These days, many retirees are very concerned about market volatility doing severe damage to their retirement nest-egg. There is no level of protection from market risk losses in a traditional account invested in the securities market.
So what can we do as financial professionals to help our clients eliminate this risk but still have the potential for substantial growth? We can help them “get to the point to point.”
There are products such as Fixed Indexed Annuities (FIA), which offer a point-to-point crediting strategy. Here’s how they work.
If you were to assume one of your clients started with a FIA on the date you’re reading this article, the company would look at your client’s account value at issue of the annuity, this would be their starting point.
With a point-to-point type of product, the annuity company measures at the beginning of the selected time period and at the end of the period. At that time, the company would compute any gain earned, if any.
There are only 2 things that can happen at the end of each reporting period. The index has increased in value, and your client gets a portion of the gains that the market index they selected (participation rate or cap rate), or they have not credited anything if the index is down.
The condition for accepting a participation rate below the actual return rate is the benefit of not being exposed to any market risk.
That’s it. Never any losses and only account increases when the index rises. With a point-to-point product, your clients will either get a portion of the gains at the end of every reporting period, or they will stay exactly where they were previously. These reporting periods happen every year (or two), and you can help your clients change their strategy at the end of each reporting period.
This is why so many retirees or soon-to-be retirees are choosing these point-to-point annuities. They can still have some exposure to account for growth but eliminate all the stress of market volatility associated with at-risk accounts.
One last “point” to make here. The hidden beauty of these products is what can happen after a significant market downturn. For example, let’s say we have another 2008-2009 on our hands, and some indexes lost half of their value. If your clients were in that index, they wouldn’t make any gains that year, but they also wouldn’t be exposed to market risk losses. But here’s the beauty of a point-to-point strategy. The reporting period would have just reset in 2009 and would look forward another year to 2010. When others are stressed at their market losses, your clients would have had no market risk exposure.
It’s that simple.
Consider utilizing these point-to-point strategies can help reduce market risk exposure. Both you and your clients will enjoy this level of planning, Point to Point!
