Are bonds a good choice for a retirement vehicle, or are they?
In a recent article in Investment News, Jason Kephart made a point that I have long argued that brokers and planners want to be annuity salesmen. The article (link below) explains how bonds are the new focus for brokers and planners because they offer the one thing Boomers desire, income, safety, freedom from risk, lack of volatility, and reduced stress. Bonds are the greatest possible choice for the Boomers; at least, the investment side would have them believe it.
Bonds can be hazardous;
- Interest rate sensitive
- Rating risk
- Inflation exposure.
Plus, bonds can change the game if it suits the bond issuer; they can call the bonds if it is to their advantage.
The coming (and already here) 10,000 a day Baby Boomer crush has caused many brokers and planners to figure out how to solve the one thing boomers want,.stability!
Stability in their retirement accounts converts to less stress and a more optimistic view of retirement. How are the brokers and planners accomplishing this?
Bonds are the new savior for the boomers; why? Because bonds pay interest, interest can e calculated as an income source, and an income source can mean retirement stability.
Great thinking, right? Not hardly. True bonds do pay interest, but what happens to their account value? Should interest rates in general increase?
Two things could happen.
- If the Boomer sold the bonds in an increasing interest rate scenario, the value of the bonds would be worthless. Interest rates are at a historical low; what are the chances rates will remain this low over the next 20 years?
- If the Boomer decided to keep the bonds until maturity and earn interest, the face value of the bonds would be returned.
How can these be bad choices?
How long are bonds issued for (time period, maturity period) 20 years at least (many for 30 years)? If a Boomer uses this route for retirement income, how long are 20 years in relation to his life expectancy? Will the economy and life be stable for the next 20 years?
The point is simple, brokers want to sell bonds. They do so for one underlying reason, they earn compensation. Plus, any adjustment in a portfolio over time would mean more compensation.
Selling bonds as an income is ok, but other options are much better, and using them does not mean your account can be affected by increasing interest rates; actually, the opposite is true.
Fixed Indexed Annuities can provide the very income Boomers are looking for without compensation being charged directly to the Boomer. Plus, a variety of options exist, especially the BIG one, and income can never be outlived.
I have to chuckle at the brokers and planners working so hard to make sure their products mimic the best retirement products available, Fixed Indexed Annuities.