Time to Revisit Your Fixed Income Strategy

Most of us have a short list of financial assets that have become conversation shutters. Ask about them, and we’re inclined to not only stop assessing them but to also lose trust in the conversation.

We have enough evidence to make these ‘red flag’ categories legitimate targets. Common ills are complexity, illiquidity, aggressive selling, high fees, disappointing past experiences (often failure, such as oil partnerships or private credit), or promises that sound too good to be true.

Many advisors work inside investment-only systems where every solution must resemble a stock, bond or mutual fund. Many others primarily or exclusively in annuity or life insurance business models.

Passage of time has taught me that an open mind and meaningful homework can uncover life-changing investment and risk management benefits in most asset classes, including some that are seldom in the conversation (zero dividend stocks, anyone?).

With current stock valuations screaming from the rafters, asset protection has moved up the ladder of priorities. Shifting to a higher bond allocation is the default response. That is unfortunate if it is the only action considered. Using a planned MYGA-to-SPIA sequence just might preserve flexibility today and create more income later, a practical bridge with higher return or rate guarantees.

For those who love to prosper and flounder in a stock-only world, they critique yet overlook two of the simplest contracts available, perhaps because they require more planning and generally produce less agent compensation than alternatives.

A MYGA is an insurance-company contract that pays a stated interest rate for a fixed period. It resembles a bank certificate of deposit, although it is not FDIC-insured, withdrawals may be restricted, and its guarantees depend on the insurer’s financial strength.

A SPIA converts a lump sum into monthly income, usually for life. Part of each payment is interest, part is principal coming back, and part reflects longevity pooling—the financial advantage created when people who die earlier help fund payments to those who live longer.

Money not needed for near-term emergencies is invested into a three- or five-year MYGA. It grows without market volatility at a guaranteed rate, which in most cases is considerably higher than bank CDs or high yield savings. At maturity, reassess health, income needs, interest rates and family circumstances. The owner may take the money, renew it, transfer it to another annuity or use only part of it to purchase lifetime income. That decision is made knowing the SPIA return on that date.

Research increasingly describes income annuities as “actuarial bonds.” Academic and actuarial reviews find that replacing part—not necessarily all—of a bond allocation with guaranteed lifetime income can improve spending reliability, reduce longevity risk and sometimes permit the remaining portfolio to hold more growth assets. The same research warns against over-annuitizing and leaving too little liquidity for emergencies, health costs or heirs.

Your financial roadmap will preserve choices today while preparing to purchase tomorrow’s pension with your purpose always in mind.