Some Creative Options to Reduce Investment Risk in IRAs – Kiplinger’s Personal Finance

People approaching or in retirement should not have an over-weighted stake in equities. If you need to reduce risk in your IRA and/or Roth IRA, what are the best ways to do it?

A bank certificate of deposit (CD) is a reasonable choice … but a fixed-rate annuity can be an even better choice.

Both CDs and fixed annuities let you protect your savings from market risk, earn a set rate of interest and guarantee your principal. But fixed-rate annuities have the edge because they usually pay substantially more than a CD with the same term.

For instance, you can buy a five-year annuity that pays a 3.15% annual rate (as of November 2021). The top five-year CD pays 1.25%: 60% less interest.   

Fixed-rate annuities also have advantages over bond funds. Bond funds are totally liquid but do not guarantee a rate of return. If interest rates spike, the share price will decline, perhaps substantially.

All annuities fall into two basic groups: immediate and deferred. The latter are called deferred because you’re normally not taking income out in the short term. Reinvesting the interest lets your principal grow faster. Beyond that, annuities can be broken down further into several types:

CD-type annuities

The fixed-rate deferred annuity, mentioned above, is sometimes called a CD-type annuity. Its formal name is the multi-year guaranteed annuity, or MYGA — a tongue-twister of a name for a simple product.

Like a certificate of deposit, it guarantees a set interest rate for a number of years. MYGAs usually pay somewhat higher rates than CDs with a comparable term.  For current rates, see this chart.

You can repeatedly renew an MYGA for additional guarantee periods at the end of each term. Or you may eventually choose to annuitize it: meaning you will convert it to a guaranteed stream of income for a set number of years or your lifetime.

Fixed-index annuities

The fixed-index annuity is the only product available that offers both market-based growth potential while still guaranteeing your principal.

It’s a have-your-cake-and-eat-it-too product. It can be a great halfway alternative.

This type of deferred fixed annuity offers a share of the gains, in the form of an interest rate credit, when the stock market goes up. In exchange for a guarantee that you’ll never lose money, you may get only part of the market’s annual gain as measured by an index, such as the Dow Jones Industrial …….


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