Fixed indexed annuities: A proven hub and spoke alternative for a bubbled bond market

By Kevin Startt

Startt Planning!


American’s were never promised a rose garden of retirement bliss and the good book has no mention of its origin or validity. But the blessing of longevity is not to be looked at with disdain or despair, but with rejoicing and a more efficient plan that incorporates a time-tested and true strategy along with a tactical plan.

As I sit on another delayed flight due in part to a failed computer system, I am reminded of why this airline is sometimes dubbed: “Delays exceedingly late through the afternoon" or "Doesn’t even leave the airport." I will let the acronym and mnemonics groupies decipher what airline I am referring to but needless to say, the possibility of a delayed retirement is increasingly likely for most Americans, much like the many publicized delays in the airline industry.

Americans were never promised a rose garden of retirement bliss and the good book has no mention of its origin or validity. But the blessing of longevity is not to be looked at with disdain or despair, but with rejoicing and a more efficient plan that incorporates a time-tested and true strategy along with a tactical plan.

When I was a broker in 1995, I knew that I could mimic a fixed indexed annuity through a combination of laddered zero coupon Treasuries and an indexed fund, ETF or unit trust. A dart thrower could have made money laddering bonds over the last 30 years but regardless of the time I started, it’s that stubborn hedging, locking in of gains through annual reset and insurance company guarantees that makes today’s core income value of alternative lifetime income: producing a supreme investing starter in a zero rate environment.

I, for one, do not look forward to a dramatic rise in rates over a short period of time like 1979-80, 1987 or 2007, but I am curious as to how those same Monkees will do helping the millions of bond holders protect their principal with Davy Jones gone and the dartboard much smaller due to lower rates, defaults and reinvestment risk.

Authors in some publications presume that the value of core fixed income is over. This assumption negates the benefit of combining retirement savings with a well-diversified portfolio of good solid dividend paying stocks, REITS and other income investments, like fixed income substitutes (laddered annuities, for example).

In three different publications, including “The Guide to Alternative Investments," fixed indexed annuities are mentioned as a “hub savings vehicle” to serve as a core to the spokes that drive higher potential growth with unlimited upside and downside in the assets mentioned above. Like the hub of a bicycle, these savings options are designed to allow the wheels of the bike to run efficiently and get the driver to the destination with less risk. Training wheels support the payment of guaranteed withdrawal lifetime benefits. When constructed properly, the saver has the ideal retirement savior or saver. Recently, annuities were at the top of a list of savings vehicles asked about by consumers.
They say that the definition of insanity is doing the same thing over and over. Investors should learn from past easy money times worldwide. In a recent survey, annuities were the most asked about products, taking the place of Roth IRAs. With the advent of the country’s first income annuity to be used in a defined contribution 401(k) plan at Southwest Air, it is a perfect time for the revenue starved Treasury to consider exempting some lifetime-income products from taxes or at least mandate that a certain portion of the plans assets be in safe, stable money alternatives. Even stable value funds, which can only be allocated to in a retirement plan, come with no guarantees. These considerations would encourage saving and not spook savers who are worried about paying more in taxes during decumulation than they did in saving money.

Capitol Hill is debating how to make the defined contribution system stronger as I write, and the negative connotation of the word “annuities” is in their crosshairs.

There are all kinds of ways to describe annuities, especially since the concept has been around for hundreds of years. Call them private pensions, personal pensions, supplemental income strategies, etc.

By the way, as the flight concludes, we have made up a lot of time, and will arrive safely. I forgot that the airline also stands for “Don’t expect the luggage to arrive.”

If something is not done soon about America’s undersaving debacle, our bags will not arrive and there will be a charge that will be paid for generations.