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DPL Financial Partners Bond Fan? Don’t Miss the Sequel
Fixed income is failing retirees in the era of low interest rates but there are compelling alternatives advisors should check out
“0.07” Everybody’s favorite secret agent, right? No, that’s the average percentage yield on the one-year Treasury through the end of the third quarter this year. At 1.4%, the 10-year was not much of an improvement. Despite the market buzz about inflation and the Federal Reserve taper, fixed income yields look to be stuck roughly where they have been for the last decade or so going into 2022.
The trusty old bond isn’t producing income as it once did, creating a problem for individuals in or near retirement and their financial advisors tasked with delivering a plan for retirement success.
The need for a bond alternative is sinking in. This summer we surveyed more than 200 advisors and, among other things, asked what they consider the purpose of bonds in today’s financial plans. Only 40% of respondents cited income generation, well behind safety (just over 70%) and diversification (just over 60%). A stunning finding when you consider bonds’ traditional role as the reliable go-to source for safe retirement income. Equally surprising is more than half of advisors still consider bonds for safety and diversification—a very expensive hedge—especially when there are better alternatives to be had in the form of a seasoned income performer, an annuity.
The comparison in the chart shows how much a 60-yearold woman—we’ll call her Miss Moneypenny--would need to invest in fixed income vs. an annuity to fund $30,000 in annual income for thirty years starting at age 65. On the left is the required investment in a commission-free annuity to meet the income need—$428, 571. On the right is the investment in fixed income—assuming a 2% return—required to meet the same income need—$765,009.
Due to its income generating efficiency, the annuity meets the income need for $336,438 less investment, and will pay the income for as long as Miss Moneypenny lives, even after the account value has gone to zero—a feat the fixed income portfolio simply can’t match.
And, if she decides to invest the surplus of $336k in the stock market, Miss Moneypenny could grow those assets by an additional $1.8M over thirty years, assuming a 6% return, while her advisor could generate almost $305k for the firm on a 1% advisory fee.
By achieving the same annual income stream with a commission-free annuity, Miss Moneypenny has secured guaranteed income to cover her essential expenses in retirement and freed up assets to invest more aggressively for legacy, hedge against inflation, health-related expenses or that Aston Martin she’s always coveted.
Rather than waiting for bonds to rebound and save the day, or looking to riskier assets to fund retirement income in their place, it’s time to take a close look at income alternatives that are readily available for clients. Bonds’ sequel may not be as familiar as the original, but today’s modern, commission-free annuities are built specifically to generate efficient, lifetime income. Look at the facts, run the numbers and see why annuities are strong performers in today’s retirement portfolios, worthy of consideration.
Tim Rembowski is VP Member Success at DPL Financial Partners.
Learn more at www.dplfp.com.