I recently read a Fidelity “Highlights” series article; providing commentary on the financial environment and strategies for planners and their clients (for a copy, just comment below & I can send it over).
It’s great education on bonds, interest rates and what’s likely to happen when rates rise in the near future. The base commentary on bond concepts, duration risk for interest sensitive bonds, why credit spreads matter and ultimately 5 strategies for managing this risk were all very good!
But considering this came from Fidelity, the last strategy (#5) really caught my eye. Here it was:
Try to Find a Guaranteed Income StreamIf you have the resources to hold on to an investment until maturity, and you are saving for a goal several years down the road, consider a fixed annuity. Like a CD or bond, a fixed annuity can offer a rate of interest for a set period of years in return for a lump-sum investment. Like a bond, if you hold your annuity to maturity, you shouldn’t have to worry that your principal will be lost as rising rates cause prices to fall. Annuities can also offer the added benefit of tax deferral. So your effective after-tax yield may be higher than interest received from some CDs or bonds—if you plan to utilize the assets in retirement when your tax rate may be lower. This type of security doesn’t come free, of course. Once you sign up, you generally can’t liquidate without a penalty. So, if you may need to turn the investment into cash, or want to reinvest with a different strategy, you should be cautious. Also, since annuities are essentially contracts with an insurance provider, the guarantees are based on the ability of the company to meet its financial obligations, so customers should do their research and choose products from solid companies. You may want to consider converting a portion of your assets into a steady stream of income for life with a fixed income annuity. By staggering your annuity purchases over time, you can ensure you are not subject to one point in the interest rate cycle.
Fidelity isn’t particularly known for their annuity sales. But we can all agree there a lot of bright people there. Even Fidelity can see that as interest rates rise, the caps/rates/value proposition of fixed annuities will also increase. Retired and soon to be retired clients desperately need the two contractual guarantees fixed annuities provide – safety and income. And since you’re reading this blog and in that marketplace, have confidence that your “safe money” products are about to become even stronger!
Strengthen your education on rising interest rates now and reap the benefits soon! (Again, just comment below if you’d like the article).
Make it a successful May. Retirees need your guidance and products now more than ever.