Page 37 - Investment Advisor - November 2023

Conclusions

reTIremeNT PLANNING
By John Manganaro

one Way to Protect near-retirees From

Market shocks

Near-retirees with significant bond allocations can be steered off course
by a rapid rise in interest rates.

Recent innovations in the structured
annuity market, in particular, offer
an alternative distribution of returns
through guarantees that offer both the
opportunity for growth and protection
against loss, Pfau says.
As Pfau explains, structured annui-
ties use financial derivatives to create a
structured return that changes the shape
of the portfolio’s projected return dis-
tribution and the relationship between
downside risk and upside potential.
Though the mechanics are somewhat
complicated, when added to a diversified
ear-retirees who are depending tility often feel they have little choice portfolio, these solutions may provide
on bond funds to maintain the but to stick with their bond-heavy port- an opportunity for household investors
Nvalue of their assets without folio allocations. This is because the to improve their financial outcomes by
taking excess equity market risk are traditional approach of investing only in offering a beneficial trade-off between
still vulnerable to having their financial stocks and bonds creates a big limitation. upside and downside risk, Pfau says.
plans steered off course by rapidly rising “The only mechanism [such] an inves- Ultimately, Pfau argues, the growing
interest rates. tor can use to adjust the distribution of category of structured annuity prod-
As noted in a new report published potential returns is the allocation of their ucts provides an alternative for house-
by the well-known retirement research- savings between the asset classes,” Pfau holds to manage market risks as they
er Wade Pfau in collaboration with notes. In this binary framework, moving approach retirement. He says these
Equitable, this concept shifted from away from bonds means taking more risk annuities allow an investor to design
abstraction to reality in 2022. The year in the equity market, which itself may be their own distribution of investment
brought stock and bond markets losses a bigger worry for some investors. outcomes to better manage downside
in the double digits, and the pain on the Fortunately, according to Pfau’s latest risks, while still providing participation
bond side was mainly driven by rising work, there is an emerging alternative in the market upside.
interest rates. approach for advisors and investors to strUCtUred AnnUItIes
Adobe Stock reduce the value of existing bonds, but tured investment products as a comple- “The ability to better manage down-
consider, and it involves using struc-
As Pfau explains, rapidly rising rates
ment to the standard 60/40 portfolio.
investors who fear equity market vola-
side risks can lay a foundation for either

November 2023 Investment AdvIsor 35