How do you get a junk bond interest rate without the junk bond risk?
Even if the above net annual effective rate of return – 10.95% to 17.50% – was the only reason to buy a Fixed Indexed Annuity, it would be justified. It’s not the only reason, but setting aside the many other advantages to incorporating an annuity into an investment plan such as – guarantee of principal protection, guarantee of interest protection, tax-deferred diversified growth with zero risk, predictable guaranteed lifetime income, penalty-free withdrawals, and no fees except for extra benefits – the return on investment far exceeds other fixed income vehicles.
Holding bonds or bond funds in your portfolio turns a silk purse into a sow’s ear by making your investments especially vulnerable to two major risks, damaging performance and reliability: 1) Rising interest rates, a chief contributor to declining bond values held within the mutual fund—and a drop in the fund’s net asset value. 2) A deterioration in the ability of the bond issuers to make expected interest payments, and return the principal to the bondholders upon maturity. Holders of individual bonds and bond mutual funds can experience significant losses, while those holding an annuity avoid risk to both principal and interest.
Fixed Index Annuities are really enhanced bonds:
1) Bonds plus more safety
2) Bonds plus more yield
3) Bonds plus more flexibility
Investors searching for safety, certainty and security in their financial future will find the many benefits of a bond alternative invaluable. A Fixed Indexed Annuity allows the holder to accumulate more assets for retirement by choosing from numerous interest crediting and volatility control indices like the S&P 500, the DJIA, Fidelity or Blackrock, enabling the owner to balance his portfolio while eliminating the risk of a stock portfolio, which can be dangerous and unpredictable.
A portfolio that splits the holdings between an equity fund and a bond fund, such as a 60/40 split, is the standard way to cover both bases. However, for people who are looking for security and stability in a retirement portfolio, holding an annuity is a smarter choice: it provides a guaranteed monthly “paycheck” and will not lose value if interest rates go higher. That’s something that bonds can’t deliver. In addition, in order to receive higher bond interest rates than the current low rates would require accepting credit risk and a low rating.
A Fixed Indexed Annuity’s principal is guaranteed and interest earned will never be subject to a loss, unlike those assets exposed to the market. When compared to dismal CD rates, bond yields and volatile equity markets, a Fixed Indexed Annuity is the ticket that outperforms.
Equipped with the knowledge and understanding of what you now know to be true about bonds and Fixed Index Annuities, doesn’t it make sense to replace those old, outdated, worn-out and flat-out misconstrued ideas about bonds and replace them with a Fixed Indexed Annuity?
Let’s look at an example of a couple
who, having built their retirement fund to $1 million during their working years, transfer $400,000 to an annuity at age 65. Depending on the exact annuity selected and the age of the youngest spouse at issue, this amount would yield from $24,500 to $32,600 for life in annual income at age 70. This income lasts as long as either member of the couple remains alive. If these retirees have $40,000 or $50,000 a year in Social Security benefits, they now have a lifetime income of $64,500 to $82,600 a year. In addition to collecting guaranteed income for life, this retired couple still has $600,000 that they can keep entirely in equities if they so choose. They are insured against the volatility of a bear market and are able to provide for all their basic necessities. Effectively, they continue to have the 60/40 split – stocks to bonds – they would have had before, but the 40 percent in bonds is now in an annuity instead of being held in a bond fund. They can capture the return on equities with the remaining amount of their financial assets, pay for vacations, unexpected expenses and either leave a bequest to their children or cover several years in a nursing home. That is why an annuity purchase is so logical and a justifiable strategy.