Investor Toolkit

Innovative approaches to protecting retiree portfolios

Key Points
  • Novel approaches include structured notes and no-load modified endowment contracts.
  • No-load modified endowment contracts provide certain minimum guarantees.
  • Reverse mortgage market has been "cleaned up," say financial advisors.

Once you've stopped working, what steps can be taken to protect your retirement portfolio? Financial advisors offered several innovative approaches.

Structured notes. "We have been utilizing structured notes since the financial crisis of 2008 as a 'portfolio repair and recovery' strategy and now as a 'hedging solution' for our clients' portfolios," said Thomas W. Balcom, certified financial planner and founder of 1650 Wealth Management.

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A structured note is a debt obligation that tracks both an underlying debt obligation and a derivative (option) embedded within it.

Balcom's firm works with major banks to develop notes designed to cap the upside and protect the downside from modest declines. By creating an in-house structured note, the firm is able to allocate assets to it for both high-net-worth and mass-affluent clients. He estimates that more than one third of his clients' portfolios are invested in this strategy.

The notes are generally from one to three years in duration, and the firm offers a series of laddered maturities.

One advantage of this strategy is that it is allowed within an individual retirement account, Balcom said. Downsides include credit risk of the issuers and the lack of dividend income.

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No-load modified endowment contracts. "I have been using [these] the last few years as an alternative to cash," said Keith Singer, CFP and founder of Singer Wealth Management. "Client funds are safe and liquid and average about 5 [percent] to 6 percent tax-deferred, with no interest-rate risk."

A modified endowment contract is a "tax qualification of a life insurance policy where the policy has been funded with more money than allowed under federal laws," according to

"Historically used as a wealth-transfer tool, this new liquid version, introduced about three years ago, may be used as a proxy to cash or bonds," said Singer. "It is usually owned by people interested in tax-favored growth and tax-free death benefit or long-term care benefit."

The product provides certain minimum guarantees, he said, netting investors between 1 percent and 1.5 percent if the market goes down. If the market is up, it yields a yearly range of returns tied to the .

Singer offered several disadvantages to consider. "You must qualify medically and it is somewhat arbitrary in that you don't know what your yield is until your one year enrollment anniversary," he said. "Every year, you start over.

"Deposits are subject to the credit risk of the insurer," Singer added.

Home-equity conversion mortgage (reverse mortgage). "They have really cleaned up this space to benefit the end consumer," said Rob O'Dell, a CFP with Coyle Financial Counsel. "Many fee-only financial planners are recommending this strategy to clients."

O'Dell said he believes a financial advisor is "remiss" if he or she does not address the issue with eligible clients: homeowners over age 62 with no-to-low current mortgage balance.

"Going lender direct, not through a broker, means very low closing costs," he said. "And clients are not pressured to withdraw money as with a traditional home equity line of credit or reverse mortgage."

We're taking a defensive growth approach called risk parity, using socially responsible products instead of gold and Treasurys.
Shane Yonston
principal advisor, Impact Investors

The HECM positions the portfolio for longevity, O'Dell said, by having the client tap the line of credit instead of assets when the market is down. In this way, assets are preserved and have the opportunity to keep growing through the years.

While the withdrawal from the HECM is tax-free, it does result in the client accruing debt and interest and HUD insurance premiums. These can be accrued or paid according to the client's financial and cash flow situation

Most importantly, O'Dell, said, "the HECM allows the borrowers to be in control of their loan and payment terms, not the lenders."

Alternative assets. "We're taking a defensive growth approach called risk parity, using socially responsible products instead of gold and Treasurys," said Shane Yonston, CFP and principal advisor with Impact Investors, which specializes in socially responsible investing.

The goal of this strategy is to spread risk evenly throughout the portfolio, which generally means placing a substantial proportion of the portfolio in treasury bonds and/or precious metals, he said.

In deference to clients who do not want to fund military spending or objectionable mining practices, and being mindful of the rising interest-rate risk to bonds, Yonston substitutes socially responsible non-correlated assets. Examples of these include:

  • Community impact notes, which fund microfinance loans in the United States and internationally.
  • Private placement in international trade finance loans and renewable-energy hard assets (i.e., wind or solar farms).
  • Build America Bonds, which fund U.S. infrastructure projects.
  • Individual municipal bonds, which support the socially responsible tenet of investing locally.

— By Deborah Nason, special to