Fixed Indexed Annuities: Good, Bad or Ugly?

Piggy Bank 1My Comments: In many circles, a FIA, or fixed index annuity, is an evil thing. As a professional retirement income planner, I believe they can be a lifesaver for many people.

That billions of dollars flow into FIAs annually tells me nothing; we have less than sophisticated buyers being sold stuff by self-serving salesmen just like the used car business. But the right contract sold to a knowledgable buyer can satisfy many needs, among them the absence of fear about having enough money as you get older.

Very little in life carries no risk and FIAs have their share. The trick is to help clients properly articulate their fears and then find the best contract to mitigate those fears. They can be a key ingredient with respect to Medicaid qualification planning.

By NewsbrkChi , September 11, 2015

Facing longer life expectancies and fewer traditional employer pensions, today’s Baby Boomers are looking for low risk, guaranteed income opportunities to see them through retirement. The pension-like income of a fixed indexed annuity (FIA) has made it an attractive means to an end in the world of retirement planning. Part of the FIA’s rise in popularity can be attributed to its ability to provide a lifetime income source for anyone, including the millions of Americans entering retirement without the benefit of a pension.

Driving the appeal is the FIA’s ability to generate returns well above historically safe investment products, such as corporate bonds, while delivering 100 percent principal protection. For the fixed income set whose number one concern is securing an income stream that they won’t outlive, the FIA has become a favorite addition to retirement portfolios, especially when compared to the low rates of return on CDs, and high risks associated with bonds.

Annuities are confusing to many investors, especially retirees who may have been warned away from them for years. Generally, the performance of an annuity is based upon a major index or indices—most often a stock index, like the S&P 500. Unlike investing directly in the equity markets, however, the fixed indexed annuity product itself provides principal protection in exchange for limitations on the investor’s potential for investment gains.

According to Coral Gables, Florida-based investment advisor Michael Ladin, the increase in FIA popularity reflects the mood of today’s retirees.

“Ninety-percent of the fixed indexed annuities available aren’t going to work, but 10 percent of them work really well for retirement planning to create that pension-like income,” he says. “As fewer employer-funded pensions are available to retirees, more Baby Boomers are looking for additional sources of guaranteed income, and FIAs are a great option in the current financial environment.

“For many retirees, the best approach is to carve off the smallest piece of a portfolio necessary to purchase an annuity and create the income source needed to protect one’s lifestyle, and then distribute the balance into the market to hedge inflation and potentially earn higher returns.”

Ladin says that, for the greatest security, retirees should have enough guaranteed income to cover their expenses for the type of retirement they want to create. Many of today’s retirees find that Social Security, military retirement pay and even civilian pensions may not be enough to support their living expenses throughout their golden years, and withdrawing money from savings adds to concerns about running out of money during retirement.

“Folks need to know that at 59½, they have the opportunity to move their money from a 401k to an IRA, and then use a portion of that money to buy themselves a pension-like income via a fixed income annuity,” he says. “This way, they give themselves the guaranteed income stream they need to create the retirement of their dreams.”

A guaranteed income annuity can fill in the income gap by exchanging a portion of the retiree’s savings for a guaranteed fixed monthly income to last for the rest of their lives and/or the life of their spouse. At a time when life expectancies are longer than ever before, securing a guaranteed income stream has never been more pressing.

With an FIA, regardless of what happens in the market, retirees know they have enough to maintain their lifestyle.

Pre-retirees who are facing a future that does not include an employer-generated retirement fund are looking at annuities as a way to purchase their own personal pension, one that can be structured to fit their specific needs. A fixed income annuity allows retirees to pre-determine the amount of guaranteed, pension-like income they receive and how often they receive it. Monthly, quarterly or annual income options can be established upon purchasing an annuity.

Individuals select their annuity according to how much income they expect to need each month during retirement. An experienced advisor can help determine how much to spend on an annuity that will help an individual achieve their retirement goals.