Hybrid index annuity becoming the hot retirement investment vehicle

Retirement investment strategies are a hot topic all of a sudden. Not only has the investment landscape shifted over the last decade, a big portion of the population is headed toward retirement.

With thousands of baby boomers reaching their 60th to 65th birthdays every day, the search is on for investments that can produce enough income to support a comfortable retirement. It can be a problem, since the last decade has shaken a lot of confidence in Wall Street.

"Right now, $9.43 trillion is sitting in cash vehicles as people are moving away from the stock market," said Steve Jurich, President of IQ Wealth Management, in Scottsdale, Ariz. "The demand for that risk, for the potential upside in the stock market, has shifted sideways. The smart investor is asking where they can go to ensure a stable retirement income. That's now an area of demand."

Hybrid index annuities

Jurich is an advocate of the Hybrid Index Annuity, which has emerged as the hottest sector of the retirement investment scene since the Great Recession. Consumers nearing retirement often find it attractive because it is said to combine the best features of many different types of annuities.

Stan Haithcock, an annuity specialist in Ponte Vedra Beach, Fla., says the Hybrid Index Annuity is still little understood by most investors.

"Please understand that indexed annuities are complex products, and the majority of agents are unable, or unwilling, to properly explain them and usually just focus on a few sizzle points," he writes.

Annuities

First, let's focus on plain old annuities. An annuity is a stream of fixed payments you will receive, based on the amount of money you put in and how it is invested. The company managing the annuity takes what you pay in and invests it, creating returns that are used to fund the regular payments you receive.

Some retirees like the idea of an annuity because it's money they can count on each month. However, the return on the money is usually fairly modest, which results in lower payments.

Some annuities pay for a fixed period of time and then stop. Others, called "life annuities," pay as long as you live. These annuities are usually sold by insurance companies.

Upside potential

A hybrid Index annuity generally pays a standard rate of interest but also delivers the possibility of gains if the stock market goes up. It's this potential for upside gain that many find attractive. Jurich says it's a different breed that provides stability while preserving the option to make money when the market goes up.

"You don't have to worry about losing money, and there are still competitive rates of payout," he said.

But in a report on annuities, Walter Updegrave, senior editor at CNN Money, said the hybrids are hardly all gain and no pain. While they can shield you from market setbacks, he writes, their hefty fees and many restrictions dramatically dampen their growth potential.

Watch out for fees

In any retirement plan, fees are a major concern since they can cut into earnings. Since many retirement investments tend to be conservative in nature, there isn't a lot of growth there to start with.

Ideally, soon-to-be-retired consumers should be getting their financial advice from someone who is not trying to sell them an annuity, or any other type of investment for that matter. A retirement investment portfolio should be custom-tailored to the individual's needs and goals.

Over the last decade, with the stock market showing little long-term growth, some financial advisers and their clients have found income-producing securities to be an attractive way to build a retirement nest egg.

For example, investments in stocks or mutual funds that produce regular quarterly dividends provide a steady flow of cash. Over time, the value of the security might also rise, giving the investor two benefits -- income and growth. The stock price could also go down, but the dividends would continue in most cases.

Look for profitable companies

Not all stocks pay a dividend, but many do. Paying a dividend is one way a company returns a portion of its profits directly to its shareholders. So, before a company can pay a dividend, it needs to be profitable.

While banks are paying less than one percent on CDs, blue chip companies like Johnson & Johnson, Campbell Soup, General Mills, Chevron, and Kimberly Clark, pay dividends of three percent or more. Altria, Eli Lilly, Bristol-Myers Squibb, AT&T and Verizon, pay dividends of five percent or more.

A company may cut its dividend, so the income is not guaranteed. It requires the investor to follow the stocks in the investment portfolio closely. Still, the returns can be impressive.

If you invested $100,000 in a balanced, diversified portfolio of high-yield stocks that yielded on average six percent, your money would earn $6,000 a year in dividends, as long as the companies continued to pay those dividends. You would receive the dividends, usually paid quarterly, whether the price of the stock went up or down. If the stock value rose three percent per year, that's a combined nine percent annual return.

Master limited partnerships

For funds in a tax-deferred retirement account, you might ask your financial adviser about master limited partnerships (MLP) that have issued common stock. MLP dividends tend to be even higher because the companies are required by law to return more of their profits to shareholders.

It's not uncommon for an MLP to pay a dividend of eight or nine percent. While the tax reporting requirements can make them a nuisance for small investors, there are generally no tax reporting requirements if the shares are owned in a tax-deferred account.

Before making any investments, however, you should do research and consult with a qualified and objective financial adviser.