The 50/50 Model: Balancing Risk and Growth for Your Retirement
Retirement is an exciting milestone, but planning for it can be challenging. We've previously discussed several retirement strategies, including High Dividend Funds, the Three-Year Model, the 60/40 Portfolio, and Roth Conversions. Today, we'll explore a pre-retirement model that aims to give your assets some protection while still pursuing growth.
Introducing the 50/50 Model
When you hear "50/50 Model," you might think it means 50% stocks and 50% bonds, but that's not the case here. This model consists of 50% stocks and 50% in a buffered product.
What is a Buffered Product?
A buffered product is an investment where the issuing company, typically an annuity or unit investment trust (UIT) provider, covers a portion of potential losses. For instance, a Registered Index Linked Annuity might offer a 20% buffer over six years. This means that if the underlying index (S&P 500, Russell 2000 etc.) is negative at the end of the contract, the company will cover the first 20% of losses. Some of these products come with no additional cost and offer high caps, and some are even uncapped.
Similarly, a UIT provides a comparable option but usually with a shorter term and higher costs. By allocating 50% of your portfolio to a buffered product, you can pursue growth while transferring some risk to the issuing company. The remaining 50% of your portfolio would be invested in an actively managed stock fund aimed at growth without unnecessary risk.
Who Benefits from the 50/50 Model?
This model is ideal for those who are at least five years away from retirement and seeking continued growth. It’s not suitable for individuals already in retirement who need immediate income, as buffered products often impose fees for early withdrawals.
Example Scenario
Consider a couple, both age 60, with $500,000 in retirement assets. Their home will be paid off by retirement, and they plan to save $20,000 annually until they retire at 65, when they qualify for Medicare. They hope to have $1,000,000 by retirement.
Using the 50/50 Model:
- $250,000 goes into a buffered product.
- $250,000 goes into an actively managed stock fund.
With a goal of averaging 12% annual growth, their assets could grow to $1,008,227.79 in five years. The buffered product’s 20% buffer allows for a more aggressive stock fund strategy. In contrast, a typical 60/40 portfolio with a historical annual median return of 7.8% would only reach $844,751.
Impact on Retirement Income
Applying the 4% rule, the difference in annual income is significant:
- 50/50 Model: $40,329 per year
- 60/40 Portfolio: $33,790 per year
- Difference: $6,538 annually
Is the 50/50 Model Right for You?
This model isn't for everyone. It requires a higher risk tolerance and meticulous planning. If you're curious about how this strategy could work for you, schedule an initial consultation [here].
Disclosure: An annuity is a long-term investment designed for retirement purposes. With a RILA, there is a risk of loss of principal if negative index returns exceed the selected protection level. Gains or losses are assessed at the end of each term. With a registered annuity, investment returns and the principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than the original investment. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Annuities contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Investors are cautioned to carefully review an annuity for its features, costs, risks and how the variables are calculated.