A Safe Retirement

A Safe Retirement

March 07, 2018

How do you create a safe retirement and still participate in the growth of the market? It may sound too good to be true but it's not! You have to have an open mind and consider something that you may have a bias against because of misinformation.

If you’re like most investors you’ve worked hard to build up your 401k, IRA or a non-qualified account using stocks, or mutual funds so why not consider locking in some of your gains? You might be reluctant because you still want to participate in a market rise which is understandable and this why you should consider a Fixed Indexed Annuity (FIA).

There are many variations of FIA’s available on the market offered through various insurance companies. So let’s discuss some of the benefits of why you should consider an FIA.

An FIA is an insurance contract where the insurance company assumes the risk unlike a Variable Annuity (VA) where you assume the risk. This type of annuity links you to an index like the S&P 500 without the risk on the downside while locking in gains usually on an annual basis with very little fees or in some cases no fees at all.    

You may have heard or been told that if you go into an FIA that you will be capped at a very low rate on the upside since many FIA’s have cap rates. A cap rate does limit how much your contract can gain on the upside either monthly or annually since the insurance company is protecting you on the downside but there are many other options.

For example, many FIA’s have a spread with a participation rate as an option. If you have a 100% participation rate with a 1.5% spread this means you get 100% of what the index does minus the spread. Some FIA’s have a 150-160% (depending on age)  participation rate with a 1% spread with no risk of the principal. We had many clients in 2017 that used this strategy and earned up to 14.33% on their contract with no risk to their principal.

Sure the market did well last year but let's say the market was down for the year and you were in mutual funds. You could be down the same 14.33% whereas with the FIA you would have no loss or gain. You just don't participate in a bad year only good years.    

An FIA can be a good way to protect your retirement but at the same time keep pace with inflation. It can also be used to create a guaranteed income stream like a pension or just a death benefit for your loved ones.

You may have also heard that all FIA’s have very long surrender periods. The surrender periods can be as low as 5 years and if you’re purchasing the annuity for a lifetime income benefit or just the death benefit then the surrender period becomes less relevant.   

You may have also heard that you don’t have access you’re your funds during the surrender period. Most FIA’s allow you to access up to 10% annually on the contract value free while you’re in the surrender period and if you went over the annual free withdraw amount then you would be subject to a surrender fee for that amount.

So why expose yourself to unnecessary risk when there is a better way?