With the S&P 500 fast approaching 6000, many experts, economists, advisors, and clients never thought we would have the year we are having in 2024 in terms of the stock market. Clients that are approaching retirement or are already in retirement may be asking themselves and their advisors, “Should I sell and de-risk my portfolio?” “What if the market goes higher and I sell to early?” “What if the market crashes and I didn’t lock in gains; will I need to work longer or even go back to work?”
Source: Yahoo!Finance
While no one can time the market, if a client could sell some of their holdings 20% higher than they are today without waiting for the unknown future, most would probably jump at the idea.
What if you could guarantee your clients that they could sell the S&P 500 at 6800 or 7000 or 7200 without the risk of a future correction or bear market? Perhaps you can—without waiting for further market appreciation—and while still participating in market upside with no market risk to principal.
Consider a fixed indexed annuity (FIA) to achieve just that. FIAs are contracts with guarantees provided by the financial strength of insurance companies.
Many FIA products developed in the last couple of years by A-rated insurance companies now provide premium “cash bonuses” up to 20%. FIAs also protect your principal from market losses while still being able to participate in the performance of indices like the S&P 500, Nasdaq 100, Russell 2000 or risk-controlled indices based on individual FIA contract crediting terms.
- FIAs gains are linked to an index like the S&P 500, and your earnings are based on the participation in an index performance. When the index rises, your gains increase. If the index falls, your principal is protected so you do not have to worry about a market correction or bear market.
- These FIAs also have a free partial withdraw feature so clients have additional liquidity if the need arises.
Case Study:
- Mr. Jones, age 65.
- Thinking of retiring in the next couple years.
- $1,000,000 invested in the market.
- Moderate to conservative risk profile but would like to de-risk some of his portfolio.
- Concerned markets could be getting expensive but worried about selling too early.
Proposed Solution:
- Liquidate $400,000 and invest in a FIA (fixed indexed annuity) with a 20% premium “cash bonus.”
- $400,000 is immediately valued at $480,000 – with an $80,000 cash bonus added to principal.
NOTE: This is equivalent to Mr. Jones selling the S&P 500 at 7,020 assuming he was in the SPX.
- Mr. Jones decides to equal weight his FIA in the S&P 500, Nasdaq 100, Russell 2000 and MSCI EAFE indices with capped participation between 6%-8%. Meaning if the indices do 15%, he will only receive 6%-8%. However, if the stock market corrects or crashes into a bear market, he will not lose money. In other words, Mr. Jones’ $480,000 only participates in positive returns.
Studies have shown that by adding a percentage of an investment portfolio to an FIA, you are not only de-risking the portfolio for retirement, but the risk-adjusted returns increase as well. Couple that with a premium “cash bonus,” and more advisors and clients should be considering this attractive opportunity while they still can.
If you have any questions about FIAs or would like a custom case design for your client, call us at 800.440.1088.
As a CERTIFIED FINANCIAL PLANNER™, former advisor and portfolio manager for one of the nation’s largest wirehouses, Andy understands what it is like to sit across from a client during good times, but more importantly, during bad times when markets are down.
