The Best Bond Alternative No One Is Talking About
Fixed indexed annuities may provide the steady income and stability that bonds aren't providing these days.
What is the job of a bond in your portfolio? When you think about it, bonds have two primary roles in a well-balanced portfolio.
Role #1 is to provide steady income. Role #2 is to provide stability for a portion of your principal to offset some of the volatility of market positions. How are bonds doing in fulfilling those roles in today's environment?
When it comes to steady income, bonds are currently grading out at a D. Due to low interest rates, you are receiving almost no income from your bond positions, unless you venture into high-yield bonds, which are a euphemism for junk. Investment-grade bonds are paying very little.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In regards to providing stability to your portfolio, bond prices are at all-time highs. Bond prices move inversely with interest rates. What will happen to the value of your bonds when interest rates rise in the future? They will decline. Buying bonds today is the equivalent of buying high so you can later sell low. Not a great idea.
What else can you do?
Imagine for a moment that you could go out on the market today and buy a 10-year investment-grade bond with the principal insured paying a coupon rate of 4%. Would you buy that bond? If you are like most people, you would jump all over it and hold it for the next 10 years happily.
That hypothetical bond would fulfill both roles of a bond admirably. Unfortunately, no such bond exists. However, something very similar does exist if you broaden your horizons.
If you are willing to expand your thinking just a bit, you will find that insurance companies have a few fixed indexed annuities that actually work similarly to our hypothetical 10-year 4% bond.
For many of you, you simply need to get over the word "annuity."
Warning: Very Few Qualify
Please be aware that out of the thousands of fixed indexed annuities very few will actually produce a 4% return over the next 10 years.
One fixed indexed annuity approach that we are currently using as a bond alternative: As of this writing, two highly rated companies have a 10-year fixed indexed annuity that pays interest equal to 35% of Standard & Poor's 500-stock index when it is up for the year, and pays 0% when that index is down for the year.
In other words, if the market is up, you get 35% of the upside. If it is down, you get 0% for that year. Each year during the 10 years is evaluated separately when calculating interest.
If you do any kind of research, you will find that this approach will very likely net you between 3% to 6% annual returns in almost any 10-year period. Your principal is insured, and you receive returns closer to what you want your bonds to pay.
Of course, fixed indexed annuities come with disadvantages. The two biggest are that you will pay surrender charges if you exit out of the annuity completely during the contract period, and the earnings are not guaranteed.
If you cannot stomach an annuity, you can also look into the world of limited partnerships, as there are options for alternative income. But buyer beware: These can look very good on the surface, but the liquidity is often very limited.
Don't be afraid to think outside the box in today's low interest rate environment. You need to evaluate new solutions to today's new problems.
Michael Reese, CFP®, CLU, ChFC, CTS is the founder and principal of Centennial Wealth Advisory, LLC with offices in Austin, Texas and Traverse City, Michigan. His focus is to help retirees enjoy financial security in any economy.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Michael Reese is the founder and CEO of Centennial Advisors, LLC. He is the host of the television show Retiring Well and the author of two books: Retiring Well: How to Enjoy Retirement in Any Economy and The Big Retirement Lie: Why Traditional Retirement Planning Benefits the IRS More Than You. He has been featured in major publications such as Kiplinger, U.S. News & World Report and Yahoo Finance. Reese also is a featured speaker at industry events.
-
A Lesson From the School of Rock About the MarketsIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I retired at 65 with $7.8 million and feel like I over-saved. My 40-something son is on the same path. Should I tell him to reconsider?We ask financial experts for advice.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and AroundIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.