How can I grow my retirement savings without loss?
I have $500,000 in a retirement account. My bank offers a program that guarantees no loss but caps the gain at 7.5 percent. The plan requires a seven-year commitment. Is this a good plan?
This sounds like an annuity. An annuity may be an acceptable option but you must be aware of high fees and penalties that can be associated with an annuity. Especially the banker's commission for recommending it to you.
When seeking investment advice insist on the fiduciary standard of care. Require that your advisor provide you with a written statement of their fiduciary commitment to place your interests first.
It sounds like an annuity, especially with a 7-year surrender period. When most of banks provide a paltry yield and your bank offers an exceptional deal, it almost sounds too good to be true.
There’s nothing wrong with an annuity if you use it as a part of an overall retirement planning or bridge the income gap between your income and expense for now or future.
Either way, I urge you to consult with a CFP® practitioner who specializes in annuity and peruses the bank offer before proceeding to make the purchase. Alternatively, you could build an income portfolio with traditional investments to generate the income stream without a high fee of the annuity. Compare both methods to see which one costs the least but gives you the most. Best!
It sounds like the proposed investment vehicle is a structured CD AKA market-linked CD. These are popular instruments for more conservative investors looking to protect their principal while getting the upside benefits of the markets, with one exception - the gains are capped at a level set by the bank.
The key to the protection feature is making sure that you don't cancel (sell) the CD prior to maturity. If you do, the market value of that CD can be up or down relative to the price you paid. Therefore, you will notice account fluctuations (much less than the stock market) over the course of the 7 year period you hold the CD. This particular aspect sometimes gets swept over by the person selling the product, so just be aware that you need to hold to maturity to realize the protection feature.
Ultimately, for those who like the idea of getting access to better growth potential than cash or bonds without the risk of principal loss, this is a potential investment strategy worth considering. With the main drawback being liquidity.
Long-term investors should fully expect to incur periodic gains and losses in market value. Any other expectation is unrealistic, simplistic thinking.
In my experience, market-linked products are too complicated, high-cost, tax-inefficient, and often deceptive. A simple ETF portfolio based on investor risk tolerance is a better solution.
There are pro's and con's of this type of investment. As the saying goes "Beauty (in this case "good") is in the eye of the beholder. I've seen investors who love these investments, a fixed index annuity, and those who can't wait to get out of them. Honestly, you need an advisor to discuss your needs and various investment options, not a bank product salesman. These products typically pay a very high commission rate and are therefore somewhat controversial in terms of appropriateness of sales. I think you would benefit greatly from paying a fee-only advisor to go over your situation, and really focus on the risk side of investing, not just the return.