When it comes to fixed indexed annuities (FIAs) and bonds, which is the stronger contender?
A recent report shows how fixed indexed annuities (FIAs) have shown more promise over the past 25 years due to their flexibility. On the other hand, bonds are described as a “flight to quality” asset. That is, it’s the asset that investors run towards in terms of financial turmoil. After all, they’re backed by the government or big corporations.
This article will compare FIAs and bonds to help you determine the better choice.
Innovation In Annuities
The big advantage that fixed index annuities offer is that since 2013, most insurance companies base these products on a volatility-targeted index. This is a basket of stocks and bonds designed to reach certain volatility, say, 5%.
Volatility is calculated by comparing a stock or bond’s current output to its historical performance. It’s how much statistical “noise” the asset creates over time.
By using a basket of products, FIAs can offer their investors no loss of principal while giving some upside associated with stocks. And volatility targeting means that the company holding the FIA will shift more to bonds in times of market turbulence and more towards stock indices in times of steady growth.
FIA companies have also included the use of “smart beta strategies,” or strategies designed to diversify stock portfolios by finding undervalued stocks. Think of it as the Moneyball of the stock market.
All these innovations mean that FIA investors can get the best of both worlds — market-based upside and the security of bonds.
Bonds Aren’t Always A Smart Choice Near Retirement
As you near retirement, your risk tolerance generally goes down. At the same time, your investment horizon is soon, and you simply don’t have the time to make up for any losses.
While bonds, especially government bonds, don’t have a lot of risks, increasing inflation threatens to eat away any return that bonds can provide. If you still need to grow your money, FIAs can be a much smarter choice.
When investors hold government bonds, they’re often left to read the tea leaves to decide what moves central bankers might make. FIAs limit that problem.
Some Annuity Downsides
Annuities do have some downsides. With surrender periods and charges, they are illiquid assets that can’t be cashed in if you have an emergency. While they are low-risk, they’re not FDIC insured. And, of course, there are fees involved with variable annuities.
Annuities Have Come A Long Way
FIAs have changed significantly in the past 10 years and offer a sophisticated product that maximizes market upside while protecting investors. While they involve fees, you’ll have access to a dynamic, risk-controlled portfolio managed by professionals.
If you’re intrigued by FIAs or other annuities, contact Annuity Associates for a free, no-obligation consultation. We’ll help you add annuities to your mix of retirement investments.
This article is not intended as financial advice. Each person’s situation is different, and you should contact a financial professional before making any decisions.