10 Reasons to Use a Fixed Index Annuity

How to Guarantee You Won’t Outlive Your Nest Egg

The following content is excerpted from our book, Momma’s Secret Recipe for Retirement Success,” by Dan Ahmad, Jim Files, and Jack Canfield, with contributions from multiple financial advisors across the US.

Most of our clients share a common fear: running out of money in retirement. We tell them that there are at least ten compelling reasons to put some of their more serious money—money needed to produce guaranteed retirement income for life—into a fixed income annuity with an income rider. Below, we’ll go in-depth on each of these reasons.

#1 – There’s No Other Product Like It

No other financial product or vehicle can do it—give you a guaranteed income stream as long as you live—as a fixed index annuity with an income rider does. As many Americans are already aware, we have a pension crisis in the country, and the Trustees of the Social Security system warn us every spring about the shortfalls and cuts that are coming to that program. We think it is smart, therefore, for all Americans (especially those without a traditional pension coming to them in retirement), to build a solid guaranteed income stream for themselves, which they can layer on top of any Social Security that they receive.

#2 – Longevity Risk

Longevity risk (the risk of living too long and running out of money) is the major concern for retirees in most of the retirement surveys taken and can be successfully eliminated with the use of one or more fixed index annuities with an income rider. In fact, if multiple contracts are used, the retirees can “turn on the tap” every few years on another contract, to give themselves an income boost or inflation adjustment.

#3 – Low or No Annual Costs

Unlike their expensive cousins, the variable annuities, fixed index annuities with an income rider typically have an average 1% annual total cost, meaning they are cheaper than many mutual funds and managed money programs—with no market risk to boot! By contrast, I have seen the typical variable annuity contract carry total fees in the 3% to 5% per year range. Every fixed index annuity with an income rider does have a surrender schedule that addresses early withdrawals, as do the variable annuities.

Please note that if you surrender or withdraw more than the “free withdrawal amount” from an FIA in the early years of the contract, you may be subject to an early withdrawal penalty, which may result in your receiving less than your full principal balance.

SEE ALSO: Annuities 101

#4 – The Interest Rate Environment is Irrelevant

Interest rate risk – unlike bond portfolios – carries default and reinvestment risk; that is, the risk that interest rates, and hence, income streams, will be lower when a bond matures, and the funds need to be reinvested in a new bond. Fixed index annuities with income riders, however, guarantee that the income will never decline, regardless of the interest rate environment. There is also no default risk borne by the owner of a fixed index annuity with an income rider.

#5 – A Partial Fix for Inflation

The risk of inflation can be successfully addressed, at least partially, by a fixed index annuity with an income rider that includes the opportunity for an increasing income stream for a period of years, or for as long as the fixed index annuity with an income rider owner lives. Over time, these increases may be substantial, and can, therefore, help retirees address cost of living increases.

#6 – The ‘Chronic Illness’ Benefit

In certain states, some newer fixed index annuities with an income rider offer a “Chronic Illness” benefit rider, under which income payments are increased significantly, if you cannot perform two of the six Activities of Daily Living, and other conditions are met. There is usually little to no cost for these riders, so it may be worth seeking them out if you have not planned to address long-term healthcare risks yet. While these riders are not a substitute for a long-term care insurance policy, they can provide extra funds for chronic illness expenses, with no underwriting involved.

#7 – Guaranteed Death Benefit Features

Virtually all fixed index annuities with an income rider come with a guaranteed death benefit feature. Unlike the circumstance in which a mutual fund or stock owner dies in the midst of a stock market crash or prolonged bad stock market cycle, the fixed index annuity with an income rider owner is assured of always leaving their original invested capital and any accrued growth (reduced by withdrawals) to their loved ones in any and every type of market or economic environment.

#8 – Tax Liability Control

If structured properly, fixed index annuities with an income rider can help retirees control or even reduce tax liabilities in retirement. In particular, the conversion of the fixed index annuity with an income rider to ROTH IRA status, if purchased in an IRA account, will make the pension-like stream of income from the fixed index annuity tax-free for as long as the owner lives, and will insulate that income stream from any tax increases that may come down the road.

SEE ALSO: How Do You Set Up a Fixed Index Annuity? (And What Do You Get Back?)

#9 – A Guaranteed Principal at All Times

Unlike traditional stock, bond, and mutual fund portfolios, which are subject to market risk every day, fixed index annuities with an income rider offer a guarantee of principal at all times and in all types of economic or market environments. Additionally, in general, any earnings or growth that has been experienced in the fixed index annuity with an income rider contract is also guaranteed never to go backward. As a result, the contract owner can have peace of mind that his or her retirement nest egg held in the fixed index annuity with an income rider will always be there, and can only increase in value.

#10 – Control the Underlying Capital Base

Unlike traditional pensions that are received from employers, a fixed index annuity with an income rider offers the same monthly income, as a pension, which is guaranteed for life, but allows the contract owner to maintain control over the underlying capital base, even after beginning the income stream, and as long as there is money left in the contract. While fixed index annuities with income riders are intended to be long-term vehicles, they do not have to be a permanent decision. While the primary objective is lifetime income, it is a great benefit to have the flexibility of being able to move your capital elsewhere at all times, if the situation warrants it.

Would you like to know more creating a retirement income for life through a fixed index annuity with a income rider? Contact us today to schedule an introductory conversation. We’ll answer your questions, get to know your goals, and help you determine whether our services are a good fit for your needs. We look forward to hearing from you!

Peak Financial Freedom Group
2520 Douglas Boulevard, Suite 110
Roseville, CA 95661


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