When Fidelity Investments recently crunched the data on its retirement accounts customers, it found that 37% of those born between 1946 and 1964 (so-called Baby Boomers) have more equity holdings than they should.
Depending on age, people in this age bracket should have 47% to 67% in equities, Fidelity said. But well more than a third were above that.
While there’s no one-size-fits-all when it comes to asset allocation, experts agree that having too much in stocks beyond a certain age is risky. When you’re older, you don’t have as much time on your side to recover from market downturns.
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.
Fixed-income choices include annuities, bonds and CDs
Annuities, bonds and bank certificates of deposit (CDs) produce an income stream and thus are part of the fixed-income asset class you need to cut back your holdings in equities (stocks and stock funds). When choosing among them, consider yield, guarantees, the safety of your principal, liquidity and taxes.
Treasury bonds and notes, for instance, are popular because they’re guaranteed by the U.S. government. You’re guaranteed to get your principal back if you hold one to maturity, but you can lose money if you sell a bond before it matures. With Treasury bond funds, the price varies, and you may have a loss or gain when you sell. While interest is subject to federal income tax (unless held in an IRA or qualified account), it’s exempt from state tax.
Corporate bonds generally pay more than Treasuries but are subject to more credit risk. Municipal bonds are free of federal income tax, and in-state bonds are free of state income tax. Because they typically pay lower rates, they’re most appropriate for people in higher tax brackets.
Fixed-rate annuities often beat CDs
Bank CDs are popular because they’re easy to buy and guaranteed up to $250,000 by federal deposit insurance (FDIC for banks, NCUA for credit unions), which insures both interest and principal. And while you can cash a CD in before maturity, you’ll usually pay a substantial penalty. Non-qualified CD interest is subject to federal and state income tax in the year it was earned.
A fixed-rate annuity can be a better choice for part of your money. The most popular type is the multiyear guarantee annuity (MYGA), which guarantees a set interest rate for multiple years. Sometimes it’s called a CD-type annuity because it acts much like one, but there are some key differences:
Tax deferral and thus greater compounding. The biggest advantage over CDs is that annuities in non-qualified accounts are tax-deferred. You won’t pay any federal or state taxes on interest you’ve earned as long as you keep it in the annuity. Without the drag of taxes, interest in your annuity compounds and grows faster. When your current annuity matures, you can transfer the proceeds, via a 1035 exchange, to a new annuity and continue to receive tax deferral.
This doesn’t make any difference in qualified retirement accounts (IRAs, Roth IRAs, 401(k)s and similar accounts), since interest in these accounts is already tax-deferred, or tax-free with the Roth IRA. Even so, a MYGA can be a great choice for an IRA or a Roth IRA.
Often higher rates. MYGAs often pay higher rates than bank CDs with a comparable term. While you can today find short-term CDs (six months to a year) that pay more than 5%, annuities usually pay more if you’re looking for a longer guarantee. For instance, it appears that 4.75% is the top rate nationally on a three-year CD as of late September 2023, but you can find a three-year MYGA paying 5.60%. If you want to get a 10-year guarantee, you can earn 6% on an annuity.
While there are bonds and bond funds that do pay more currently, they typically fall into the high-risk or junk-bond category and thus entail more risk, and the goal of asset allocation is to reduce risk.
Typically, more penalty-free liquidity. With CDs, you can usually withdraw interest without paying a penalty, but if you want to tap any of the principal before maturity, you’ll typically pay a stiff penalty. Early-withdrawal penalties vary from bank to bank.
Many MYGAs offer more flexibility and let you withdraw up to 10% of the account value annually without penalty. (All interest withdrawn is taxable.) This can come in handy if rates go up and you’d like to transfer that 10% tax-free via a 1035 exchange to a higher-paying annuity.
Some annuities, however, have less generous withdrawal provisions in exchange for a higher rate. Nearly all MYGAs have surrender charges for withdrawals beyond the amount allowed by the contract. Some insurers may waive all surrender charges if the annuity owner has a terminal illness or is in a care facility for an extended period.
Withdrawal of annuity earnings before you reach age 59½ is subject to a 10% IRS penalty unless you’re totally disabled. While this is an important consideration for non-qualified funds, it’s not as significant an issue for IRA annuities because you’ll normally keep funds in an IRA past that age.
No federal deposit insurance. This is one area where CDs have an edge. But if you choose carefully, it isn’t a major drawback for annuities, I believe.
While annuities aren’t covered by federal deposit insurance, state annuity guaranty associations are required by law to protect annuity buyers, up to certain limits. Coverage limits and conditions vary by state. They apply to the state where you live.
Furthermore, life insurers, strictly regulated by the states, have an excellent track record of financial stability. AM Best rates most annuity issuers with a letter grade. While some people feel comfortable using only A-rated insurers, many companies rated B++ are worthy of consideration.
MYGAs aren’t the only type of annuities that can help you reduce an overdependence on equities. Fixed indexed annuities and lifetime income annuities are also worth considering — but that’s a story for a different article.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. He’s a nationally recognized annuity expert and prolific writer on retirement income. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.
related content
- Are Bonus Annuities a Good Deal?
- Annuities Are the Swiss Army Knife of Personal Finance
- Mutual Funds Reality Check: Are You Really Diversified?
- Considering Annuities? Here’s What to Keep in Mind
- Need Income Until Social Security Kicks In? Consider an Income Annuity With a Time Limit
-
I Need to Free Up $1,000 in My Monthly Budget, and I've Already Given Up Starbucks and Dining Out. What Else Can I Do?Here are some creative ways to save up to $1,000 a month, even if you feel like you've already made all of the obvious cuts.
-
Steps to Get You Through the Open Enrollment Jungle at WorkWondering how to survive open enrollment this year? Arm yourself with these tools to cut through the process and get the best workplace benefits for you.
-
Eight Steps to Help Get You Through the Open Enrollment Jungle at Work
Wondering how to survive open enrollment this year? Arm yourself with these tools to cut through the process and get the best workplace benefits for you.
-
Seven Moves for High-Net-Worth People to Make Before End of 2025, From a Financial PlannerIt's time to focus on how they can potentially reduce their taxes, align their finances with family goals and build their financial confidence for the new year.
-
I'm a Financial Planner: These Are the Seven Tiers of Retirement Well-BeingLet's apply Maslow's hierarchy of needs to financial planning to create a guide for ranking financial priorities.
-
Why More Americans Are Redefining Retirement, Just Like I DidRetirement readiness requires more than just money. You have a lot of decisions to make about what kind of life you want to live and how to make it happen.
-
A Compelling Case for Why Property Investing Reigns Supreme, From a Real Estate Investing ProInvestment data show real estate's superior risk-adjusted returns and unprecedented tax advantages through strategies like 1031 exchanges and opportunity zones.
-
Are You Retired? Here's How to Drop the Guilt and Spend Your Nest EggTransitioning from a lifetime of diligent saving to enjoying your wealth in retirement tends to be riddled with guilt, but it doesn't have to be that way.
-
Government Shutdown Freezes National Flood Insurance Program: What Homeowners and Buyers Need to KnowFEMA's National Flood Insurance Program is unavailable for new customers, increased coverage or renewals during the government shutdown.
-
Separating the Pros From the Pretenders: This Is How to Tell if You Have a Great AdviserDo you leave meetings with your financial adviser feeling as though you've been bulldozed into decisions or you're unsure of what you're paying for?
