If you’ve ever owned or seen a Swiss army knife, then you know that it can solve a number of needs, with a wide variety of different tools all wrapped up into just one single device. This is a similar concept with fixed indexed annuities, or FIAs.
That’s because FIAs offer the opportunity for a nice rate of return, as well as protection of both principal and prior gains – regardless of what happens in the stock market or the economy. You can also opt to receive income from a fixed indexed annuity in retirement – and it can last for the remainder of your life, no matter how long that may be. This, in turn, can help to alleviate the fear of running out of money at a time when it is needed the most.
But is a fixed indexed annuity really all it’s cracked up to be?
Risks that Fixed Indexed Annuities Can Reduce or Eliminate
A volatile stock market can be one of the worst nightmares that a pre-retiree or retiree faces. After a lifetime of saving and investing, it can only take one stock market correction for the value of your portfolio to be decimated.
But with a fixed indexed annuity, this type of risk can be reduced – or possibly even eliminated. That is because no matter how badly the underlying index(es) performs, principal will be protected.
Therefore, without having to worry about getting your account value back to even, gains can continue to compound upon previous gains once the underlying index(es) turn around and perform in the positive again.
The Bigger the Loss, the More It Takes to Get Back to Even
|Loss||Gain needed to get back to even:|
Another lesser-known risk that can also be alleviated with a fixed indexed annuity is sequence (or order) of returns. In this case, any time there is a negative return generated, it can impact the time frame before a portfolio becomes depleted. Therefore, because there are no negative returns calculated on a fixed indexed annuity, sequence of returns risk isn’t a concern.
Sequence of Returns
|Year 1||Year 2||Year 3||Ave. Return||Years Until Depleted|
Source: Government Accountability Office, June 2011.
The performance of assets can also be critical when a portfolio drawdown strategy is being used for generating retirement income. In this case, a retiree may withdraw a certain percentage of the portfolio’s total value, and leave the rest of the funds in the account to (hopefully) grow and regenerate what was withdrawn. But if the stock market performs poorly and/or interest rates are too low to return the portfolio to its original value, it will eventually run out of money.
With a fixed indexed annuity, income can be set up to last for a pre-determined time period, or even for the remainder of your life. Because of this, you can count on a certain dollar amount of cash flow that arrives on a regular basis – without concern that you’ll run out of money at any time during your retirement.
Is a Fixed Indexed Annuity Right for You?
While there are numerous benefits offered through fixed indexed annuities, these financial vehicles might not be right for everyone. So, before you move forward and commit to purchasing one, it is recommended that you first discuss your pre-and post-retirement financial objectives with an annuity specialist.
If you still have questions regarding whether or not an FIA is appropriate for you, feel free to contact us and chat with an annuity specialist. At Annuity Gator, our mission is to educate consumers and financial professionals on how annuities work, and why they may – or may not – be right for certain investors and retirees.
You can reach out to us via phone by calling (888) 440-2468 or by sending us an email through our secure online contact form. We look forward to answering any of the questions that you may have so that you know whether or not a fixed indexed annuity is right for you.