year, FIA owners are guaranteed against market losses. More aggressive structured annuities aren’t this safe but offer substantial mitigation in down markets and the opportunity for much better returns in good market years.

Two attractive growth FIAs that have improved their terms are Athene Accumulator and Midland National Retire Vantage. Probably the best investment deal offered by Athene Accumulator invests in the popular BNP Paribas MAD 5 low-volatility index, a mixture of stocks, bonds and commodities. It offers the opportunity of up to a 195% return over two years, up from 150% earlier this year.

At Midland National RetireVantage, investors who sign on to a 1% fee in exchange for higher index participation rates can invest in the S&P 500 MARC 5% Index, another low volatility index, and, over two years, enjoy an index participation rate of up to 210%, up from 190% previously. An investment in the Fidelity Multifactor Yield Index 5% offers an even better participation rate than this.

Also attractive, in the world of structured annuities, is the Equitable Structured Capital Strategies PLUS annuity, the oldest such annuity. In this case, an investor can invest in the S&P 500 over six years and reap up to a 175% cap rate, up from 150% before. Investors can lose money in a down market but are protected from losses in an initial 10% market decline.

Markets Could Remain Weak Down the Road

All of these potential returns, of course, are just that – potential returns that may or may not occur. Even if the market strengthens, some stock market pundits predict that returns in coming years will be much lower than they were in recent years, partly because the market, even at this juncture, remains relatively expensive.

Accordingly, the decades old so-called 4% rule – a method that calls for spending 4% of your financial assets in the first year of retirement and then adjusting the amount annually to keep pace with inflation – has been falling out of favor. Many financial planners say it now needs to be trimmed to 3% to 3.85% initially so that retirees don’t face the risk of running out of money during retirement.

In particular, when inflation is as high as it is, withdrawals under the 4% rule grow by leaps and bounds. This means that a stock portfolio must earn a higher return to prevent depletion, a prospect that may not be in the cards.

Although it has been a long time since inflation and high interest rates plagued the financial markets for a prolonged period of time, it’s hardly unheard of among today’s retirees. Starting in 1968, research shows, the inflation rate started rising significantly, and, shortly afterward, interest rates as well. Stocks encountered bear markets starting in 1969 and again in 1973.

From the end of 1965 to the end of 1981, the annualized return on the S&P 500 was virtually flat without dividends.

Select Annuities Must Be Put in Perspective

The odds are low that any sort of replay is unlikely. But at this point, at least, the financial future remains uncertain. And that is why investments in MYGAs, FIAs and structured annuities make sense today. At least they have a good shot at faring better than average today in their respective categories, and that’s about all a savvy investor can ask for.

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