Annuities aren't for everyone, but for retirees considering how to make shrinking portfolios last, they're worth keeping in mind. Fixed annuities are contracts issued by insurance companies that provide regular payments until the end of the holder's life. They offer some of the best security against ups and downs in investment returns at a time when you'll be spending your hard-won gains in retirement. A bonus: The payments you receive from putting a lump sum in an annuity can actually be higher than investing the same amount in a 30-year bond. Swedroe says a 60-year-old male taking out an immediate annuity will see a payout 20 percent higher than a 30-year treasury bond would produce, and if he lives past 90, the payments continue.
The obvious drawback to annuities is that if you die early, you generally lose the asset. But the peace of mind that comes with guaranteed income may make it worth taking that risk. "We insure so many things in our lives, but few people think about hedging longevity risk because they don't think of it as a risk," Swedroe says. "But you have the risk of outliving your money. It's the only way to hedge that."
Offered through retirement accounts, including IRAs, stable-value funds are a conservative answer for investors looking for just a bit more return than the usual money market fund provides. Stable-value funds are essentially agreements between an issuer and an insurer who agree to keep the fund's value stable. ( Here is a more detailed explanation). Volatility and risk are generally low for stable value. Stable-value funds invest in longer-dated bonds (typically one to three years) with higher yields than those of traditional money market funds, which hold short-dated treasuries. A 20-year study by the Stable Value Investment Association showed that such funds outperformed 30-day treasury bills by 3.2 percentage points a year, with only slightly higher risk.
However, stable-value funds aren't as transparent as money market funds (for instance, they can take credit risk or make other bets on riskier bonds), so investing in a highly rated fund is a must. "They're a nice enhancement for people who need a little more yield," Swedroe says.
One caution: Stable-value funds tend to do well when interest rates are dropping. That's great when short-term rates are falling, as they have been during this recession, but the funds could be less attractive when interest rates edge up from their currently low levels.
Corrected on 12/12/08: An earlier version of this article implied an inverse correlation between commodity prices and returns on equities and bonds. The correlation is negative.