I’m sure you’ve heard about annuities. Some of them can be imagined as a “Swiss Army Knife” when it comes to retirement planning, a versatile companion that serves multiple purposes, much like the trusty Swiss Army Knife I’ve carried for years. In this post, I’ll describe a financial product tailored for your retirement journey. While it won’t cut paper or string, it could alleviate the financial challenges that often follow unprepared retirements.

Over my extensive career as a licensed insurance agent and financial advisor, I’ve encountered a wide spectrum of ideas, agents, and companies. Some excel in providing quality solutions aligned with my commitment to serving my clients’ best interests. Unfortunately, the media tends to spotlight the “bad apples,” perpetuating the misconception that annuities are universally poor choices. In my perspective, this is a misleading narrative.

For decades, I’ve adhered to the fiduciary standard, where my foremost duty is to benefit my clients. While earning compensation is important, the primary motivation in any transaction is my moral, ethical, and sometimes legal responsibility to act in my clients’ best interests.

Understanding Fixed Index Annuities (FIAs)

A few years ago, a financial product emerged—the Fixed Index Annuity, or FIA. To comprehend where it fits within the annuity landscape, let’s briefly outline annuity categories: (1) immediate annuities and (2) deferred annuities.

An immediate annuity transforms a lump sum into guaranteed payments, typically involving an insurance company. Deferred annuities, on the other hand, insure risks related to life expectancy. Within deferred annuities, we have fixed and variable sub-categories, but I’ll focus solely on the fixed category today, as I find deferred variable annuities less beneficial for retirement planning.

So, what is a Fixed Index Annuity (FIA)? It’s a deferred annuity, not an immediate one, designed primarily to accumulate funds for retirement. It may accept either a lump sum or incremental deposits. The term “index” refers to the method used to calculate growth, allowing investors to select from various indices. The “fixed” aspect assures that the investor’s principal is guaranteed by the issuing insurance company, unlike variable annuities with no principal guarantees. You can opt for a guaranteed interest rate or choose index performance to boost your investment.

Each company offers different indices, making it challenging to pre-determine which are legitimate. The crediting methods also vary, impacting account value based on index performance over specific periods. FIAs safeguard your principal, creating a financial floor during each crediting milestone.

In summary, a Fixed Index Annuity is a tax-deferred, long-term savings contract with principal protection. This “long-term savings” applies both before and during retirement, given today’s extended post-retirement lifespans.

The market offers numerous FIA variations, complicating decision-making, even for experts. Finding an agent aligned with reputable companies can enhance your chances of a positive outcome.

Five Reasons for the Swiss Army Knife Analogy

Safety of Principal: Unlike typical brokerage accounts, which are subject to market volatility, FIAs provide a safety net. All legitimate insurance companies offering deferred annuities meet legal reserve requirements, ensuring your account’s value won’t fall below your initial investment.

Income: FIAs offer a means to secure retirement income without relinquishing control of your funds. You can convert it into an immediate annuity if necessary, but that decision irrevocably alters your income stream.

Tax-Deferred Growth: As your funds grow within a deferred annuity, the IRS defers taxing your account’s annual growth until you withdraw income to cover expenses.

Growth Potential: The multitude of companies and indices make informed decisions complex. Identifying skilled agents connected to reputable companies improves your odds of success.

Long-Term Care Riders: Long-term care is a growing concern in retirement. Some insurance companies offer optional LTC riders, enabling tax-free fund withdrawals for LTC expenses, a valuable benefit that addresses a significant financial risk.

Understanding Costs and the Surrender Charge

Both insurance companies and agents receive compensation in a free-market economy. Most FIAs have a surrender charge, which is a percentage of your investment gain or fees related to riders like LTC. Removing too much of your account value during the surrender period incurs this charge, which diminishes over time. This charge offsets the absence of upfront fees or commissions on the entirety of your investment.

Income Allocation: A New Approach

Income allocation, akin to asset allocation, spreads investment assets across various sources to minimize the impact of market crashes on your monthly income.

Final Thoughts

Planning for retirement can be overwhelming amidst the noise of information. If you struggle to discern useful insights, consider seeking assistance from a trusted expert or enhancing your financial literacy. I have the tools to aid you in both endeavors.

In conclusion, a well-structured FIA can serve as a valuable tool to balance your retirement income and secure your financial future, whether you’re already retired or preparing for it. Achieving a successful retirement, however you define it, often necessitates a strong return on investment to avoid financial hardships in later years.

Tony Kendzior, CLU, ChFC