As a 77-year-old, how can I protect my principal in a maturing investment account with $500,000?
I am 78 years old and my wife is 77 years old. I have $500,000 in a maturing investment. My total income, excluding earned interest, is $63,000. How can I protect my principal?
Be careful asking this question in this forum because you will get annuity agents coming out of the woodwork to sell you an "indexed" annuity where you supposedly get "most of the upside but none of the downside." While it is true that you will get none of the downside, you won't get most of the upside either. They are expensive and have long surrender penalties. It will lock in your money and the expenses will significantly eat away at the gains, which by the way will have caps or monthly averaging etc... all designed to reduce the return to low single digit. More importantly at your age, having surrender penalties is not desirable.
With the manipulation by the Central Banks driving interest rates down to artificially historic lows, CDs & money markets won't even keep up with inflation and bonds are dangerous now due to rising rates. So we must deal with the hand that we are dealt. Anything completely safe doesn't earn enough return to keep up the cost of living. Therefore in your situation, I believe having solid Blue Chip Dividend paying stocks but with a sell discipline is the best solution. You can limit & manage drawdown risks or downside risks, which also means you will give up some to the upside. But in the current environment, I think this is a far better solution. After rates do rise then you can move back a portion into bonds. Unfortunately, you also have to maneuver in the markets you are given and they don't care about you.
Now if you are looking for "guaranteed income" to supplement what you have, you could take a portion, say $100k (and you would back into the appropriate number), and do an immediate annuity, meaning annuitize it for income through 2nd to die. This way you would know that you & you spouse had a minimum income amount for your lifetimes. But know that you are exchanging or giving up the "$100k" principal for a lifetime income. This is NOT my personal choice and I wouldn't do it myself, but I am an active manager who understands markets. Many people don't, or at least want some portion that they absolutely don't have to worry about which would be the "fixed" minimum amount. There is still always inflation risk, but I digress. If you do decide to do this, make sure you get 3 to 4 competitive bids for the highest cash flow, and read the contracts carefully. I am always skeptical of insurance companies.
Whole point is you have to do what's right and comfortable for you & your wife.
Hope this helps and best of luck, Dan Stewart CFA®
Thanks for your question. It's a difficult one to answer without more information.
You indicate you have a maturing investment account. That could be a CD, a Treasury security or other bond that is coming due. It's unlikely, but it could also be a fixed annuity that is coming out of its surrender period.
If by "protect" you mean guarantee, that limits your options. Individual bonds (treasury, corporate, municipal, etc.) have a set interest rate for a set period of time, ranging from months to years. The issuer is contractually obligated to pay back your principal when the bond matures. The guarantee is contingent on the financial ability of the issuer to pay you back. Treasury securities are backed by the full faith and credit of the federal government. As such, they are considered the safest type of bond.
Fixed annuities may also be an option to protect your principal. They can also provide a guaranteed income if that's something important to you. They come with additional restrictions and tax issues. Make sure you understand those before making an annuity investment.
If "protect" means limit the volatility of your portfolio, that is a different discussion. The smaller the percentage of stocks you own in an investment portfolio, the lower the risk. However, there is still risk.
If you're not working with a competent financial advisor, I would suggest you consider doing so. They can help you sort out what you're trying to accomplish and review several options. Make sure you work with someone committed to acting in your best interest.
I hope this at least provides some help.
Thank you for your question.
A fixed index annuity through an insurance company can offer you some nice benefits. I use it exclusively to help my clients plan for a long, comfortable, and worry-free retirement. Benefits include:
Principal protection (you can't lose your money to market volatility)
Reasonable return that's linked to the upside of a market index, with 100% downside protection
Gains are locked in annually (can't lose them)
Guaranteed lifetime income as a distribution option
I think your wife will like it also. You'll never have to worry about market losses. Never have to worry about spending years to recover losses. No more sleepless nights or high blood pressure. And, you'll earn a nice steady, tax-deferred return. Sounds too good to be true, but it's true. Two caveats: you will have a surrender charge period (say anywhere between 6 to 10 years), but you're still able to take an annual penalty-free withdrawal of 5% to 10%, and...you won't get 100% of the upside of the index. At the end of the surrender charge period, you no longer have a penalty. It's a wonderful product that so many people are not aware of. Call your life insurance agent to get the details.
I agree with Roger Ibbotson: https://www.prnewswire.com/news-releases/renowned-economist-roger-ibbotson-unveils-new-research-indicating-fixed-indexed-annuities-may-outperform-bonds-over-the-next-decade-300609670.html
There are a number of ways to do this. Depending on your individual circumstances, there are strategies that can be implemented to reduce the volatility of your portfolio and still provide a reasonable return. I have a number of clients in your age group and have created a strategy where we limit the exposure we have to stocks during downturns. That being said, there is still inherent risk in stocks and you should speak to a financial advisor that you feel has the expertise to help you with your investments.
Every investment strategy will have its own risks, so make sure you are clear on what your investment advisor is doing.