if not, what would be a better idea for a 58 year old couple with little to no debt, steady income who wish to retire within the next 10 years?
Hi Hugh, Congrats on investigating some ideas through a portal like Brightscope. You will get a number of thoughts and opinions and I am pleased to share mine. An equity linked CD is a rather complex product sold by brokerage firms. My first question is that you should understand exactly what is being offered to you in terms of costs, surrender charges, and worst case scenarios. Right now, a 5 year plain vanilla CD is paying under 1 % nationally so there are many products that seek to provide safety with a fair degree of return. Many are so confusing that it is hard to unbunble the product and understand how it is designed. An equity linked CD is a product created to offer upside capped at a certain percentage with probably very little principal risk if things don't go well. The problem is likely liquidity in that your money is locked up and that if returns are bad in the equity market, even though you get our funds back, you've given up a ton of possible purchasing power due to rising prices (inflation). In my 15 years in this business I have yet to find an equity linked product (a CD or annuity) that really fits ideally into what I believe is in the best interest of a client. However, your circumstances might be different or I could be missing some new and improved product but in any event I think you probably could seek out better options. Check with a local independent RIA in your region and see if they agree with me.
I agree with Ryan, Hugh. And you are not alone in your search for "safety" with some potential upside. Nowhere has the old adage been more true, "There is no such thing as a free lunch."
In searching for safety with no downside, people (almost) always give up the potential for real growth in excess of inflation. More often than not, what I am calling a "free lunch" product (like equity-linked CD's or equity-indexed annuities) ends up losing purchasing power (as Ryan mentioned) and severely limits access to the funds for some time period, also known as liquidity.
Having said that, volatility is the "cost" we bear for returns that exceed inflation. This is the relationship between risk and reward: I can't have one without the other. The best I can do is find out what the science of finance knows about which risks are worth taking (and which are not.) Good luck!
The problem with equity-linked CDs is that they are another synthetic product created by brokerage firms to be sold on a commission basis. The products are very complex, the imbedded commissions are very high, and the liquidity before maturity is virtually non-existent. Generally, the sales pitch is that you have the safety of a CD wrapper (FDIC insurance), the guarantee of at last getting your money back at the end of term, and the promise of some percentage sharing of the upside of the linked market.
What you have to realize is that the underwriting brokerage firm is taking ZERO risk in these products. They have enough built in profits to pay not only the high commission to the salesman, but also a locked-in high profit margin for the structured products desk. In essence, you are sharing a big percentage of your investment with the brokerage firm...and they make this money even if you earn nothing.
Additionally, you will most likely have to pay tax on this investment throughout the life of ownership, which is another expense.
Read the prospectus. If you can't understand it, maybe you shouldn't buy it. Below is a link to FINRA, the brokerage industry regulatory body, which has a good write-up on structured products for your review.