As your clients near retirement and their investing timeframe shortens, they become especially vulnerable to market volatility risk. There is less time for portfolios to recover from sudden and drastic market downturns that can severely disrupt their carefully laid retirement plans, which makes preservation of principal more important.
A fixed index annuity (FIA) may be a good choice in this situation. An FIA ensures that principal is protected from loss and the contract value never declines due to market downturns.* What sets FIAs apart from other fixed annuities is the opportunity to earn tax-deferred interest based on the performance of a market index, such as the S&P 500 Index.
Here are five reasons to consider fixed index annuities for your clients’ portfolios.
Protection from sequence of returns risk
This is the risk of negative market returns occurring either late in a client’s working years or early in their retirement, especially as they begin to draw income from their portfolio. The order and timing of negative investment returns can have a big impact on how long a retirement portfolio lasts and a client’s lifetime income strategy.
Sequence of returns risk may be especially high over the next year or two due to the presidential election. According to data compiled by T. Rowe Price1, since 1927 stock market returns (as measured by the S&P 500) have generally been higher in the year leading up to presidential elections than in non-election years. However, returns have been meaningfully lower over the following 1-, 6- and 12-month periods. This year is a great time to help clients take potential 2025 market volatility off the table for a portion of their retirement assets.
Upside potential with downside protection
FIAs offer full protection of principal along with growth potential. Because FIAs are insurance contracts and money is not invested directly in the market, there’s no risk of principal loss due to a market decline. Rather, interest is credited based on the performance of a chosen market index, such as the S&P500. For example, a contract might guarantee a “cap” of up to a 10% index return. So if the index returns 15% annually, the annuity owner will be credited with 10% interest that contract year. If the index return is negative, the contract will credit 0%. While no interest is credited in a contract year when the index is negative, there is zero risk of loss.
In the current high interest rate environment, many FIAs feature interest crediting caps north of 10%. This is significantly higher than most savings and money market accounts and a much better potential hedge against increased inflation as well.
Helps remove the number one retirement fear: Outliving retirement savings
According to the 2024 Annual Retirement Study from Allianz Life Insurance Company2, two out of three Americans say they worry more about outliving their retirement savings than they do about dying!
An FIA with a lifetime income rider eliminates this worry because it provides a guaranteed lifetime income stream that cannot be outlived. In fact, one-third of respondents in the Allianz study said that one potential solution to this problem is putting a portion of their retirement savings into an investment product that provides lifetime income payments, such as a fixed index annuity.
An FIA is uniquely positioned as one of the few financial products that can take longevity risk off the table for retirees. Stocks, bonds, mutual funds, managed money, real estate and CDs, while all useful components of a portfolio, simply cannot offer contractually guaranteed income that lasts as long as you live.
Freedom to invest other assets more aggressively
It’s generally not recommended that clients place all their retirement assets in a fixed index annuity. One strategy is for retirees to use a fixed index annuity to generate enough monthly income to meet their basic living expenses, such as mortgage, utilities, insurance, groceries, etc. In effect, they are creating their own personal pension plan.
With this strategy, clients can invest other assets more aggressively if they choose since the assets in the FIA are protected from loss. This could allow clients to capture more growth, which could extend the life of their retirement portfolio.
Benefit from the power of annual reset
With a fixed index annuity, the interest credited each contract year is locked in for life and becomes part of the principal, a feature known as annual reset. As a result, this amount is fully protected from market volatility just like the principal that was originally invested in the annuity. Annual reset is also beneficial during years when the market index is down or flat since it protects principal and previously credited interest.
Give me a call at 404-364-2598 or shoot me an email here if you have questions about fixed index annuities or want to talk more about how they can play a role in your clients’ retirement planning strategies.
*Guarantees in annuities are backed solely by the financial strength and claims-paying ability of the issuing insurer.
1 https://www.troweprice.com/en/us/insights/how-do-us-elections-affect-stock-market-performance