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Do you recommend the rule of 120 to your clients?

With consumer interest in fixed index annuities increasing, can FIAs supplement a bond strategy as part of the “rule of 120”?

As clients get older, their tolerance for financial risk decreases. With less time to recover from market losses it can be important to discuss rebalancing their retirement portfolios between more aggressive and more conservative vehicles. The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio. The remaining percentage should be in more conservative, fixed-income products like bonds. So, a 60-year-old should have 60% equities (120-60) and the rest in bonds (40%).

“As interest rates rise, they can have an adverse effect on a bond strategy.”

Bonds have always been the go-to “income” play, and are often seen as a way to add some stability to a retirement strategy while generating some income. However, increasing bond holdings as a way to balance a portfolio or to reduce exposure to volatile equity markets might not be the only move.

As interest rates rise, they can have an adverse effect on a bond strategy, especially if you need to access its value before the maturity date. Bonds have historically been seen as a “predictable” investment to protect against market downturns – delivering a steady annual yield and a return of the original investment if held to maturity. But now, with rising interest rates, those low yields also come with additional risk.

Strategies that offer reliability and growth potential

Fixed index annuities can add balance to your clients’ portfolios and help offset rising interest rates. FIAs can support these financial objectives because many of these products have interest crediting strategy options that can be linked to an equity index (such as the S&P 500) that offer upside potential, while providing protection against market losses. And with more consumer interest in guaranteed lifetime income – strategies that offer opportunities to build a larger retirement income stream could fit with your clients’ retirement goals.

This Wall Street Journal article talks more about how annuities that provide lifetime income may give clients more spending power than bonds – while in retirement.

So while the Rule of 120 may still apply, bonds might not be the only answer to creating a more balanced portfolio for your clients. Explore fixed index annuities as a strategy to help them mitigate downside market risk and offer potential upside market growth.

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