As our monthly seminar attendees are settling into their seats, I often pose this question: “How many of you would be willing to give up some of your gains, in exchange for never losing money in the stock market again?” Every hand in the room goes up. As our 50-something clients approach retirement, their ongoing needs can easily be broken down into 3 areas: Accumulation, Income, and Legacy. In this article, we will deal with the need for accumulation, i.e. consistent, reasonable returns without risk.
It’s September of 2007 and the stock market just recovered the 51% declines of the Tech Wreck and dot-com sell-off, yet Frank and Nancy, both 60 and still working at IBM, are nervous. A long-time student of the markets, Frank believes the next shoe is about to drop amid a housing bubble that went from euphoric to just plain ridiculous, before crashing in panic. Frank and Nancy are skeptical that the stock market can go much higher. Both have been highly comfortable with risk and market fluctuations for most of their investing lives, yet Frank believes that the real estate crash is about to infect equities and their 401(k) accounts at IBM. Having just turned 59½ several months earlier, both Frank and Nancy want to affect an in-service rollover of their 401(k)s, even though each intends to work for three more years. This little-known option allows employees the ability to rescue their account dollars from their employer plan into safer investments, CDs, annuities, or a private IRA, even as they continue to contribute to the still-open 401(k) from each week’s payroll.
So where do such investors go? Our most popular holding is a savings platform first developed by insurance companies in the mid-nineties called a Fixed Index Annuity. FIAs credit market-linked interest (like a CD) during years when the indices (S&P 500, DJIA, etc.) advance—while retaining such gains amid a sell-off or meltdown the following year. FIAs protected their owner’s account balances magnificently during both the -51% “Tech Wreck” sell-off in 2000-2, and again during the -57% decline that followed the Subprime Mortgage and Financial Crisis in 2007-9. Indeed, they have grown so much in popularity that even some of the brokerage firms that once maligned them have recently partnered with the companies that developed them, for the benefit of their more risk-averse clients, lest their advisory sales forces lose such clients to other firms.
Employing the simplicity and genius of time-tested hedging via the use of options, FIA firms guarantee a) their client’s original principal, b) any bonus monies credited (in exchange for a longer enrollment), as well as c) each year’s market-linked interest gains against losses. Like an ever rising tide leaving a new high-water mark, an FIA owner will only see their account value grow or hold—and only decline when they take a withdrawal. While they’ll never again hit a market “home run,” they’ll hit a lot of singles, doubles, and occasional triples, while never losing the retirement game.
After three meetings with us, Frank and Nancy each affect an in-service rollover of 95% of their 401(k) balances into two separate fixed index annuities. Each understands that, while they will continue to earn market-linked interest during gain years, they can never lose principal or gains to a market decline, regardless of how severe. The vehicle they chose includes linkage to seven different market indices, and three annual crediting strategies. Since inception in September of 2007, Frank and Nancy, now retired, have averaged a 6.78% annual return, or 82% of the market’s historical average of 8.3%, with none of the market risk. As this goes to press, the S&P 500 is up 49.6% from their 9/5/07 date of issue, while Frank and Nancy are up 54.3% during that same period.
The best part, according to Nancy, is that “we sleep well at night, knowing that the dollars we worked so hard to save are not at the mercy of geopolitical events, central bankers, and the irrational herd on Wall Street. That was important to us in 2007, and it’s become even more so since.”
If this case study resonates with you or someone you know, contact our office to schedule a complimentary review of your financial portfolio. You can also use the social media buttons below to share this article with your connections. Our best clients are those referred by other happy clients!
