With the expected rise in interest rates on the horizon and growing inflation, economic experts are telling us NOT to expect the incredibly robust returns we have been experiencing in the market over the last years. In an article entitled Four Ways to Increase Returns Without Added Risk, the author Kevin McKinley refers to a survey by Spectrem Associates for CNBC that revealed that millionaires are interested in “increasing allocations toward safer investments.” Survey respondents over the age of 55 and those with more that $5m to invest felt quite strongly about pursuing safer investments.
Ways to Minimize Investment Risk
In his article, Kevin McKinley discusses four ways to increase “net returns while scaling back on risk”:
- Maximize Returns on Cash – the survey showed investors were moving their money out of equities and putting it into bond funds, Treasurys, money market funds, and checking\savings accounts.
- Trim Those Taxes – the guidance is to sell equity investments inside of tax-deferred accounts such as 401(k)s, IRAs, Roth IRAs, and annuities. For non-qualified accounts, McKinley recommends selling positions that would generate losses to offset taxable capital gains or income or selling securities that would be taxed at a long-term capital gain rate.
- Just for Retirees – be mindful of generating income, such as realized capital gains, which could trigger or increase taxes on Social Security benefits.
- Charitable Intentions – clients with appreciated assets can either gift the shares outright to charity or donate them to a donor-advised fund for donations in later years.
Indexed Universal Life & Equity Index Annuities to Minimize Risk
What Mr. McKinley DOES NOT talk about in his article are life insurance and annuities – Index Universal Life and Equity Index Annuities specifically – and their value in minimizing risk to investment accounts.
Equity Index Annuities
Let’s start our discussion with Equity Index Annuities as an alternative for equities. In a 2018 study by Zebra Capital Management, acclaimed economist Roger Ibbotson stated “conventional wisdom has most investors de-risking their portfolios by allocating more heavily to bonds as they approach retirement, however, investors should consider other alternatives such as FIA’s. In this low interest rate environment, complacency can be a danger to our clients’ futures”. Ibbotson’s research demonstrates that uncapped Fixed Index Annuities may help control market risk, mitigate longevity risk, and have the potential to outperform bonds in the near future. The study linked above will provide more detailed information on Ibbotson’s research.
Index Universal Life
When it comes to Index Universal Life, we have demonstrated in past articles the power and benefit of tax free distributions from a life insurance policy following down markets, whether from an IUL or any other cash value product. As the millionaires described in McKinley’s article head in the direction of retirement and are looking at “de-risking”, consider recommending life insurance as a hedge against down markets not only from a distribution standpoint, but also as a hedge against mortality, morbidity, and longevity.
Life Insurance & Legacy Portfolios
Many clients are not earmarking their assets for use during retirement, but instead as legacy assets for their children and grandchildren. Proven unequivocally through statistical and financial analysis, adding life insurance to a long-term legacy portfolio enhances the risk-adjusted returns of said portfolio. This is based on the work done by Christian Kaplan, CFA at Equitable.
When we saw the initial article by Mr. McKinley, which is referenced at the beginning of this article, we immediately sent it to Mr. Kaplan with the comment “it is a shame that the investment community is not more well versed in life insurance.”
Life Insurance as Part of Your Clients’ Portfolios
Insurance and annuities are a bit like the bastard child of the wealth management space, but things are beginning to change. Very smart people like Roger Ibbotson who is promoting the benefits of Equity Index Annuities and Chris Kaplan of Equitable are laying the groundwork to make the argument that life insurance belongs in a well-rounded portfolio.
Well designed and well thought out insurance products provide a solid foundation in the execution of any retirement and wealth transfer plan.