Sep 23, 2022
Does the 60/40 Split Still Work in Investing? Bonds Portion Needs Help
BRT S03 EP47 (146) 9-23-2022 – Wealth for Life
Things We Learned This Week
- What is the 60/40 Split in Investing? Equities 60% for Growth/ Bonds 40% for Income
- Bonds Returns have been going down for 2 decades, hurting Retirements
- Sequence of Returns Risk – When you retire matters, if the Market is down, your income can take a big hit
- Annuities - Bonds Replacement for Income, w/ Inflation increases & Income for Life
Co-Host: Denver Nowicz, President - Wealth For Life
https://wealthforlife.net/brt/
https://twitter.com/denvernowicz
Denver is an advisor with nearly 20 years experience working with clients in investments and insurance, designing retirement plans with a combo of both. He takes us through different strategies for clients to get the best allocations for their money over the long term. It is the Combo Strategy of both Offense and Defense, the synergy of the mix, not ‘All or Nothing’.
Notes:
Typical investment split is 60/40. This is a growth bucket of 60% equities / stocks, and an income bucket of 40% bonds. The expectation is that the bond bucket is less volatile so you can pull income.
Unsure if 60/40 ever worked as well as people thought. If you look at the bond history and the returns, they have been going down since 2000. This coincides with lowered interest rates.
Sequence of Returns Risk: "Sequence" refers to the fact that the order and timing of poor investment returns can have a big impact on how long your retirement savings last.
Options to replace the bond portion would be annuities, that have inflation protection. The 60/40 split could vary depending on your age, so a 30 year old might have an 80/20 split, while a 60 year old might be 50/50.
It’s important to have defensive strategy, like annuities and other strategies for income. You have to be careful with sequence of returns risk. This is the risk of the market being down when you retire. For example the S&P from 2000 to 2010 had a near 0% return.
Because of lowered interest rates, bond returns have not kept up with inflation. In the current market, when stocks go down, bonds follow. It is not rational or how it’s supposed to be, but it is what is happening.
Financial advice has been dominated by stocks, but that is not the only way to invest. You can use alternative strategies like rental real estate or insurance products. You’re told to just invest in the market but some of these products have market risk and potentially fee issues.
Not all annuities are the same. We would not recommend variable annuities, as they have high fees and market risk. You might as well just invest directly in the market.
You still want a growth bucket so in the split could be 60/20/20 – Equities / Bonds / Annuities. Better products like fixed indexed annuities may have caps on the upside, but they also have principal protection which protects the downside. No matter what advertising you see on annuities, they are designed to yield 3 to 5% with guarantees.
Annuities are longevity insurance, so you do not outlive your money. And the longer you live, yields go higher, like 7% and more. If you lived here 85+, some annuities with inflation protection for income go up as inflation goes up.
This is a game changer in the income area and relieves pressure on your a stock growth account. The analogy would be an escalator going up. People can roll over an IRA in their 50s to an annuity (with 20% of your capital to an annuity) with a 5 to 10 year runway to build up the annuity income.
Again you have to pick the right annuities, some are average. Many annuities will just market the growth phase with a bonus received for purchasing that annuity. You really want protection in the income phase. The safe structure 60/20/20 split with that inflation protection during the income payout phase. There are recent studies that show annuities beat out bonds over the long term.
Annuities have fees of 0 to 1 1/4%. You want to have some fees in the fixed indexed annuity for the growth potential. Good to avoid the no fee annuities, as they may have lower rates and less protections. The downside of annuities is they do have surrender charges that last 7 to 10 years, which is common, but you can take out 10% a year.
The goal is to map out the income needed in your overall financial plan. Understand that for a married couple, annuities are a good option because the odds are one person is going to live to 85 or older.
Annuity company guarantees to give income for life. They act as Longevity insurance, that you will not run out of money. Not uncommon by age 75 with a 401(k) to run out of money, or have to take less per year. Then you can use Social Security plus an annuity bucket to cover income for expenses.
More Annuity Info:
What Is Longevity Insurance And How Does It Manage The Retirement Time Horizon Problem
https://www.wealthmanagement.com/insurance/ibbotson-fixed-indexed-annuities-beat-out-bonds
Ibbotson: Fixed Indexed Annuities Beat Out Bonds
In his latest research, economist Roger Ibbotson argues that fixed indexed annuities have the potential to outperform bonds in the near future and smooth the return pattern of a portfolio.
Diana Britton | Mar 07, 2018
ANNUITIES
Better Than Bonds? A Look at Uncapped Fixed Index Annuities
For safety and performance, it could be time to consider including them in your retirement portfolio to diversify your asset allocation.
by: David Braun, Investment Adviser Representative
June 14, 2018
Annuities vs. Bonds: New Research
In March, economist Roger Ibbotson, a 10-time recipient of the Graham and Dodd Award for financial research excellence and professor emeritus at the Yale School of Management, unveiled new research analyzing the emerging potential of fixed index annuities as a bond alternative in retirement portfolios. Working with Annexus, a leading designer of indexed annuities and indexed universal life insurance, Ibbotson and his research team used S&P 500 dynamic participation rates to simulate fixed index annuity performance over the past 90 years.
https://www.plansponsor.com/using-annuities-alternative-bonds-secure-retirement-outcomes/
INVESTING October 29, 2021
Using Annuities as an Alternative to Bonds to Secure Retirement Outcomes
In a low interest rate environment, annuities provide an option that reduces longevity and sequence-of-return risks.
Reported by
https://www.forbes.com/advisor/investing/stock-and-bond-returns/
The Historical Performance Of Stocks And Bonds
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