Two Paths to Reliable Retirement Income in Volatile Times

Indexed insurance policies and REIT preferred stock are options that focus on defense but still score financial points even if the markets are down.

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With recession signals flashing, inflation surging and interest rates rising, many Americans are focused on how to protect their investments from major market losses and help provide predictable retirement income.

Given that most investors prefer to make money and not lose it, the first priority of investing should be on playing defense. This means using vehicles to guard against volatility, but it doesn’t mean sitting on the sidelines. It requires being selective and proactive while using strategies that provide stability and steady growth.

Here are two options to provide protection for your money and to generate predictable retirement income.

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Indexing can be a great way to protect your principal and have upside when the market is positive. Insurance companies offer the ability to “index” your investment and retirement portfolio. Typically, the way it works is you earn interest based on the upside performance of a stock market index. In a year when the stock market is positive, you have the opportunity to earn interest that year. If the stock market is negative, you don’t earn interest that year, but you also don’t lose anything. Your principal is protected against stock market losses.

There are a few ways you can earn interest inside of indexing contracts. The first is through a cap-rate strategy. The cap rate can vary between insurance companies, but some of the best cap rates can be as high as 7% or more.

Let’s assume you have a cap rate of 7%, and the S&P 500 is up 10% for the policy year. In a year like this, your account would be credited 7% interest. You earn interest based on the upside market performance, up to the specified cap.

In a really good year, where the S&P 500 is up 30%, you are still credited up to the cap of 7%. The good news is if the S&P 500 took a big loss and was down 30% for the year, your account would stay flat for the policy year, and your principal would be protected from market losses.

The second way you can earn interest is through a participation-rate strategy. Let’s assume that the participation rate is 50%. If the stock market index is up, you earn 50% of the market return during the policy year. For example, if the S&P 500 is up 10% over the policy year, you are credited 5% interest. If the market is up 30%, you are credited 15% interest. If the S&P 500 is negative 30% for the year, your account would stay flat, and your principal would still be protected from stock market losses.

Indexing can provide two things to investors — principal protection when the market is volatile and upside potential when the market is up.

Real estate investment trust (REIT) preferred stock

A real estate investment trust is a company that owns, operates or finances income-generating real estate. REITs, which are modeled after mutual funds, pool the capital of numerous investors, which makes it possible for individual investors to earn dividends from real estate investments without having to buy, manage or finance any properties themselves.

REIT preferred stock is a type of hybrid security with both equity- and bond-like characteristics. Dividends paid on REIT preferred stocks are often considerably higher than the dividends paid on REIT common stock. With inflation being so high, that’s a key consideration for investors today. While REIT preferred shareholders have no voting rights, they can often benefit from investing when issues are trading at discounts to par.

REIT preferred stock is generally callable between two and five years from the date of issuance, at which point management reserves the right to redeem the shares at par. This two-year non-call period provides the potential for income and capital appreciation.

One of the overlooked benefits of owning preferred stock is the option to purchase “direct issuance” preferred shares. These shares do not trade on the stock market exchange, so they do not experience the market volatility typically associated with common stock or traditional preferred stock offerings. These preferred stocks can be a great way to generate consistent, steady dividends of 6% to 8% per year without the ups and downs of the stock market.

These times are indeed challenging for our economy, and knowing how to adjust your strategies to more of a defensive stance is key to not losing ground.

Dan Dunkin contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Aaron Gaines
Financial Adviser, Nicholas Wealth Management

Aaron Gaines is a financial adviser at Nicholas Wealth Management, an investment, advisory and financial planning firm in Atlanta. He holds a BA in finance with a concentration in investment management from the University of Alabama. Gaines has passed the Series 7 and 66 securities licenses and life, health and variable insurance licenses.

Securities offered through World Equity Group, Inc. FINRA and SIPC. Investment advisory services offered through Nicholas Wealth and Bluepath Capital, LLC. Nicholas Wealth and Bluepath Capital, LLC are separate entities and are not owned or controlled by WEG. Neither David Nicholas, Nicholas Wealth nor WEG give tax advice. This is not a solicitation nor recommendation to purchase or sell any investment or insurance product or service and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. Guarantees mentioned are backed solely by the financial strength and claims-paying ability of the issuing insurance company.