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  • Writer's pictureRetirement and Annuity Advisor Jennifer Lang

Fixed Index Annuities The “Swiss Army Knife” Of Retirement Planning

As a licensed fiduciary for over 15 years and spending most of that time with retirees, I’ve heard the same desires and concerns repeatedly: They want a retirement product that will offer them safety, income, and growth.

My clients fear a repeat of 2000 or 2008, are concerned with how to pay for long-term care, and are very concerned about outliving their retirement assets. When I hear this, there is one financial product that comes to mind that can help address all of these concerns: a hybrid annuity, also known as a fixed index annuity.

A lot of people get scared when they hear the word annuity, but the truth is not all annuities are created equal. In fact, a fixed index annuity is like a Swiss army knife: It’s a flexible tool with multiple uses to help benefit your portfolio.

Here are five reasons the fixed index annuity is the “Swiss army knife” of retirement planning.

Safety of principal

The fixed index annuity is a vehicle where your principal is protected from the downside risk of the stock market. When the market declined in 2000 or 2008, hybrid annuity owners did not lose any principal due to the downturn, or any of the gains that were previously credited. This is possible because a consumer earns interest in this product by linking their contract to various external index options; however, because the money is never directly invested in the stock market, there is no direct market risk.


The retirement landscape has changed. Now that pensions are practically gone, individuals are having to create their own income stream, and that can be a scary thing.

Fixed index annuities are an efficient way to generate income. When Social Security benefits and/or pensions can’t provide enough income, this is one product that offers an optional guaranteed lifetime income stream by turning 401(k) or IRA dollars into an income stream you can’t outlive. Having a guaranteed income stream in retirement is what I call having a paycheck versus having a “playcheck.”

Growth potential

Unlike bonds, fixed index annuities can offer safer growth with potentially a better upside. You earn interest or grow your money inside of this vehicle by linking your annuity to various external index options, like the S&P 500, for example, without directly investing in the stock market. You are not buying stocks, bonds, or mutual funds. You’re simply linking your money to share in a portion of the gains of the external index you selected. Obviously, you don’t get all the upside since you aren’t fully invested in the stock market. If the market has a downturn, there are no losses because you are not in the stock market.

Different companies have various indexing options and crediting methods. When these products were first introduced almost 25 years ago, your money typically had to be linked to the one index option available (such as the S&P 500) and had a cap. Now, there are more index options available today, there are strategies that are not caped meaning there is not a ceiling on how much the client can gain. These options are called spreads and participation rates.

Roger Ibbotson, professor at Yale and one of the greatest minds in the financial world, states, “Annuities have for a long time deserved a place in retirement portfolios, and the evolution of the industry has made these vehicles more flexible and attractive. Furthermore, FIAs have many attractive features as both an accumulation investment and as a potential source of income in retirement. In a simulation, the FIA performed better net of assumed fees than long-term government bonds.”

Long-term care riders

There are a handful of companies that offer optional long-term care riders inside a fixed index annuity. Typically with a long-term care rider, if you are receiving a lifetime income stream from the annuity and you meet the long-term care qualifications, whether it be in a facility or at home, you could be eligible to double your income payment for a portion of time.

For example, if you were getting an income stream of $5K a month from the annuity and you qualified for long-term care benefits through the rider, the insurance company can increase your income payment to $10K a month for five years. This is not a long-term care insurance policy but can offer additional financial protection by helping you cover a portion of long-term care costs.

I like two features of this rider: one, there is less stringent medical underwriting than traditional long-term care insurance; two, it can cover joint owners or husband and wife!

Tax-deferred growth  

Fixed index annuities offer 100% tax-deferred growth, meaning you aren’t taxed on the interest earnings while your money stays in the annuity. When you take withdrawals from the annuity or cash it out, the taxes you pay will generally be based on your ordinary income tax rate at the time of distribution. That is not the case for Roth IRAs, Roth 401(k), or 1035 exchanges; with these, there are no taxes due.

It's important to diversify your retirement portfolio past the standard bonds, stocks, and other traditional retirement vehicles; utilizing a fixed index annuity as a “Swiss army knife” in your portfolio could benefit you for your retirement years. Just like no one investment strategy works for everyone, it’s important that you discuss if a fixed index annuity could work for you with a seasoned financial professional.

Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees, and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.

Riders are available for an additional fee - some riders may not be available in all States.

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About the author:

Author: Adam Moeller

Source: © 2020 Forbes Media LLC

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FINRA Compliance Reviewed by Red Oak: 1201393

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