Have you called someone a “good-for-nothing” and thought you were being derogatory?
With hybrid annuities, being good for nothing in the bad years is actually one of the best features! There is a phrase in the hybrid annuity world, “zero is your hero”, and it is derived from the feature of fixed index annuities which allows you to participate in the upside of a stock market index without suffering any losses due to…[continued below video]
Video: Watch as Annuity Guys, Dick and Eric, look at the power of zero for retirement security.
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.
[continued]…poor stock performance or even serious losses. For example; many hybrid style annuities are linked to the performance of the S&P 500 and when the S&P 500 was down over 38% in 2008, those indexed annuity holders were credited with a 0. Which would you have rather had, a loss in your $500,000 portfolio of $190,000 or simply zero gains and your $500,000 stays intact during that same time period? In 2008, you were most likely bragging about your zero – if you were that fortunate.
The next question when trying to determine if a hybrid or fixed index annuity might be right for you is what are you willing to give up in exchange for never having any losses due to market downturns? Would you accept a limitation on your growth potential? The answer for many retirees has been a resounding YES. The research shows that retirees who can avoid significant losses to their portfolio in the first 5 to 10 years of retirement have a great chance of never running out of money. The reason is simple math. For example, a couple with a $500,000 portfolio who can comfortably withdraw $20,000 out annually to meet their income need only needs a 4% annual average gain to maintain their principal balance and lifestyle without fear of running out of money. However, what happens if the market corrects and they lose 30% of their portfolio ($150,000) and they now have $350,000? Do they keep withdrawing the $20,000? Hoping and waiting for a market rebound – considering that they will need a market rebound of about 43% – if your portfolio has a loss, it takes an even greater return to overcome the loss to get you back to where you started.
Hybrid annuities help retirees take the risk of stock market loss off the table and smooths out the volatility of the markets. Fixed Index Annuities can offer solid growth allowing retirees to capture a portion of the market upside while insulated from market corrections. Are you are ready for “zero” to be your “hero” for a foundational portion of your portfolio?
Here is a similar article by Anton Hendler at Annuity123.
Pros and Cons of Fixed Index Annuities
“Beauty is in the eye of the beholder”, so the saying goes. So it is that with an article of this nature, it depends on who is writing it and that persons perspective as no two people will share the same opinion. So let us nail our colors firmly to the mast, so to speak, and share with you that we promote Fixed Index Annuities (FIAs) to our clients and are firm believers in their place in any Retirement strategy.
Now that we have our ‘disclaimer’ out of the way, let’s turn to the subject at hand. We will not even attempt to provide a comprehensive list here of all the pros and cons (in no particular order) but will merely touch on what we believe to be the major points and, again, these may differ from another person’s view.
Pros of Fixed Index Annuities
- The power of annual reset. What this means is that every year on the anniversary of the policy, any gains in the market (based on the strategy which you have chosen and an index such as the S&P 500) will be credited to your policy and then ‘locked in’. So if the market goes down in the next year, not only will your value not go down (you will stay level) but the gains made in the previous year that were locked in are yours as well. This can be compared to a ratchet on a jack for your car. As you move forward (up) you are protected from slipping backwards (down) by the ratchet (click here to learn more about annual reset).
- No downside risk. Following on from the first bullet, it follows that whilst you share in a portion of market gains (and these are locked in every year) you do not share in market losses. If the market goes down in any year, your prior year ‘locked-in’ value will stay level. That is, it will not go down or up, but will remain at the prior year’s value.
- Sharing in the market upside. What one has to remember with FIAs is that you are not invested directly into the market. As such, you do not get the full amount of any increase in the market, but share in the growth in any year. Your growth is limited by devices such as participation rates and caps so if the market goes up by 8% and you have a 100% Participation rate with a 5% cap, then you will get 5% growth in that year. Funds are not invested by the insurance company directly in the market, but they buy options in the market. If the market goes up then the insurance company exercises those options and pays you your percentage of the increase. If the market goes down then the insurance company essentially ‘burns’ the options and you get nothing.
- The power of zero. Getting a return of zero in a down year sounds, at first, like a con but it is a very significant pro. Take the example of a market that goes down by 20% in year one. In year two, you will need it to go up by 25% just to get back to where you were. So the power of staying level in that down year suddenly looks very compelling compared to taking a ‘hit’ and having to climb your way back up to where you were before you can start to show gains in your principal again. [Read more at Annuity123]