In my previous posts (Part One, Part Two), I discussed the reasons for the underperformance of 60/40 portfolios in today’s market and interest rate environment, and now we look towards what options exist for today’s investors seeking protection from portfolio losses.

WealthVest believes that there is a natural fit for MYGAs within optimized portfolios. A multi-year guaranteed annuity, or MYGA, is a type of fixed annuity that offers a guaranteed fixed interest rate for a certain period, usually from three to ten years. A MYGA is appropriate for someone who is closer to retirement and prefers tax deferral and a guarantee of investment return. By allocating 20% of a 60/40 portfolio to a MYGA, the portfolio’s risk premium decreases thanks to the guaranteed protection from the annuity.

Let’s look at how allocating 20% of a hypothetical 60/40 portfolio to a 5-Year MYGA with a guaranteed annual interest rate of 4.50% would have affected the portfolio’s performance in 1969, a period that mirrors today’s market conditions and Fed policy. The chart below demonstrates how a $1,000,000 60/40 portfolio performed during this period compared to allocating $200,000 of this portfolio to a MYGA and leaving $800,000 allocated to a 60/40 split. Due to the MYGA’s guarantees, the portfolio ends the 5-year period up 5.33%. By allocating 20%, or $200,000, to the MYGA with a guaranteed rate of return, the investor can recoup market losses and put themselves in a better position years later. Although this scenario may be one of the worst cases since 1928, with the addition of a portion of your assets to a MYGA, a base level of protection is guaranteed and can ease sequence-of-return risk while enhancing performance.

MYGAs combine 4 powerful concepts:

1. PRINCIPAL PROTECTION

An insurance company issues MYGAs and the guarantees on a MYGA are backed by that insurance company’s financial strength and claims-paying ability. Their principal is protected, and its value will not decrease below the initial purchase price.

2. TAX DEFERRED GROWTH

Careful management of taxes paid on your savings can substantially increase those savings’ growth. Greater savings mean greater retirement income. This is one of the great benefits of individual retirement accounts, 401(k)s, and other retirement vehicles. These vehicles allow you to defer taxes until you need your retirement income. When you are deferring taxes, you are earning interest on money that would have been paid to taxes. This is the power of tax deferral.

In a MYGA, the owner only pays taxes when income is taken out, allowing the money to grow in deferral. From the wide variety of financial products, choosing one that allows for tax deferral can be prudent in a retirement portfolio. Tax deferral is often in a client’s best interest. MYGAs allow you to defer your taxes until you need the income. An investor’s withdrawals are taxed at an ordinary income rate, which is typically much lower in retirement.

3. LIFETIME INCOME OPTIONS

With a MYGA at maturity there are options to convert the accumulated principal to a guaranteed lifetime income stream for one life or two.

4. GUARANTEED INTEREST RATES

The issuing insurance company guarantees the interest rate a MYGA earns for the life of the contract. In addition, upon renewal, the rate will never fall below the minimum guaranteed interest rate, even if economic conditions cause interest rates to drop dramatically.

Are you interested in alternatives to 60/40 allocations? Contact us at 877-595-9325 or reach out to your wholesaler. Don’t know who your wholesaler is? Meet them by filling out the following form.

The 60/40 portfolio returns shown are net of assumed management fees. The annual assumed management fee used within the model was 1.12% and is based on a summation of the annual average fee for households with managed assets of $1 million to $1.5 million in 2019 of 1.05% and the average equity index mutual fund average fee of 0.07%. This fee data was gathered from McKinsey & Company and ICI Research, respectively.