Fixed Index Annuity [FIA] – Advantages & Disadvantages
There are no perfect investments, annuities or retirement strategies that solve every contingency. It is more likely that a combination of investment strategies and financial vehicles will ultimately give you the balanced retirement plan that you are looking for. A Fixed index annuity also known as a hybrid annuity offers several advantages that may suggest a foundational position in your retirement portfolio; however, FIAs are not without their disadvantages.
Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
As with all investments, there are pros and cons to be aware of and take into consideration. These characteristics for some individuals may be a true disadvantage, and for other individuals they may offer a needed advantage with no negative impact based on one’s retirement planning objectives.
Video Summary of The Top Five Fixed Index Annuity Lies!
- Fixed index annuities earn market returns with no downside – mostly a Lie. They do, in fact, have no downside risk. However, hybrid and fixed index annuities are designed to capture a portion of the market upside while protecting the principal from loss due to poor market performance, but they do not capture all the market returns.
- Uncapped index strategies offer unlimited upside potential with no downside – mostly a Lie. By it’s definition, uncapped should be unlimited but in this case the uncapped index has other limiting factors. Uncapped indexes typically have some other “braking” mechanism that is designed to hedge against loss – whether it be a volatility control feature that automatically moves to a fixed income option or cash when the volatility formula is triggered. It may also have a spread “fee” or other feature that limits the potential growth.
- This annuity has a 7 percent floor or a minimum 7 percent **guarantee – a complete lie! This is the biggest misconception among annuity consumers/researchers that have been “pitched” an annuity. Unfortunately, the seven percent growth **guarantee is not on your money – surprise? The seven percent **guarantee is on the formulaic value used to calculate your future income. Does it have value – Yes. Does it **guarantee a future income amount – Yes. Can you walk away with a lump sum of money in the seven percent **guarantee account – No.
- This variable annuity# cannot lose money – a complete lie. This often comes from the rider feature available on variable annuities# similar to the “lie” mentioned in number four. While variable annuities# can have **guarantees, they do not protect your cash account value.
- The Guaranty Association is the same as the Federal Deposit Insurance Corporation (FDIC) – a complete lie. The FDIC has the backing of the Federal Government and its credit standing is considered to be the highest possible (I know for some that is debatable) and it is superior to the backing provided by the Guaranty Association which is tied to each individual state’s department of insurance guidelines. Each state has their own coverage limits and different rules and regulations regarding accounts and ownership.
Fixed Index Annuity Disadvantages:
- 10% IRS penalty on withdrawals prior to 59 1/2 years of age
- Early withdrawal penalties or surrender charges for large withdrawals prior to maturity or when withdrawing in excess of the 10% annual surrender-free portion
- Ordinary income tax owed on earnings during the withdrawal or income payout stage
- LIFO: Last in first out tax requirement so earnings are taxed first, unless annuitization takes place, which then uses a tax exclusion ratio
- Fixed index annuities are not FDIC insured
- Fixed index annuities do not capture the full upside of the stock market
- Caps, participation, spreads and declared fixed interest rates are all subject to change on an annual basis
- It is possible during a down year or years to have zero-interest crediting
Fixed Index Annuity Benefits
- Safety: Backed by highly rated, state regulated insurance companies
- Tax Deferral: Tax-deferred growth
- Participation in a portion of stock market gains with of loss
- Higher Return: Better interest rates typically than CDs, money markets and bonds
- Life Insurance: Death payout **guarantee options
- Liquidity: Flexible withdrawal privileges
- Unlimited Contributions, unlike IRAs and 401(k)s
- Inheritance: Pass money directly to heirs bypassing probate
- Lifetime Option: Income you can’t outlive (Annuitization or a Living Benefit Rider)
Fixed Annuity with Indexing Options
[FIA, Fixed Index Annuity]
- Lump-sum or periodic contributions
- Invested in mostly high quality A-AAA bonds
- Annual interest crediting risk. Insurance company **guarantees principal.
- Higher rate potential based on index performance (such as S&P 500, Dow Jones, NASDAQ, etc.)
- Moderate growth
- 4% to 8% interest crediting potential; varies with index performance
- 3- to 14-year term
- Sophisticated, greater potential
- Guaranteed retirement income options
- Annual fees, minimal to none
Question: If the S&P 500 index coming off of a a 40% loss year goes up 20% but never gets back in that year to the 40% it lost in the prior year, and you have a 5% spread with 100% participation on an annual point-to-point strategy, how much interest would be credited to your fixed index annuity?
Answer: 15%. Reasons: You never have to get back to what the market lost initially. With an annual reset the new low point is where you reset on your contract anniversary date for new index gains. The insurer would deduct the 5% spread from 20% gain and credit your account with 15% for the year. If there were no earnings, the insurer would not charge the spread; it is only used against gains.
Using OutCome Based Planning™ for Your Retirement
We practice and recommend a "Holistic - OutCome Based Planning™ process when considering annuities." This approach has the effect of balancing your overall portfolio so you can meet your retirement objectives by "first identifying the least amount of your investments or savings (if any) that should be considered for annuities." OutCome Based Planning™ analyzes and models multiple outcomes so you can clearly identify your best income and growth opportunities.
"The Annuity Guys will only call if you request help". Hence, when you are ready for specialized help we will be available."Working with an Experienced Fiduciary Financial Planner can help you Avoid a Trial & Error or Risk Based Retirement"
This type of approach does take considerably more time, effort and analysis which will show you mathematically the successful possibilities by comparing various outcomes rather than trying to sell or convince you of that "so-called one best solution." Clients frequently tell us that this process removes some of the confusion and emotion to help them objectively identify a better retirement plan; rather than just ending up with the most convincing salesperson or advisor.
When requesting help you can be assured of working with an experienced Annuity Guys' Retirement Planner who is independently insurance licensed and securities licensed as a fiduciary financial planner having access to the vast majority of annuity companies in helping you choose the best annuities using a holistic-outcome based planning approach. We consider the high quality advisor recommendations we make to our website visitors as a direct reflection back on our commitment to serve all client's with a high standard of excellence in financial planning for retirement.
Based on survey feedback on advisors from our website visitors, we eliminated about two-hundred local advisors and now only recommend a few that we consider experienced vetted Annuity Guys' Fiduciary Advisors. Many local advisors continue requesting us to recommend them as a vetted advisor. However, our reputation and future business is driven only by satisfied website visitors. So, unfortunately we've had to tell the vast majority of local advisors no, since we changed our business model four years ago. At that time we stopped trying to satisfy everyone with local advisors, we now primarily work with individuals who are comfortable using today's internet technology to their fullest advantage by working with a select group of vetted, experienced and knowledgeable Annuity Guys' Fiduciary Planners.
Selecting the Best Annuity & Retirement Income Advisor
Are you willing to work with one of our retirement and annuity advisors based on their experience and expertise as a first priority rather than being limited by a local or regional area? The good news is that technology has forever eliminated our geographical limitations and leveled the playing field for everyone! As a result of today's technological advances, all of us can now work confidently with experts in any field including personal finance. We are no longer confined by regional or local boundaries limiting our choices and ultimate success. A high quality advisor is now as close as a click or phone call away.
"There is no room for trial and error when it comes to choosing MarketFree® Annuities or a Successful Retirement Planner."
"There are no undo buttons in retirement so it is vitally important that you do it right the first time!"
We are fortunate to have a select few who we believe are truly the highest qualified advisors out of about two hundred licensed insurance agents that we eliminated. Your survey feedback is what helps us make these tough decisions. Our advisors have an independent financial practice, specializing in annuities and retirement planning, which helps ensure that you are given the best options available for your retirement planning.
"It takes an experienced expert to know how to structure annuities for income, inflation, growth, return of principal, and tax advantage."
"Anyone can sell you an annuity; however, it takes a truly qualified and experienced advisor to know how to structure them for income, inflation, growth, return of principal, and tax advantage. Typically, there is not just one that can accomplish all of these objectives. It is how an advisor structures multiple annuities in balancing your total portfolio that makes it possible to achieve your most important retirement objectives."
Why Searching for the Best Annuities on Your Own Can be so Frustrating...Almost everyone nowadays turns to the internet for answers on everything - from buying new widgets to researching just about everything under the sun; and finding the best annuity is no exception!At first, it may seem that researching will be straightforward but the more time you spend researching them, the more frustrating it can be. Why is this? First of all, it does not take long to realize that gimmicks abound - such as warnings and alerts from salesmen who just want your attention so they can sell you one or the "too good to be true" claims of 8% to 14% **guaranteed interest and of course the claim that you can get the full market upside with no downside risk! If you have done any research you have heard all of these claims in advertising which are mostly half truths and not fully explained.So how can you find the best annuities on the internet? The truth is... you can't! And what is even more frustrating is all the conflicting points of view from so called experts. There are well over 6,000 different annuities - all designed for different reasons, so is it any wonder that the deck is stacked against the average researcher or do-it-yourselfer. Add to that the fact that they pay high enough commissions to attract a plethora of both good and bad agents. This does not make annuities good or bad; they are simply a financial tool that truly benefit those who use them correctly.How can you find the best annuities for your unique situation?
- Use the internet cautiously;
- Work with a vetted and experienced specialist;
- Do not settle for that one dubious best plan. Compare multiple Outcome Based Plans to decide on the one that is truly best for you;
- Be keenly aware of scare tactics and hyperbole - avoid those advisors and websites;
- Avoid websites that are focused on rushing free reports, rates and quotes to get your contact information they are rushing you to speak with them, instead, take your time and choose someone you are more comfortable with that works on your time-table;
- Know the Five Vital Factors (listed above) that an experienced specialist must answer before helping you select the best options for your situation;
- Watch this telling video "Avoid Annuity Gimmicks, Amateurs and Charlatans"...
** Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. Annuities are not FDIC insured and it is possible to lose money.
They are insurance products that require a premium to be paid for purchase.
Annuities do not accept or receive deposits and are not to be confused with bank issued financial instruments.
During all video segments, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
*Retirement Planning and annuity purchase assistance may be provided by Eric Judy or by referral to a recommended, experienced, Fiduciary Investment Advisor in helping our website visitors. Dick Van Dyke semi-retired from his Investment Advisory Practice in 2012 and now focuses on this website. He still maintains his insurance license in good standing and assists his current clients.
Our vetted and recommended Fiduciary Financial Planners are required to be properly licensed in assisting clients with their annuity and retirement planning needs. (Due diligence as a client is still always necessary when working with any advisor to check their current standing.)
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- MarketFree™ Annuity Definition: Any fixed annuity or portfolio of fixed annuities that protects principal / premium and growth by remaining market risk free.
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