It's been a roller-coaster ride this year if you've been in the stock market. The DOW closed today down 507.53 points down 4.56% for the year and the S&P 500 was down 54.01 points down 4.78% for the year. There are solutions to managing risk when it comes to your retirement savings by shifting the risk away from you to an insurance company that is willing to accept that risk. You can still participate in a market rise but never a market decline.
There are many indexes that have been specifically designed for low volatility and constancy for insurance companies to link the performance of a fixed indexed annuity contract to. You're not actually in the index since you're in an insurance contract between you and the insurance company and the insurance company assumes all of the risk. Let’s assume we're only focused on accumulation or growth with no risk to the principal. A focus on income would be another subject. Let’s take a look a few examples on index options available in a fixed index annuity (FIA).
- Using the S&P 500 Dividend Aristocrats Daily Risk Control 5% Index with a 175% participation rate (PR). This means you get 175%% of what the index does with no risk to your principal. So, if there is a 10% gain locked in they add 17.5% to your contract value. This strategy locks in gains every other year. Other index options available lock-in annually. When running illustrations using this option the contract value more than doubled over a 10 year period with no risk (or fees) to the principal the whole time. You are allowed to withdraw up to 10% annually during the surrender period with no surrender fees if needed. This contract has a 10-year surrender period, but also comes in a 7-year version with a 115% PR and a 5-year surrender period with a 110% PR.
- Using the J.P. Morgan Mozaic II index with a 180% participation rate (PR) minus a 1% spread with no risk to your principal. This means that if there is a 10% gain locked in they add 18% minus the spread 1% = 17% net to your contract value. The spread is never taken from your contract value, only from the gain. This index is designed for consistency and lower volatility.
The gains on the contract value are automatically locked in every 3 years though you can manually lock in an index value one time during any three year period. When running illustrations using this option, the contract value more than doubled over a 10 year period with no risk (or fees) to the principal the whole time. You are allowed to withdraw up to 7% annually during the surrender period with no surrender fees, if needed. This contract has a 12-year surrender period but it also comes in a 9-year version with a 160% PR, and an 8-year version with a 125% PR that locks in every two years.
These are just a couple of examples of ways to reduce some of your risk exposure while still participating in a market rise. There are always pros and cons to any annuity contract and an adviser should always consider what is in the best interest of their client based on their objective.