Know When to Switch From Bonds to Annuities
From: money.usnews.com
Annuities can compensate for declining bond yields when interest rates begin to soar.
While savings accounts or certificates of deposit should get a bump from continued interest rate hikes, the bonds in your portfolio may not fare as well.
The State Street Investor Confidence Index, which measures investor sentiment, lost 3.4 points in October, falling to 84.4 on the heels of the Federal Reserve’s September rate hike. A third-quarter survey by The Conference Board, a nonprofit research association, found that CEO confidence in the U.S. economic outlook declined because of upward movements in the federal funds rate.
“The Federal Open Market Committee projects one more rate hike in 2018, and three more in 2019,” says Dylan Huang, head of retail annuities at New York Life Insurance Company. “If they’re true to their word and interest rates continue to rise as a result, bondholders will see the value of their holdings decline.”
Huang says this is concerning for retirees who may be invested more heavily in bonds and rely on their portfolios for income. Investors may be wondering if shifting some allocation away from bonds into annuities can safeguard income as rates rise. Whether to do so hinges largely on timing and how much of a lead-up time an investor has before retirement.
“Bonds can be an effective investment even in a rising interest-rate environment if the duration of exposure is laddered from one to 10 years out,” says Jason Ware, co-founder and head of trading at San Francisco-based 280 CapMarkets. “With this strategy, as an investor’s bonds mature and rates rise, maturing principal payments can be reinvested to keep the 10-year ladder consistent, allowing them to systematically capture those higher yields in their bond portfolio.”
That can be a sound strategy. But for some investors, an annuity may seem more appealing. Here are a few ways to decide if switching out of bonds for annuities makes sense for your portfolio as interest rates rise.
