In times of economic uncertainty, the traditional wisdom for pre-retirees has been to rebalance their investments to help minimize risk. For many, investing in bonds was a way to reduce risk and provide additional sources of retirement income. However, in recent years, bond market volatility has led many experts to recommend investing in Fixed Indexed Annuities (FIAs) instead.
An Overview Of Bonds
When you buy a bond, you’re lending your investment money to another entity like a company, municipality, or the federal government for a set period of time. Your investment in the debt provides interest payments until the bond matures and then your initial investment is returned to you. A bond can be issued with a maturity date as short as three months after which you have to make a decision on how much you want to reinvest in another bond or financial product.
Of course, like any investment product, a bond comes with risks:
- The income you receive from a bond stops on the day the bond matures.
- There is some risk of default. If the entity that issued the bond stops making payments you stand to lose your initial investment.
- Bond prices fall when interest rates rise. When combined with rising inflation, it impacts the performance of your bond.
“At the end of the day, deciding between a bond or an FIA depends upon your tolerance for risk and your long-term financial goals.”
An Overview Of FIAs
An FIA is an insurance product that establishes a contract between you and an insurance company to provide you with a guaranteed income stream for life. It offers a minimum guaranteed interest rate combined with an interest rate linked to the performance of an outside index such as the S&P 500. Since it’s not directly invested in the stock market, an FIA protects your initial investment during stock market volatility. You can start receiving income as early as 30 days after purchasing an FIA or at a future date of your choosing.
Other advantages to consider:
- FIAs have historically outperformed bonds and provide a better rate of return than bank CDs.
- FIAs are tax deferred which means your earnings will not be taxed until money is withdrawn or paid out as retirement income.
- FIAs enable you to leave a beneficiary a cash inheritance that’s not subject to probate court.
- A range of riders can be added to your FIA for living and death benefits, long-term care insurance coverage, and more.
At the end of the day, deciding between a bond or an FIA depends on your tolerance for risk and your long-term financial goals. To learn more, reach out to an FRC® trained advisor.
