“Instead of trying to compare fixed indexed annuities to securities, just as mutual funds, it’s better to look at an annuity as an insurance product.” Jim Fish
During economic volatility and uncertainty, many turn to fixed indexed annuities (FIAs) for their safety and stability.
Unfortunately, the marketing created for these products has caused confusion about how they work and how best to use them in a comprehensive financial plan.
I believe that instead of comparing FIAs to mutual funds, you should consider them for what they are insurance products. By including a fixed indexed annuity in your retirement blueprint, you can achieve a reasonable measure of growth while protecting your principal investment.
What is a FIA?
A fixed indexed annuity is a contract providing retirees with lifetime income. When you purchase an annuity, your payments, while not directly correlated to the stock market, are computed using an underlying market index, such as the S&P 500 or the Nasdaq Composite. Using these indices to determine payments means that although you may gain when the market increases, you have protection against most losses. You probably won’t lose any of your initial funds. FIAs, when added to a correctly balanced portfolio, offer several advantages, including:
- There is a possibility of creating a stream of lifetime income that you won’t outlive. Having at least one source of lifetime income in addition to Social Security can help retirees have greater peace of mind. This additional retirement stream may make you more confident about taking more significant risks with the rest of your money. A more aggressive approach could increase yields and give you better cash flow when you retire, especially if you need to catch up with your savings. As a bonus, most modern annuities offer you a measure of liquidity in the form of penalty-free withdrawals up to 10%, which you can access in an emergency.
- FIAs can be bond replacement vehicles. Much research indicates that FIAs may outperform bonds, especially in low-interest rate environments.
- Annuities have tax advantages.
Interest accumulated inside a fixed annuity account is tax deferred. Your money isn’t taxed until you start taking payments. Also, by the time retirees start withdrawing from their FIAs, they may be in lower tax brackets.
- Potential inflation protection.
Long-term returns on fixed indexed annuities can be significantly higher than those of other accounts such as certificates of deposit. Because they are subject to an interest-rate floor, a fixed indexed annuity won’t earn less than the original investment.
- You can provide for long-term care needs. Annuity companies have refined and improved their products over the last twenty years.
Annuities now allow for greater customization and flexibility than ever before. Optional coverages, such as riders providing for long-term care (LTC), are now available. While not typically as extensive as stand-alone long-term care insurance, an annuity with an LTC rider may benefit seniors who don’t meet underwriting requirements for regular LTC insurance or can’t afford it.
Fixed indexed annuities, then, are not competing with other market-correlated assets. Instead, their purpose is to smooth out your retirement portfolio so that you have less of your wealth exposed to risk. A FIA is a solid choice for anyone who wants to avoid losing their principal investment, needs an income for life, or wants to provide coverage for potential long-term care needs. However, if you wish to add an annuity, you should always consult an experienced safe money and retirement income specialist. You want to ensure you understand both this vehicle’s benefits and potential downsides.
Advisory services are offered through Aegis Wealth Management, Inc. The firm is registered as an investment advisor with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the advisor has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or tax advice. Pier Financial Group and Aegis Wealth Management, Inc. are not affiliated. Annuity and life insurance guarantees are subject to the claims-paying ability of the issuing insurance company. Insurance products are subject to fees and additional expenses. All investment and insurance strategies have the potential for profit or loss. 1022JF