By Sean A Ruggiero
It’s March 2020 and the markets are down over 30%.
I’m a believer in the U.S. stock market. In my opinion, it is the best place to build wealth through consistent, dedicated contributions over time. If you share this belief, then you would agree that a down market presents opportunity.
Many Americans are still in their accumulation phase of life. They are still investing a percentage of every paycheck toward their savings with the hopes of someday turning that into their retirement.
Most often, this takes place inside a defined contribution plan, like a 401k. If you are one of those people and you are reading this, then my advice to you is simple – stay the course! While the market is down, you’ll acquire more shares and this will benefit you in the future when you do prepare for retirement.
However, the list of opportunists in a down market would not include those who are preparing for, or already in retirement. In fact, for someone facing retirement, this sudden and drastic drop in stock value is a shock that can have long lasting consequences.
If you find yourself in this position, and your nest egg has declined, then the real question is what should you do? My suggestion? Look at a Fixed Indexed Annuity (FIA).
Just mentioning an annuity in financial planning can have a polarizing effect. There are those who don’t believe in annuities to solve any problem other than guaranteed lifetime income, and there are even more who actually don’t understand the many benefits of FIAs and how they could help in recovering from this down market. Let me explain.
I am suggesting the use of an accumulation FIA. That is an FIA that is designed for maximum safe growth, not for income or to roll up some sort of benefit base.
These accumulation FIAs usually offer an up front premium bonus, which cannot be found with any other financial vehicle. Secondly, accumulation FIAs should be designed to limit fees and rollup riders. These excess costs create drag and limit returns.
It is of the utmost importance to reiterate the fact that an accumulation FIA is a safety product first! It is not designed to beat the market, but to participate in the market. For this illustrative example, I chose an annuity that is offered by an A rated carrier (AM Best) that has a 15% up front bonus, some attractive indexing options, and a 15 year surrender schedule.
Our goal is to stop the losses and recover as much as we can as quickly as we can. By using an accumulation FIA, accomplish this goal using a tactic I call a “Double Bump.”
Step One – Stop the Losses. When dealing with the uncharted waters of a viral pandemic and the potential for 30% unemployment, there is no surety that the markets have stopped declining. There are opportunities for true investors at today’s prices, but regardless of any research I do, I am still speculating that the market value will go back up. The worst thing that could happen to someone facing retirement at this time is to lose more money! So, the FIA applies the much needed triage and stops the market losses.
Step Two – Apply Your First “Bump.” Using an accumulation FIA with a premium bonus allows for you to regain some losses immediately. The annuity I chose (rates current as of 3/24/2020) applies a 15% premium bonus. This bonus will stick so long as you don’t cancel the annuity early or take out more than the allocated percentage each year (a percentage that ranges normally from 5-10%). IRAs (qualified funds) are perfect candidates for these types of annuities because their tax status is already a deterrent for taking out too much money in one year.
Step Three – Allow the Market to Apply the Second “Bump.” When we look at the history of Bull vs. Bear markets, we see that the average Bear market lasts about 1.4 years with vicious losses averaging over 43% during that time. What we also see is the “bounce back” that occurs at the bottom of a Bear market. When the losses finally stop, the markets tend to have rapid recovery which can lead to some impressive returns.
Remember, safety is step one, so preventing further losses is key. Once those losses do subside, we are likely to see some serious gains from the market, and with an accumulation FIA we will participate in those!
One of my favorite things about an accumulation FIA as a safe growth tool is it’s upside. Government bonds, CDs and money market accounts can all provide safety and eliminate market loss, but when the market does rise, you won’t see that reflected in the gains.
If I have an FDIC insured CD that offers 1%, I can rest assured that the money isn’t going anywhere, even if the markets continue to drop. On the flip side, I won’t see gains higher than 1% when the markets do come back. For a retirement account that needs to attempt to keep up with inflation, that can be a deal breaker.
The FIA has the potential for higher returns than other safe money options, and when combined with a premium bonus, there is a unique opportunity to recover from market losses with the “Double Bump” tactic.
Take a look at the two interest crediting statements I’ve highlighted below. These are real, redacted statements that represent one and two year point to point indexing strategies. They received double digit returns when the market went up in 2017 & 2018.
It is important to stress that these sorts of returns are unusual, and should not be expected year after year, but they are plausible with an accumulation FIA in the right conditions, which is why they are well suited for a “bounce back” market following a Bear decline.
Do we know what the future holds? Of course not. For most of us, if I sat at your kitchen table and announced three months ago that you would be in danger of losing a significant portion of your retirement due to a global viral epidemic, you’d probably laugh me out of your home.
Unfortunately, the fragility of the markets is real, and there are many of us who cannot ride this one out because we need access to our retirement. For those who find themselves in that position, take a close look at an accumulation FIA for your IRA or a portion of your IRA and protect your retirement and recover your losses using the “Double Bump”!
Sean A. Ruggiero is a Managing Partner at Integrity Marketing Group where he focuses on annuity sales and development. Sean was the founder of gPlex Financial, LLC and Family First Life, where he oversaw the sales of over $1B in fixed Indexed Annuities.