A Fixed Income Alternative for Near-Retirees

June 18, 2019

In his white paper, Dr. Wade D. Pfau, Ph.D., CFA, explores how fixed indexed annuities (FIAs) may provide attractive interest-earning and volatility characteristics relative to traditional bond funds or other fixed-income assets.

The role that a FIA can play in helping near-retirees accumulate and protect assets in the crucial years leading up to retirement is not widely understood. An important difference between FIAs and bonds or other fixed-income alternatives, which can lose value when interest rates rise, is that the contract value of a FIA is protected from downside risk.

FIAs credit interest to the cash value of the annuity contract based either on a fixed interest rate or on the performance of an index-linked option (such as the S&P 500® index). Unlike other fixed-income alternatives, FIAs protect against loss of principal, as it is important to recognize bonds can lose value when interest rates rise. FIAs protect principal in the sense that even if the underlying index declines in value, the FIA does not lose money; the FIA is simply not credited interest in that year.

Dr. Pfau's white paper examines ways a FIA can help retirees protect wealth and achieve their retirement savings goals, while also providing a degree of upside potential in the pivotal years leading up to retirement.

He describes in detail the steps taken to provide a historical analysis of FIA interest earnings compared with historical returns of equities and fixed-income investments. He also describes the methodology in detail, including the period of analysis, steps taken to determine the historical options budgets, and determination of historical call option prices, which lead to simulated historical FIA participation rates.

Dr. Pfau’s conclusion is that FIAs can provide another option for fixed-income assets that protects principal and has the potential to outperform bonds when considered net of taxes and fees. Their unique interest-crediting structure leads him to conclude that FIAs may have a role to play in
preretirement accumulation portfolios and are worth a careful consideration by those preparing for retirement. 

A full version of his white paper and an executive summary can be found at the bottom of this page. 

If you have any questions, speak to your Pacific Life consultative wholesaler or contact Pacific Life’s Retirement Strategies Group at (800) 722-2333, ext. 3939, or send an email to RSG@PacificLife.com.

 


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Picture of Steve Chmelka

Steve is a Senior Retirement Strategies Consultant with the Retirement Solutions Division at Pacific Life. He brings more than 25 years of industry experience in financial planning and wealth management, including detailed knowledge of both employer-sponsored retirement plans and retirement-planning strategies.

 

 

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