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A Unique Bond Substitute Vehicle

By Greg Hutto, CFP®, CFA®

If you’ve had some bonds mature in the last year or two, then you’ve no doubt experienced this unsettling reality: the interest you can receive on bonds (or bond funds) now is a LOT less than what it used to be. The ten-dollar phrase for this situation is reinvestment risk.

Bond Market Realities

Here’s what’s happening. Many investors are concerned about COVID-19 and how the pandemic may affect the economy and the stock market. These are valid concerns, and we haven’t navigated our way out of this mess yet. However, the more challenging question ahead of investors and advisory firms like ours is this: what do we do about bonds? Historically, bonds have been a staple for someone near or in retirement. But bonds don’t tend to perform well when interest rates are very low and rising, as they likely are now. The million-dollar question, then, is, should you sell all of your bonds and put that money somewhere else?

A word of caution: please do the following before you make any changes to your allocations: 1) consult with your tax and/or financial advisor, and 2) become thoroughly educated about the advantages and disadvantages of any alternatives to your current bond money.

A Unique Alternative

One of the most popular investments over the past 15 years has been an investment with a “combination” benefit. This combination is a guarantee* of a certain amount of lifetime income with higher potential returns if the financial markets perform well.

The guarantee* is usually in the 5% range and the guaranteed* rate depends upon several factors. The primary factor that determines your distribution rate is your age upon starting the income. The older you are, the higher the distribution rate tends to be, and vice versa.

You may have already figured out where I’m going with this. I’m talking about variable annuities with a guaranteed* income rider. The guarantee*, in this case, is usually from a large life insurance company and it’s based on that company’s ability to make good on their guarantee*. It’s not FDIC insured, like a certificate of deposit (CD) would be.

So back to this combination benefit: a guarantee* of income, with “upside” potential, if the markets perform well. Let’s say you want part of your portfolio to generate $25,000 per year of income. Right now, to get that amount of income with really safe bonds, with a maturity of 10 years or less, you’d need around a million dollars. That’s a lot of money not making you much income, isn’t it?

Instead, you might consider allocating $500,000 to a low-cost annuity that provides guaranteed* income. If the guaranteed* income is 5%, then you could generate that same $25,000 per year, with a LOT less of your capital allocated, for the rest of your life, regardless of what happens to the financial markets. But if the underlying investments inside the annuity perform well over time, then your $500,000 has the potential to grow to $600,000 or $700,000 or more over time, and your guaranteed* income could rise as well.

Really? An Annuity? 

Now, you might be thinking, “Low-cost annuity, isn’t that an oxymoron?” I’ve got to come clean here and tell you straight-up that, in general, I’m not a big fan of annuities! Most contracts have fees that are too high and most still pay big commissions to the sales rep for selling them to you. So where am I going with this?

The fact of the matter is that there are a few select annuities that have no surrender charges, no embedded commissions, and low fees and expenses. You won’t hear about them from commission-based advisors because they don’t want you to know about them.

I want you to become educated about them, because these low cost, no-load annuities, as they’re called, may be a good substitute for bonds for the next 10 years or more. Why? Because if the WORST you’ll receive is 4.5 or 5% income over the next 10 years in an annuity like I’ve described, then that’s likely more than the BEST you’ll get out of high-quality bonds paying you around 2 to 2.5% per year.

Your financial education in these matters is the key! Seek out an independent advisory firm, one that doesn’t sell investment products, so you’re much more likely to receive unbiased counsel that’s in YOUR best interests. If your interest is piqued, give us at Heritage Retirement Advisors a call at 817.503.0100 or email to schedule a free introductory meeting and receive information that is customized to your situation. 

*The word guarantee, in this case, is based upon the claims-paying ability of the company to make good on their guarantee. It does not refer to FDIC insurance.

About Greg

Greg Hutto, president and CEO of Heritage Retirement Advisors, comes from a family of educators, so it’s no wonder he holds a bachelor’s degree in business from Texas A&M University, and a master’s degree in education from Tarleton State University. He spent years as a teacher and coach before entering financial services in 1996. After 14 years in the industry working for such powerhouses as UBS Paine Webber and Raymond James, Greg founded Hutto Retirement Advisors LLC in 2010, now Heritage Retirement Advisors. He holds both the Certified Financial Planner® (CFP®) and Chartered Financial Analyst (CFA®) designations. Additionally, he is the founder of Heritage Tax Advisors LLC. Greg and his wife, Angie, have three children. He likes to cycle, play golf, travel with his family. To learn more about Greg, connect with him on LinkedIn.