In this episode of the Secure Your Retirement Podcast, Radon Stancil and Murs Tariq discuss the often-overlooked potential of annuities as a vital component of retirement portfolios. While traditionally, retirement planning relies on the 60/40 portfolio split between equities and bonds, Radon and Murs explore a fresh approach suited to today’s financial landscape. With fluctuating interest rates and persistent market volatility, it’s essential to consider alternatives like fixed index annuities to help manage stock market risk and secure retirement income.

Listen in to learn about the unique benefits of using annuities as an asset class and why they may serve as a better alternative to bonds for certain retirement income strategies. They discuss the challenges in bond markets, especially in today’s economy, and explain how fixed index annuities could offer more stability and potentially higher returns. Whether you’re seeking to reduce risk exposure or establish a more predictable retirement income stream, this episode provides valuable insights for a comfortable and secure retirement.

In this episode, find out:

·      Why the traditional 60/40 portfolio may not be ideal for today’s retirees

·      The impact of rising interest rates on bond volatility and retirement planning

·      How fixed index annuities can complement stock market investments

·      The pros and cons of using annuities to manage stock market risk

·      Practical steps to incorporate annuities as part of your retirement checklist

Tweetable Quotes:

·      "The old way of using bonds for stability is worth re-evaluating—annuities could provide the alternative you need." – Radon Stancil

·      "Fixed index annuities can offer income stability without the bond market's volatility." – Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Welcome to Secure Your Retirement podcast. Murs and I are very happy to chat with you today on a topic that we get to talk about a lot. You may not talk about it that much, but you would definitely know about it. And that is how do we offset the risk of the stock market? What do we put with it? Most times people think about, Hey, I need to, I don't want to have all the risk of say, just stocks in my portfolio, especially as I get closer and closer to retirement. So I need to offset that. And we agree on that a hundred percent, but then the question comes up, how do I do it? How do I offset risk of the stock market? And let me just kind of talk on that for just a second before we dive in. As to the why. If you were to take the S&P 500, which is something that a lot of people look at as an index that says, how's the stock market going?

And you would say, well, if I had just invested in the stock market, say for the last 30 years, it would've been fantastic. There's no disputing that. The thing we have to do though is we have to kind of go look in at that point and say, well, what would've been some of the downsides in there? And this is extremely important as you're in retirement or getting into retirement, because if I just invested 30 years ago and I took no money out and I just left it in there, that's great. But if I go into an area where I've got to take withdrawals out, there's a problem because there's periods of time where the S&P has been down as much as 58%. Now imagine if I had all that risk exposure and I had a million dollar portfolio, and now it's down below 500,000, but I still need to take withdrawals.

That can be devastating. So people don't want that, especially as they get closer and closer to retirement or in retirement, they say, I don't want all that exposure, so let's offset it. And that has created a scenario of like, well, what else could we do? A very popular option is bonds, but for the last decade, the bond market has been very, very difficult. And here recently it has been extremely difficult. Why? Well, bonds react to interest rates, and I always do this little thing where I show a pen, and if I were to have this pen in my hand, and if you're listening to the episode, just imagine there's a pen and it's level. And imagine that if interest rates are going up, that means bond yields are going to go down. So I'm just tilting my pin up, which means interest rates are going down, bond yields are going down, and the opposite, if interest rates come down, bond yields will go up.

My point in this is bond pricing still has volatility to it. And we set today where interest rates have gone up relatively pretty good, and so that's affected the bond market negatively. And so the question is, well now where are yields going in the future? And that's the problem. We don't know. We can anticipate, but we just don't know. And so that's the problem. Is bonds really the right way to offset risk? It could be, but we are going to talk about an alternative today to that. But Murs, could you help us to understand what that mix, there's a very popular mix of stocks and bonds that a lot of people are going to know as soon as you say it, but can you help us appreciate why that has been such a part of history?

Yeah, let's talk about the most popular portfolio that's out there, especially for someone approaching retirement. It's the 60/40 portfolio, 60% weighted towards equities. That's the general stock market, large cap, mid cap, small cap, international exposure, different types of stocks, different sectors within that world. So 60% of your money is allocated that way in the 40. That's your bonds, that's your risk offset, that's your stability piece. And so the idea being is that if we have market turmoil, well equities are going to have issues and equities are going to fall. And so if my equities are down 20% and that 60% portion of it, the idea being is that the 40% the bond, the less volatile is not down nearly as much. So it's offsetting our risk. So maybe as a whole one side is down 20%, the other side may be flat or slightly negative or slightly positive is offsetting.

So in total we're not down 20%. That's the idea of a 60/40 portfolio. Let's add bonds or an element of safety that has had a good track record for low volatility and good income producing assets. Let's add that in to offset the risk. Another really common type of portfolio or fund that we hear about, especially in the 401k space and clients are always asking questions around them or trying to understand what it is, is retirement focus funds like a retired 2025 or retire 2030. 2040. Their target date funds is what they're called. And the idea being relatively similar is that as we get closer to this date, whether it's 2025 or 2040 or 2050, the manager inside of that mutual fund is going to steadily start adding bonds to the portfolio. So maybe when you're younger, it's very equity based, but as we get closer to that age of 20, 25 or 2040, we add more bonds to the portfolio.

The idea being that bonds are going to slowly reduce our risk and create this volatility type of control in our portfolios. And that has worked for a very long time. It's been a very common way, a simple way to set up portfolios. But like Radon said earlier, as we have experienced post pandemic inflationary issues, interest rates, rising, interest rates moving up and down, have significant impacts on the bond world. And a lot of times the idea is that hey, bonds are safe and they're going to protect me if my equities are down. And for a lot of years, that has made it has been a very good logical statement. I've got bonds in my portfolio to protect against the equities falling. Well, what we know what happened in 2021 and 2022 bonds were negative. The AGG, which is a Good barometer for how the bond world is doing, just like a lot of people look at the Dow or the NASDAQ or the S&P, the AG is a bond index and it was down 13% in 2021.

And that's a number that no one expects to hear when you talk about bonds. So what we're getting at here is that while it has worked so well in the past, if we're in the inflationary and interest rate moving environment that we are now, as we sit here in 2024, the Fed just started making some rate cuts and there's still uneasiness as far as what the future is for the fed as far as how often and is inflation truly under control. We're walking into an environment where interest rate fluctuation could be all over the place, and at the end of the day, that's detrimental to how bonds operate. And so what we want to talk about is, well, is there a better way to do it? Is there a way to take advantage of where interest rates are today at a peak the highest they've been in years and decades? And so what else can we do outside of just doing the standard 60/40 portfolio?

So ultimately, we have done quite a few episodes on this topic. You can go look at previous episodes, but really what we're talking a little bit about today is that you can use a fixed index annuity as an asset class to be an alternative to the bond world. Now, when I say that, sometimes a person might say, well, what's my advantages? Or are there advantages? Well, one of the advantages is that with that, I'm not exposed as much to the bond volatility because within the bond arena, I'm exposed to that interest rate movement very rapidly. Whereas with a fixed index annuity, I could actually control that a little bit better or a little bit differently, let's say it that way. And I don't have to ever worry that I'm going to have a decline in my value in that annuity because I do have some guarantees in it.

And the guarantees are I can never do worse than making a zero in the year. So I'm not having to worry about a deterioration on that side of the portfolio because imagine, which we saw this in the last few years, if you've got the equity side down and then the bond side, and there was periods where people saw their bond portfolios down just as much if not more than their equity side, and that created a big, big problem. So using a fixed index annuity as an alternative to the bond strategy can be very, very beneficial. And there's a lot of different variations within the fixed index annuity world. One of the annuities, for example, right now the rate locks in for 10 years. So I can get a rate locked in right now that I benefit off the higher interest rates and it's going to last me for the next 10 years.

So I can really make my portfolio very, very predictable. But let me just run you through some things here. So remember what we talked about large cap? Well, I'm sorry we didn't say this. Let me preface. We talked about the S&P 500, right? So take the S&P 500 that's really large cap stocks. If I were to look at those large cap stocks over the last 10 years, I could have annualized over that period of time, 11.9%. And remember, we go, wow, that's amazing, but I got to worry about those downside years. And that's why I would say, well, okay, I understand that return is good, but I need to offset risk. So if for the last 10 years I would've taken 60% of my portfolio and left it over there in like say the S&P, and then I took 40% and I put it over into a bond portfolio, it would've taken my return down to six and a half percent annualized over that 10 year period.

So you go, well, wait a minute, that's giving up a lot of my upside in that scenario. But we did that to prepare or to make sure that we don't have huge downsides. Well, what if I just looked at a scenario of taking 60% of my portfolio, having it be in the stocks or equities, and then 40% be in something as an alternative. So we say, well, what would it look like as an example? Again, we're just using examples. These are hypothetical. I have to do all my disclosures right now so I don't get in trouble. These are all hypothetical scenarios. But I said, well, what if I put that over into a 60/40 portfolio that was 40% fixed index annuity, 60% stocks? Well, my return there is more closer to around the 10% range, 10.1%. So see, I didn't give up that much of my upside in that scenario.

And so that now for a lot of our clients, as we've gone through these higher interest rate periods, have really said, no, you know what? I do want a part of my portfolio to be in that mix of having some fixed index annuities. Now, there's a lot of things to understand about fixed index annuities. We are not telling you right now you should just go carte blanche and go out and just go buy an annuity. What we're saying is if you already have an annuity, that's a great thing. If you've been looking at them, it could be an option to consider. And we want to delay that out to you because we believe that you should have a part of your portfolio that is protected against losses. And you can do that in a couple of different ways. But we, yes, do the idea of using a fixed index annuity as at least something to consider. And so that's the purpose, and I think we want to just educate you on this particular topic just to open your mind up and to help you to appreciate how we look at things. But could you wrap things up here for us, Murs, of what our goal here is with this?

Yeah, so here's what I tell everyone is that there is no perfect investment. And if we had it, the conversations would be so much easier, but there is putting together a plan that's going to drive our income for retirement, that's going to control the volatility that we want to expect in our portfolios through retirement. And there's pros and cons to everything, right? So right now, rates are good. A lot of people are saying, Hey, let me just leave my money in the bank. And that's an okay statement for the short term. We all know rates are supposedly going down over the next year, and the four and a half percent you're making in a money market is not going to be there next year and it's going to be three, and then it's going to be two, and it's going to be back to what we know, which was next to nothing from banks.

So we don't want to get caught up in the idea of a short-term plan. And I think there's a lot of things that we need to understand. We love the stock market. That's where good money has been made over a significant period of time, and it's a true tried and true method of growing wealth, and we love managing money in a particular way out there. But in our opinion, there's other tools in the tool belt that have evolved significantly over the years and given where interest rates are right now, we're able to build longer term plans to control risk, to control volatility, and the old way of doing it by utilizing bonds, which by the way, we still use bonds in the portfolio. It's part of how we create portfolios, but there are alternatives out there that are way more attractive than they ever used to be.

So if you have questions around this idea of, well, how can I incorporate something like a fixed index annuity or I want to learn more about how these operate, what are the pros and cons I need to be thinking about? Because again, there is no perfect way of doing anything, but we can lean ourselves in a way that looks better and makes us feel better about our plan. What we have as a deliverable because of this conversation is we do have a white paper that we can get out to you kind of summing up a little bit of what we talked about here. It's called Fixed index annuities as an asset class or annuities as an asset class. It's a different way of looking at portfolio construction. Is it perfect for everyone? No. But is it something that we should absolutely be thinking about and addressing? I 100% agree with that.