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The 60/40 Portfolio is DEAD!

Long Live Life Insurance and Annuities!

Financial advisors need to adapt and stay ahead of the trends! There are so many traditional views of the “proper way” to retire that have worked for 40 to 50 years. Even as recent as 10 years ago, these strategies may have been successful. But do all of these strategies still ring true today? Traditionally, we have been told to accumulate wealth and manage risk by investing early and often into a 60/40 strategy. Let’s take a look at the 60/40 strategy and some alternatives that may be better suited in today’s environment.

People have understood the 60/40 strategy to mean that during the accumulation phase, you are supposed to invest 60% of your portfolio in stocks and 40% in bonds so that your market risk is minimized. Typically, every few years, you would go to your advisor and rebalance your portfolio. While this is better than not doing anything, I would argue that this is very far from being the optimal plan in retirement. For years, our parents and grandparents turned to bonds as the most secure way to minimize their market risk. Have you looked at the yields on bonds recently? Currently, the 30-year bond is yielding 2.55% and the 10-year bond is under 1.75%. Bond yields are at historical lows and aren’t poised to make a big move anytime soon (Don’t believe me? Read the Federal Reserve Chairman’s recent speech transcript: https://goo.gl/pbxEJB).

With bonds yielding 2% or less, the 60/40 strategy is no longer optimal. PLUS – if interest rates do increase, the bond values will plunge. So, there is really no upside potential at 2% and there is HUGE downside potential of 50% or more!

So, what is the solution?

If you or your clients are still in the accumulation phase

Use whole life, or another permanent life insurance policy as a BOND SUBSTITUTE. It pays more, about 4% (similar to a traditional bond rate) but has no interest rate risk. If interest rates go up, the value of the policy does not go down. This is a concept that even sophisticated investors can use. In addition, they get the protection of life insurance for their family. In this 1% interest rate environment, nearly everyone is underinsured. For younger generations, it’s vital to change the generic perception of whole life NOW so they are protected during their retirement. Once you can understand the benefits as a bond substitute, the value of protection, and the cash value benefits, then whole life is a no-brainer. Add in the tax-free income in retirement and the tax-free death benefit, you begin to see how powerful life insurance is as a tax diversification vehicle as well. Again, something that makes sense even to sophisticated investors!

If you are in the distribution phase

Replace the bonds with guaranteed lifetime income. With a fixed annuity, you get the security of an AAA bond, but the yield of a CCC bond with ZERO standard deviation. The payout rate returns that a lifetime income annuity provide DO NOT EXIST in the stock market. If you were to go out and try to duplicate this type of product in the stock market, it would not be possible. Why? It’s all about mortality/longevity credits. Add in the tax advantaged income due to the exclusion ratio (for non-qualified money) and a lifetime income annuity becomes a powerful alternative. In fact, these mortality/longevity credits are a new form of alpha that you cannot get from stocks, bonds or real estate. Again, even a sophisticated investor can grasp these concepts!

Look, retirement is all about managing your risks optimally. Optimal simply means the best more often than anything else and that it will never be the worst. “The definition of insanity is trying the same thing over and over and expecting a different result.” What are you and your clients doing differently to produce different and positive results?

Stay ahead of the trends and look outside the box for ways to optimally plan your clients’ retirement. June is the National Annuity Awareness Month so make sure you are alerting your clients of the un-rivaled benefits an annuity can provide.


Tom Hegna Tom Hegna, CLU, ChFC, CASL, is an author, speaker and economist and host of a popular public television show. As a former Fortune 100 senior executive, Tom has dedicated his entire career to helping retirees obtain a “happily ever after” retirement. He has been featured on FoxBusiness, American College Wealth Channel Magazine, Round the Table, Advisor Today and GAMA Magazine. Tom is also a retired U.S. Army Reserves Lieutenant Colonel. He currently lives in Arizona with his wife and children.

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