What are “floating rate” bond funds and are they better than fixed annuities?

By |2021-06-02T23:28:21+00:00June 2nd, 2021|Annuities, Bonds, Estate Planning, Retirement Planning|

“However attractive floating bond funds appear, investors must be diligent to weigh the risks, research the holdings inside the fund, and consult their financial advisory team to ensure alignment with their overall financial goals.”- Jerry Yu

With their lower sensitivity to interest rate changes and the ability to reflect current interest rates, floating rate funds enable investors to achieve diversification in their retirement portfolios. Floating rate bond funds come with variable interest rates that track with the Fed or LIBOR (London Inter-bank Offered Rate) and pay inconsistent coupon payments. These funds are sometimes attractive to pre-retirees because they allow investors to add bonds to their investment matrix at a lower threshold than buying individual bonds.

What’s inside a floating rate fund?

Most floating-rate funds are composed of numerous types of investments. These may include preferred stock, corporate bonds, floating rate bonds, corporate loans, or even mortgages. Payouts from a floating rate fund’s underlying investments are managed by the portfolio managers.  These income distributions are typically paid to shareholders on a monthly, annual, or semi-annual basis and may include both income and capital gains.

Offering yields in an economic environment where interest rates are rising, floating rate funds are often attractive to people looking to shore up the fixed income (“safe money”) portion of their retirement plan.   Floating funds may also stave off “duration” risk, which is the risk that interest rates will go up and you’ll miss out if you have too much money in fixed income vehicles. However attractive floating bond funds may appear, investors must be diligent to weigh the risks, research the holdings inside the fund, and consult their financial advisory team to ensure alignment with their overall financial goals.

If you have floating rate funds or other bonds, should you switch to annuities?

Before deciding to move from bonds to annuities, you need to thoroughly understand your financial objectives and goals and which financial vehicles work best to help you achieve those objectives.  For example, income annuities, sometimes likened to “super bonds” might work well for investors who are already retired or are with 1-3 years of retiring.  If you fall into that category and seek predictable, guaranteed income to replace your declining bond yields, you should look into income annuities.

On the other hand, if you are still putting money away for retirement and have 5-10 years of workforce participation ahead of you, a fixed-index annuity will allow some market participation while providing protection of your principle.   Fixed-index annuities are a fantastic solution for investors who want growth while minimizing the impact of stock market volatility.

A fixed-index annuity gives you downside protection with the potential to benefit when the market is up. Adding this type of annuity to your portfolio may make sense, especially as you grow closer to retirement age.    It’s good to keep in mind that the key is to adding any financial product to your investment matrix is that it should reflect your risk capacity and tolerance. You should only consider fixed annuities if you are someone who wants at least one of the following.

Protection of principal, guaranteed income (based on the claims-paying ability of the chosen annuity company), risk-averse growth, tax advantages, or legacy creation. If you don’t want any of these things when you retire, then you might not benefit from switching from bonds to annuities.

The bottom line:

Floating rate bond funds offer adjustability with interest rates, potentially reducing the opportunity cost risk for investors.  Since floaters can follow the inflation curve as well, they may offer a safer investment experience than other types of bonds.    However, since most bond investors are seeking consistency and fixed income when they purchase bonds, the inconsistent coupon payments of floating rate bonds funds may be problematic.  For some retirees and pre-retirees, the better choice may be a fixed-index annuity which offers risk-averse growth, along with protection of principal, legacy creation, and may create a guaranteed income stream in retirement.  Check with your trusted retirement and income planner to see which option will work best for you.




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About the Author:

Jerry Yu has over 20 years of experience, establishing Reign Financial and Insurance in 2000. He is focused on helping clients save income tax, asset protection and wealth transfer. Jerry is also a member of the Million Dollar Round Table, Top of Table. Website: reignfinancialservices.us

Office: (626) 890-0090 | Reign Financial & Insurance Services