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Certainty in the decade of discontent

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After decades of a bull market, is a correction inevitable? Is a “decade of discontent” ahead, and if so, how can you help clients manage the possible challenges?

Laurence Black, founder of The Index Standard®, spoke with Mary Beth Franklin on the InvestmentNews podcast, Retirement Repair Shop, about the strong market conditions of the past decade, what’s likely to change in the next decade and how you can help clients prepare for a more confident retirement.


Gain more insight from this conversation about the challenges – and opportunities – that may be ahead.

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Outliving retirement income is a top concern for many Americans. When a sudden market drop erases gains made over decades, those within a few years of retirement may be acutely aware of how difficult recovering from loss would be. Coupled with increasing longevity and rising inflation, retirees could be faced with the challenge of making less money buy fewer goods for a longer time. While the intensity of market conditions changes, the challenges aren’t new. Market volatility, sequence of returns and inflation have long been investing risks. Fortunately, industry innovations developed over the past several decades specifically address these challenges.

Using an annuity to manage sequence of return risk

Riding out the highs and lows of the market is one strategy for accumulation. As clients get closer to creating an income strategy, protection becomes a priority. A fixed indexed annuity (FIA) is designed to protect premium. Regardless of market activity, the initial premium is always guaranteed from loss due to market downturn. If you have clients who are interested in protection but have a higher risk tolerance, you may want to consider if a registered index-linked annuity (RILA) is right for them. While a RILA has increased potential risk, there is also higher potential for growth.

Protecting savings from inflation

“The last 15 to 20 years have been a time of low interest rates, low inflation and increasing globalization,” says Laurence Black, founder of The Index Standard. “But the era of low inflation is over. The times of low inflation benefitted tech markets, which the S&P 500® favors. While the S&P 500® remains a strong index, rising inflation may signal a time for higher diversification, which can be done with annuities and the variety of indices available now.”
 

Custom indices 101

Custom indices have been around for decades. Key points:

  • Custom indices use a rigorous rules-based process to provide a certain exposure to an index.
  • Large development houses and academics have collaborated on indices of many “flavors.” New indices can monitor growth of emerging market funds, American stocks, European stocks, high dividends, or low volatility.
  • Investing strategies previously only used by large pension funds and institutions are available to everyone through custom indices, largely due to innovations such as artificial intelligence.


Annuities deliver stable income retirees want

Modern annuities help manage volatility largely by linking crediting strategies to custom indices that have a volatility control feature. “This feature aims to deliver cushioned and smoother returns by toggling between a higher equity basket and cash,” says Laurence Black. “When volatility is high, markets may go down, so the index invests more in cash and less in the equity basket. When volatility comes down, the index invests more in the equity basket and less in cash. This allows for stable returns, higher participation and lower drawdowns.”

Guaranteed income that can’t be outlived

One benefit that sets annuities apart is the ability to provide guaranteed income that can’t be outlived. While sometimes misperceived because of the fees involved, there are important distinctions when comparing annuities to another fund. “A fund with a lower fee is only doing one thing for a client: trying to earn a return,” offers Laurence Black. “A FIA is earning a return, plus protecting principal and offers the ability to provide a lifetime income. We all know people living into their 90s or even to 100. The value of guaranteed income is an important distinction to help make a more equitable comparison of fees.”

Another perception of annuities and custom indices is that they are complicated. “While they are complex, research and education are available,” reminds Laurence Black. “Financial professionals have access to exclusive research conducted by The Index Standard and available through Athene.  The materials available can help explain custom indices and clarify the value they bring to your clients.”

Diving into the next decade

After decades of market growth, it’s likely that the next decade will be different than the last. “We’ve already seen inflation at the pump and in the grocery stores,” says Laurence Black. “Annuities provide new sources of returns, add diversity in index types, plus allow for income guarantees only available in the annuity.”

While education may be needed to better understand annuities and custom indices, the challenges they address are no less complex. The risks of inflation, longevity or market volatility are long-standing. Recent innovations can provide certainty and help your clients retire with confidence. 
 

This information is brought to you by Athene — where innovative annuity solutions are powered by unconventional thinking.

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