Understanding Fixed Indexed Annuities: A Safe Harbor for Retirement Income

With market volatility increasing and bank interest rates remaining disappointingly low, many retirees are searching for reliable ways to generate retirement income without excessive risk.

Fixed indexed annuities are an increasingly popular solution, offering a blend of protection and growth potential.

What Is a Fixed Indexed Annuity?

A fixed indexed annuity is a way to save money for retirement that offers:

• Protection of your savings from stock market losses, while still giving you a chance to earn money when the market goes up
  
  
• The ability to grow your money based on how well the stock market does, but with a limit on how much you can earn in good years
  
  
• Your earnings aren’t taxed until you take the money out, and you can turn those earnings into a guaranteed paycheck that lasts the rest of your life
  
  
• Your original investment is protected – the insurance company promises you won’t lose the money you put in

In short, a fixed indexed annuity is a financial product that offers the opportunity to have your investment make money when the market goes up yet not lose money when it goes down. Think of it as combining the safety of a fixed annuity with the growth potential of market-linked investments.

Unlike being directly invested in the stock market, you’re protected from market downturns while still having the opportunity to benefit when markets rise.

Real-World Example: How It Works

Let’s look at a case study from B.O.S.S. Retirement Solutions:

Consider Tom and Sarah, both age 60, who have saved $500,000 for retirement. They need an additional $2,000 monthly income ($24,000 annually) to supplement their Social Security and small pension when they retire at 65.

Traditional options would require:

• $2.4 million in bank savings accounts/CDs (at 1% interest)
• $600,000 in stock market investments (using 4% withdrawal rule)

Instead, by placing just $317,080 in a fixed indexed annuity at age 60, they can guarantee $24,000 in income every year starting at age 65 – for life.

Key Benefits of Fixed Indexed Annuities

1.     Downside Protection

Your principal is protected from market losses. Even if the market drops 40%, your account value doesn’t decline.

2.     Growth Potential

While you won’t capture all market gains, you can benefit when markets rise, typically through a participation rate or cap rate.

3.     Guaranteed Income

Many fixed indexed annuities offer lifetime income riders that guarantee income you can’t outlive.

4.     Tax-Deferred Growth

Your earnings grow tax-deferred until withdrawal, potentially allowing for larger growth over time.

Understanding Common Annuity Riders – Extra Protection (at a Cost)

Think of riders like extra features you can add to your annuity for an extra cost – similar to adding options to a new car. While these riders do cost more, they can offer extra protection and peace of mind, oftentimes at a very reasonable cost.

Here are several of the most common riders offered with fixed indexed annuities:

Income Riders

• Guarantees a specific income amount for life, even if your account value drops to zero
• Often includes an annual increase (like 6-8%) during the years before you start taking income
• Example: A 60-year-old puts in $200,000 with a 7% income rider increase. By age 70, their income base could grow to $400,000, even if the market performs poorly

Enhanced Death Benefit Riders

• Guarantees your beneficiaries receive a minimum amount if you pass away
• May offer annual increases to the death benefit
• Some provide a higher payout if death occurs from an accident

Long-Term Care/Health Care Doublers

• Doubles your income payments if you need extended healthcare or qualify for long-term care
• Example: If you’re receiving $3,000 monthly income, this could increase to $6,000 during a health crisis if you have this rider
• Helps offset rising medical costs in retirement

Cost of Living Adjustment (COLA) Riders

• Increases your income payments each year to help fight inflation
• Usually offers 1-5% annual increases
• Example: A $2,000 monthly payment with 3% COLA would grow to $2,060 in year two, $2,122 in year three, and so on

Important Notes About Riders:

• Each rider typically comes with an annual fee (usually 0.5-1.5% of your account value)
• You can choose multiple riders, but fees will add up
• Not all insurance companies offer every type of rider
• Most riders must be added when you first buy the annuity and can’t be added later

At B.O.S.S. Retirement Solutions, we help you understand which riders make sense for your situation and whether the benefits outweigh the costs. We’ll show you exactly how much each rider costs and how it might benefit you in retirement.

The Power of Early Planning

Using our earlier example, if Tom and Sarah waited until age 65 to implement their annuity strategy, they’d need $425,532 to generate the same $24,000 annual income – over $100,000 more than starting at age 60.

This illustrates a crucial point: The earlier you plan, the less money you need to set aside to achieve your income goals.

Understanding Annuity Guarantees

It’s important to note that the claims-paying ability of the issuing insurance company backs all annuity guarantees. That’s why B.O.S.S. Retirement Solutions only works with highly-rated, financially strong insurance carriers.

Real-Life Application

Here’s another example from our client files (names changed for privacy):

Bill and Linda came to B.O.S.S. Retirement Solutions worried about market volatility. They had $800,000 in retirement savings but lost $160,000 in the first half of 2022 due to market declines.

They needed $36,000 annual retirement income beyond Social Security. By repositioning $475,000 into a fixed indexed annuity five years before retirement, they could:

• Guarantee their needed income
• Protect against further market losses
• Maintain $325,000 for other investments
• Sleep better at night knowing their basic expenses were covered

When Fixed Indexed Annuities Make Sense

You might consider a fixed indexed annuity if:

• You’re within 5-10 years of retirement
• You want protection from market losses
• You need guaranteed lifetime income
• You’re concerned about outliving your money
• You want tax-deferred growth potential

Common Concerns with Fixed Income Annuities

1.     “Aren’t annuities expensive?”

While some annuities can have high fees, fixed indexed annuities typically have no direct annual fees unless you add optional riders.

2.     “What about inflation?”

Many contracts offer increasing income options or cost-of-living adjustments to help address inflation concerns.

3.     “What if I need access to my money?”

Most contracts allow annual withdrawals of 10% without penalty, though larger early withdrawals may incur surrender charges.

The B.O.S.S. Retirement Solutions Approach

At B.O.S.S. Retirement Solutions, we believe fixed indexed annuities should be considered as part of a comprehensive retirement strategy, not a one-size-fits-all solution. We typically recommend:

• Having multiple income sources
• Maintaining some market exposure for growth
• Using annuities strategically for guaranteed income
• Implementing tax-efficient withdrawal strategies

Creating Your Income Plan

Here’s how we help clients implement fixed indexed annuities:

1.     Analyze Income Needs

We determine exactly how much guaranteed income you need beyond Social Security and pensions.

2.     Review Options

We examine various contracts and insurance carriers to find the best fit for your situation.

3.     Implementation Strategy

We help determine optimal timing and amount to maximize benefits while maintaining flexibility.

4.     Ongoing Review

We monitor your plan and make adjustments as needed through retirement.

A Key Note on Annuities

Everything you’ve read about in this article relates to fixed-indexed annuities. There are several different types of annuities available, and you cannot assume that the information we’ve told you about here applies to other annuities you can choose from and the cost of making a mistake can be quite high. We encourage you to talk with one of our advisors to be sure that you are making the best decision for you in your specific situation.

Taking Action

Understanding fixed indexed annuities is one thing – implementing them effectively is another. If you’ve saved at least $200,000 for retirement, you can get a free B.O.S.S. Retirement Solutions Income Analysis that will show you:

• How a fixed indexed annuity might fit your situation
• The amount needed to generate your desired income
• Various guarantee options available
• Integration with your other retirement assets

Don’t Wait to Secure Your Retirement Income

The difference between implementing an annuity strategy at age 60 versus 65 could cost you over $100,000. Don’t wait until market losses or low interest rates derail your retirement plans.

Call B.O.S.S. Retirement Solutions at 800-637-1031 or click here to get your free retirement income analysis. Learn how fixed indexed annuities might help secure your retirement future with guaranteed lifetime income.

Remember, all guarantees are backed by the claims-paying ability of the issuing insurance company. This article is for informational purposes only and should not be considered financial advice. Individual situations vary, and you should consult a qualified professional about your circumstances.