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Avoid Bull Market Risk with Annuities


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Many investors have a specific asset allocation in mind when it comes to their retirement portfolio. And just like most other aspects of investing, there are many varying opinions on the “right” one. Your investment strategy will take into consideration your risk tolerance, goals and investment time frame, which combined make your portfolio unique. And while many financial experts have different views on how to reach your goals, most can agree that it’s important to review and rebalance periodically, particularly in this long-lasting bull market.

“People who planned to put, say, 55% of their money in stocks may find they’re now 75% in equities,” said Ken Nuss, CEO of AnnuityAdvantage, in a recent article in Physician’s Money Digest.

While money market funds are safe and liquid, they pay little interest. Certificates of deposit, while FDIC-insured, are somewhat illiquid and pay only  modest yields. On the other hand, bond funds are liquid and convenient, but short-term funds pay modest yields while longer-term funds are vulnerable to interest-rate hikes.  

“Fixed annuities, often overlooked, offer a proven way to lower your risk,” Nuss added. “As well as guaranteeing your principal, they can cut your taxes and boost your yield.”

Similar to a CD, a fixed-rate annuity pays a guaranteed rate for a set number of years, and when held in a taxable account, offers tax deferral. They also offer a significant higher interest rate than a CD typically. Currently, investors can earn up to 3.49% for a 7-year annuity, up to 3.3% for a 5-year contract, and up to 2.15% for a 3-year annuity.

In addition to these benefits, a fixed indexed annuity (FIA) can eliminate the common fear of downside risk while allowing an opportunity to benefit from the upside. The rate of interest paid annually is based on the changes to a market index, like the Dow Jones Industrial Average or S&P 500. When the index value increases, interest is credited. The biggest advantage is that when the market falls, you lose nothing, in exchange for only getting part of the market’s gains as an interest credit. The minimum interest rate is usually zero, so there is the potential for years when you earn no interest with an FIA. But the flipside is that there could be years in which you earn much more than you would have with a fixed-rate annuity.

Written by Rachel Summit

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