Fixed Index Annuities: Should I Bonus or No Bonus for My Retirement Plan?

A video and vlog by Oak Harvest Insurance Services, LLC

Quick Answer

A 10% annuity bonus can sound incredibly attractive, but a larger upfront bonus doesn’t automatically mean you’ll earn more money over time. In many cases, annuities that offer large bonuses also have lower long-term growth potential because they come with lower participation rates or caps. The right choice depends on your retirement goals, your outlook for the market, and how the annuity fits into your overall retirement income plan—not simply the size of the bonus.

In this video and transcript, Certified Financial Planner™ Troy Sharpe explains how fixed indexed annuity bonuses really work, compares bonus and no-bonus products using real examples, and shows how these tools can fit into a comprehensive retirement strategy.

Who This Is For

This guide is designed for people who are:

• Within 10 years of retirement
• Already retired and looking for safer income strategies
• Considering a fixed indexed annuity
• Receiving invitations to retirement dinner seminars
• Wondering whether a 10% or 15% annuity bonus is actually worth it
• Trying to balance growth potential with principal protection

Key Takeaways

• A large annuity bonus doesn’t necessarily mean you’ll have more money in retirement.
• Higher bonuses often come with lower long-term growth caps.
• The right annuity depends on your retirement plan, not the marketing brochure.
• Today’s interest rate environment has created some of the strongest FIA growth potential in decades.
• Every retirement investment should have a clearly defined purpose.

Watch the Video

Transcript

10% guaranteed interest on your deposit in the first year? Is this really possible? Is it a good thing? Or should you say no to the bonus and go a different direction?

Why We’re Talking About Fixed Indexed Annuity Bonuses

Talking about today are bonuses that come on fixed-indexed annuities. You may hear of a 10% bonus, a 15% bonus. There’s all these different structures out there, and I want you to be educated whenever you come across these opportunities or sales pitches so you can understand if they’re really in your best interest, how they should be properly used, and the growth potential of a product with a bonus versus virtually the identical product without a bonus.

The average age of the person who watches my channel is 55 and up. So if that’s the case, you’re probably receiving invitations to dinner seminars, lunch seminars, or online solicitations for all these different annuity products. These salesmen have you targeted in their crosshairs, so I want to educate you so you’re empowered to understand the truth from fiction whenever you come across these opportunities.

The fixed indexed annuity can be a valuable asset class in retirement because it offers features and benefits that no other financial tool does. But it also has considerations. This video is exactly why we started the YouTube channel.

I had no idea that we would get millions of views and tens of thousands of subscribers, but this video right here is going to give you information that can change your financial life. Many of you we’ll never talk to, we’ll never see, we’ll never be able to sit down and build a plan for or work with, and that’s completely fine. We didn’t do this to get clients, although a lot of people do call us and we’re able to help people all across the country.

Whether you work with us or not, this video will help you. Be armed with the information so you can make better decisions with your money. Feel free to share this video with someone you know who’s about to retire, maybe a friend or family member approaching retirement, so they can also have this information and make better decisions with their money as well.

Common Misconceptions About Annuities

Now, I want to get ahead of some of the comments that I know will show up in the comment section. They go something like this: “Annuities are stupid.” “I would never buy an annuity.” “Annuities pay sales commissions.”

Well, annuities are not stupid. You don’t have to ever buy an annuity, that’s fine. And yes, annuities do pay sales commissions.

We’re talking about the fixed indexed annuity here, and you’re looking at about a five to seven percent commission that the person who recommends it to you is going to earn. Now, that doesn’t come out of your money or your account value. It comes from the marketing budget of the insurance company.

But trust me, when we’re talking about big dollars going into these financial tools, you’re going to have people out there selling them simply to get your money into that account so they can get paid that commission. There are also other bonuses and incentives that oftentimes go along with selling one particular product or one particular company.

Yes, those things are true. Annuities do pay commissions. It does not make them a bad financial tool. It’s simply how compensation in the industry is structured.

So if you can have an open mind—if you can get away from something maybe your friend told you 10 years ago or 20 years ago, or something someone said somewhere along the line—you will really learn the benefits, the considerations, the differences, and how to make a good decision when it comes to this financial tool.

Fixed Indexed Annuities Are a Legitimate Asset Class

The fixed indexed apnnuity is a legitimate asset class. It can provide protection of principal, the potential for really good interest earnings, your gains can be locked in, you can have compound interest, and it reduces the variation of outcome in retirement.

Have an open mind as we go through this, because you’re going to be surprised with what you learn.

Before we get into the analysis, one important thing to understand is that fixed indexed annuities are not a replacement for the stock market. You make a deposit, your account earns interest based on the growth of the stock market, and your gains get locked in, typically annually. But it’s not a stock market investment, and it’s not a stock market replacement.

Where Fixed Indexed Annuities Fit in a Retirement Portfolio

Fixed indexed annuities should be considered alternatives to bonds, CDs, and other low-risk money. When you use them that way and you look at them that way, you can still have your stocks over here and your fixed indexed annuity over here, along with your bonds, CDs, and cash. It’s not a replacement for stocks.

Unfortunately, we hear that a lot of times. “Troy, why would I ever invest in this when I can invest in stocks?” Well, those are two totally different things. This is a low-risk alternative. Stocks are a high-risk alternative.

Honestly, most people in retirement should have both as part of a comprehensive plan.

How Fixed Indexed Annuities Work

For those of you who have never heard of a fixed indexed annuity before—or maybe you’ve heard of one but have the features and benefits confused with variable annuities, immediate income annuities, or you’re thinking they lock your money up forever, you never have a death benefit, or you can’t access your money—those are different types of annuities.

I want to spend a little bit of time here before we crunch the numbers getting into the benefits, considerations, highlights, and features of the fixed indexed annuity.

You may have seen a chart like this before, but if not, the red line is the stock market. It’s very volatile. We all know that. Over time the stock market has done really, really well. That’s why we want to have money in the market, but we don’t want to have too much money in the market because it can drop 20%, 30%, 40%, or even 50%.

In short, when the market goes up and you have a fixed indexed annuity that tracks the S&P 500, your account can increase in value. Every 12 months, typically, whatever gains you’ve made are locked in. Your principal is protected, and the interest you’ve earned over that previous 12-month period is also protected.

If the market goes down, your account goes sideways. You don’t lose principal or interest.

A new innovation as of late is that you can choose to pay a fee to provide yourself with more growth potential. Essentially, you’re buying more growth potential, and that’s available on a lot of different products in the market today. But if you don’t want to do that—and we typically don’t recommend that—you can have this with absolutely no fee whatsoever.

Of course, there are terms and conditions and rates that determine how much of the market upside you can actually participate in. We’re going to compare two of the most common structures today.

The big point is this: when the market goes up, you can earn interest. Your gains get locked in, and you’re typically not paying annual fees. Then, when the market goes down, you don’t lose your money.

 

The Truth About Big Annuity Bonus Offers

Alright, so we’re going to look at a popular sales pitch. You’ll hear this at seminar presentations, you’ll hear this on the radio, you’ll hear this everywhere. Typically, from my experience—and look, I’m not trying to throw shade at anyone—but if someone is only advertising the bonus that you could potentially earn, they’re probably just trying to sell a product.

They’re trying to capture your attention by advertising that big bonus. I can’t tell you how many times we have either clients or prospective clients come in here and tell me about what they heard at a dinner seminar or what they heard on the radio. It really gets under my skin because I know what those people are doing. They’re just trying to sell a product, not trying to fit a product into a more comprehensive plan that includes equities, bonds, tax planning, and all the things we talk about as part of the Retirement Success Plan.

So be aware. The first rule is this: when you hear someone advertising big bonuses—10%, 20%, 30% bonuses—understand that’s a product pitch. Most of you may innately know this, but the way it can be framed is often very, very attractive.

One of the main purposes of this video is to help you distinguish the pros and cons, or the benefits and considerations over time, of going with the product that pays a bigger bonus up front versus one that does not but is otherwise virtually identical.

Comparing Two Very Similar Products

Here we have two things, and this is very common in the industry. An insurance company may release one product that has a 10% bonus with a 6% annual cap. That means you can make 100% of the market gain up to 6%, your gains lock in, you’ll never lose them, and you receive a big 10% bonus up front.

It’s your money. It’s cash. It’s in your account. If you pass away, typically it goes to your beneficiaries. Some companies may have variations on those rules, but the vast majority will pass that money on to your family because we’re talking about true cash bonuses.

Now, they do have vesting schedules. If you break the contract early, you’ll typically lose one-tenth of the percentage of that bonus. I don’t want to go too deep into that because we’re keeping this discussion at a high level.

The same product may also be offered without a bonus, often by the very same insurance company—or at least by another company—with almost everything else being identical. Instead of the bonus, though, it comes with an 11% cap.

That means if the market goes up 10%, you earn 10%. Your gains lock in and you’ll never lose them. If the market goes up 20%, you’ll cap out at 11%, those gains lock in, and you’ll never lose them.

The Real Question

So the question becomes: should I invest my $250,000 into the no-bonus product with the 11% cap and greater long-term growth potential? Or should I take the 10% bonus, immediately turning my $250,000 into $275,000, even though my future growth potential is lower because my cap is only 6%?

To answer that question, we have to do some math. We have to understand time value of money. But we also have to understand how the stock market has historically performed over long periods of time.

What History Tells Us

If you look back over history, what you’re often going to see is about seven out of every ten years the market is up. And when the market is up, it’s usually not up just a few percentage points. More often than not, positive years produce double-digit returns.

The same principle applies to down markets. The three out of ten years that markets decline, they’re not usually down one or two percent. They’re often down 15%, 20%, 30%, 40%, or even 50%.

Understanding that context, let’s make a conservative assumption. Let’s say the market is only positive six out of the next ten years. If we assume we’re hitting the cap in each of those positive years—which is reasonable because positive market years are frequently well into the double digits—that gives us a useful framework for comparing these products.

Running the Math

With an 11% cap, six positive years would produce 66% total interest over a ten-year period. Divide that by ten years and you arrive at an average annual return of 6.6%.

Now compare that to the bonus product. Using the exact same assumptions, six positive years with a 6% cap produces 36% over ten years. Divide that by ten and you’re looking at an average return of 3.6% per year.

So now the question becomes this: would you rather own the no-bonus product averaging 6.6%, or the bonus product averaging 3.6%?

I want you in the comments right now—which one do you think, over a ten-year period, is going to turn out to be worth more money? The one with no bonus and higher growth potential, or the one with the bonus but the lower cap?

Looking at the Results

On this side we have assumed interest rates. As I said, with an 11% cap we would expect to average somewhere around six to seven percent over a ten-year period. I think that’s a very reasonable expectation for an average rate of return.

Even if the contract only averages 4%, your $250,000 grows to about $370,000. If it averages 5%, it grows to about $407,000, and so on.

On the bonus side, we begin with $250,000, immediately receive the 10% bonus, and start at $275,000. But because we have the lower cap, we also have much lower long-term growth potential. Realistically, you should probably expect to average somewhere between three and four percent.

What the Insurance Company Is Really Doing

It’s kind of intuitive if you think about it. You’re getting a 10% bonus, but what the insurance company is really doing is essentially prepaying you about 1% per year. When you compare the numbers, earning 4% with no bonus is roughly equivalent to earning 3% with the bonus. Likewise, earning 5% without the bonus is roughly equivalent to earning 4% with it.

When you look at it that way, it actually makes a lot of sense. The larger bonus gives you a higher starting value, and future interest compounds on top of that value. If markets have a long stretch of strong years, those numbers would look a little different, but the overall concept remains the same.

What the insurance company is really doing with those carrots they’re dangling out in front of you is saying, “We’re going to give you 1% per year of prepaid interest.” At the same time, they’re offering another product with no prepaid interest but significantly greater long-term growth potential.

Why Today’s Interest Rate Environment Matters

One thing to understand is that with how high caps are today because of the high interest rate environment. When insurance companies price these products, they use what we call a new money method, meaning your money and the rates you receive for the life of the contract are based on the interest rate environment at the time of purchase.

Now, the insurance company can vary the rate a little bit from year to year to protect themselves. If volatility gets really high or uncertainty in the economy increases, we might see that 11% cap drop to 10% or even 9%. But often, when conditions stabilize, those caps come back up. These products are priced over the life of the contract based on the interest rate environment that exists when you purchase them.

So when you buy a seven-year or ten-year fixed indexed annuity today, you’re essentially locking in today’s higher interest rate environment for the duration of that contract. With a fixed indexed annuity, you’re not participating in those large down years. But when markets are positive, you’re still participating up to your cap, whether that’s 10%, 11%, or whatever the contract provides.

Which Option Would I Choose?

In short, if you’re somewhat bullish and you believe markets will continue to perform reasonably well over time, personally I would go with the no-bonus product for that portion of my retirement money. I’m going to believe there’s a good chance I’m going to outperform the bonus product over the long run because of the additional growth potential.

On the other hand, if you simply believe the market is going to struggle over the next decade, or you like having that 10% bird in the hand with somewhat lower future growth potential, and you’re perfectly happy averaging somewhere between three and four percent, then that product may be appropriate for you.

If that means your $250,000 deposit grows somewhere in the neighborhood of $369,000 to $407,000 without ever worrying about losing a single penny, while your interest gains lock in each year and your beneficiaries receive the remaining value if you pass away, then that may align well with your goals.

The point is not that one product is always right and the other is always wrong. The point is that when you hear someone advertising these big bonuses, don’t automatically assume the larger bonus makes it the better choice. Typically, especially over longer periods of time, you should expect to earn more interest and end up with greater account values if you choose the no-bonus option with the higher cap.

How Fixed Indexed Annuities Fit Into a Retirement Plan

Now, for those of you who follow the channel, you know it wouldn’t be right unless I actually talked about how to incorporate the fixed indexed annuity into a plan. There are literally dozens and dozens of ways we could incorporate these financial tools into a more comprehensive financial plan. But I just want to share one example because we’re planners. We’re not product pushers, we’re not just salespeople, and we build long-term relationships with our clients, so we’re always thinking about planning first.

As a planner, we view the fixed indexed annuity as one tool in the toolbox that can help mitigate market risk and many of the other retirement risks we’ve talked about. So have a plan. Think about how fixed indexed annuities fit into your overall retirement portfolio rather than viewing them as a standalone investment.

A Simple Retirement Income Example

This is a very simple example, but it’s a good concept to understand. Let’s say you and your spouse receive $45,000 per year from Social Security, and you have a $1 million portfolio. You decide to place $250,000 into a fixed indexed annuity, and in this example you’re choosing the no-bonus product because you want the higher growth potential and your gains locked in every 12 months.

Your baseline living expenses are about $60,000 per year. You decide you’ll take $45,000 from Social Security and another $15,000 from the annuity. That means over the next ten years you know exactly where your basic retirement income is coming from.

Typically, a fixed indexed annuity allows annual withdrawals of up to 10% of the account value. So maybe you withdraw $25,000 one year. Maybe you only withdraw $12,000. Maybe you don’t take anything at all. If markets experience a major decline and you don’t want to withdraw from your investment portfolio, you could simply take your income from the annuity instead. If the account eventually grows to $350,000, you might withdraw $35,000.

This is a very simple income plan. I’m not getting into tax planning here. I’m simply focusing on income, secure growth, and showing how different retirement tools can work together. Over the next ten years, you know your baseline expenses are covered because you’ll receive at least $60,000 per year.

During your go-go years—the years when you’re traveling and spending more—you might take another $20,000 from your investment portfolio. Now, what will that investment portfolio actually be worth after ten years? I don’t know. I have no clue. It could be worth one and a half million dollars. If it’s not a good decade, that original $750,000 could be worth only $250,000.

That’s the unknown. Whenever we’re taking withdrawals from an investment portfolio, there’s always an element of uncertainty. Two or three difficult market years in a row can dramatically change the outcome. We could have six great years followed by three poor ones. We simply don’t know.

The annuity is different. We know we’re not participating in market declines. We know we’ll be able to access the money.

Even in the worst-case scenario—if the market never goes up at all—you could withdraw $15,000 per year for ten years, taking out a total of $150,000, and you’d still have $100,000 remaining. But if the annuity averages roughly 6.6% annually with the higher cap, after taking out $150,000 of retirement income over ten years, that original $250,000 account would still be worth roughly $270,000.

Now we’re beginning to build a retirement plan. We’re combining secure tools with market investments. We don’t have to worry nearly as much about covering our basic income needs, and typically we sleep a little better at night because of it.

Meanwhile, I’d also expect the investment portfolio to hold up better because we’re only taking about 2.5% from it each year. Ideally, the dividends alone could cover that withdrawal. You can start thinking about mixing and matching different financial tools and understanding how they work together inside a comprehensive retirement plan.

Have Questions? Here’s How We Can Help

Hey, just a quick cut in here to let you know that if you have questions or if you want to learn more, there’s always a link in the description that you can use to reach out to us.

Also, don’t forget to share this video with someone you think may be retiring—a coworker, a friend, or a family member—so they can benefit from the same education you’re receiving today.

Key Takeaways

Fixed Indexed Annuities Are Designed for Low-Risk Money

The FIA is ideal for low-risk money. It is not a replacement for your equities. They’re not stocks—they’re alternatives to bonds, CDs, and other conservative investments. The number one reason we add something like this alongside other investments is to help smooth out the retirement plan and reduce the range of possible outcomes while providing something that isn’t going to lose value when the stock market or bond market goes down.

Every Investment Should Have a Purpose

Have a plan. Don’t just go to a dinner seminar, buy an annuity because it sounds good, and then not know what you’re doing.

Doctors are horrible at this typically. All the doctors we’ve worked with over the years—I don’t know what happens—but when we review everything they’ve accumulated, they tend to have one of everything.

So don’t be a doctor when it comes to your financial investments.

Have a purpose for every investment you own. Understand how it fits with everything else, how you’re going to generate income from it, and what role it plays from a tax perspective. That’s why we call our process the Retirement Success Plan. If you’re a new client and we have a blank slate, we can start painting the picture of your retirement. If you’ve accumulated a collection of different products over the years, we’ll clean that up. It simply takes a little more work, but we can still make that orchestra start playing the music of your retirement goals.

Bonus vs. No Bonus Depends on Your Outlook

If you’re bullish and believe markets are going to perform well over time, but you still want a portion of your retirement money protected from market declines, the strategy with no bonus is probably going to give you greater earning potential and will likely earn more in that environment.

If you prefer the bird in the hand, you like receiving the larger bonus up front, and you’re perfectly happy earning somewhere around three, four, or five percent, then that strategy may be appropriate for you. Likewise, if you believe markets are going to struggle over the next ten years, the bonus option may better fit your expectations.

Understand What the Bonus Really Represents

Do the math.

If the insurance company is giving you a 10% cash bonus up front and the contract has a 10-year surrender period, they’re essentially prepaying you about 1% per year. That means a non-bonus annuity only needs to outperform the bonus annuity by roughly one percentage point annually to make up the difference.

Understand the Withdrawal Rules

These contracts do have exit fee schedules, or surrender charges, but you can still access your money. The insurance companies aren’t trying to lock your money away forever. They’re simply saying that if they’re going to provide principal protection and allow you to participate in market gains without downside risk, they need stability on their balance sheet.

Typically, you’ll be able to access about 10% of your account value each year. So if you deposited $250,000 and the account eventually grew to $350,000, you could generally withdraw $35,000. The key is not to place too much money into these contracts. They’re simply one financial tool that can reduce portfolio volatility, smooth expected returns, and provide supplemental retirement income when incorporated into a broader retirement plan.

If You Already Own an Older Annuity

One thing we didn’t exactly cover is that you may have purchased an annuity several years ago. Remember when I mentioned insurance companies using what we call new money rates? Growth potential and adjustments to caps are generally based on today’s interest rate environment.

What that means is if you bought an annuity three, five, or seven years ago, today’s products may offer considerably greater growth potential. In some situations, the bonus on a new annuity may even help offset the remaining surrender charges on an existing contract.

That could potentially leave you with more account value after paying those surrender charges while also moving you into a contract that offers significantly greater long-term growth potential. The tradeoff, of course, is that you’ll be starting a brand-new surrender period. So make sure you won’t need access to more than the annual withdrawal allowance before making that type of decision.

Final Thoughts

If you’re new to fixed indexed annuities and didn’t quite understand all the terminology or everything we covered today, click to watch Fixed Indexed Annuities: The Basics, a video I recorded about a year ago.

That video will help you build a strong understanding of how fixed indexed annuities work and make everything we’ve discussed here much easier to understand.

Frequently Asked Questions

Is a 10% annuity bonus really free?

The bonus is generally credited to your contract by the insurance company, but it usually comes with a tradeoff. Products offering larger bonuses often have lower participation rates, caps, or other features that reduce long-term growth potential. That’s why it’s important to compare the entire contract rather than focusing only on the upfront bonus.

Is a fixed indexed annuity better with or without a bonus?

Neither option is automatically better. Bonus products may appeal to investors who prioritize an immediate increase in account value and are comfortable with lower growth potential. No-bonus products often provide higher caps or participation rates that can produce greater long-term growth if markets perform well.

Are fixed indexed annuities safe?

Fixed indexed annuities are designed to protect principal from market losses while allowing interest to be credited based on the performance of a market index, subject to contract terms. They are insurance products rather than stock market investments and carry the financial backing of the issuing insurance company.

Can I lose money in a fixed indexed annuity?

You generally do not lose money due to stock market declines because your principal is protected from market losses. However, withdrawals beyond the contract’s free withdrawal provisions may trigger surrender charges, and early withdrawals could affect your account value.

Are fixed indexed annuities a replacement for stocks?

No. Fixed indexed annuities are typically considered conservative retirement assets that may complement stocks within a diversified retirement portfolio. They are often used alongside equities to help provide greater stability and predictable retirement income.

What is the downside of an annuity bonus?

The biggest consideration is opportunity cost. Larger bonuses frequently come with lower caps or participation rates, meaning your long-term growth may be lower than a comparable product without the bonus.

Retirement Planning Is About More Than Choosing the Right Product

The best retirement strategies don’t start with a product—they start with a plan.

Whether you’re evaluating a fixed indexed annuity, planning retirement income, considering Roth conversions, or trying to reduce taxes in retirement, every financial decision should fit into an overall retirement strategy designed around your goals.

At Oak Harvest Financial Group, we build comprehensive retirement income plans that help clients understand how investments, taxes, Social Security, Medicare, and income planning all work together.

Ready to See How Prepared You Are for Retirement?

If you’re wondering whether your retirement plan is on track, take our free Retirement Readiness Quiz.

In just a few minutes, you’ll receive a personalized readiness score and identify potential gaps in your retirement strategy before they become costly mistakes.

👉 Take the Retirement Readiness Quiz

Contact us today to request an appointment and start building a retirement plan designed to help you feel more confident about your future.

 

Related Retirement Planning Resources

What Is a Fixed Indexed Annuity?

5 Ways to Turn Savings Into Retirement Income 

How to Calculate My Social Security Benefit: A Guide for Your Retirement Strategy

9 Retirement Tax Tips – Pay Uncle Sam Less During Tax Season

What Healthcare Actually Costs as You Age, and the Smarter Way to Plan for It

 

Disclosure

Insurance services are provided through Oak Harvest Insurance Services, LLC, a licensed insurance agency. Some Oak Harvest investment adviser representatives are also independent insurance agents. The agents and Oak Harvest Insurance Services, LLC earn combined commissions typically between 1.5% to 8%, but can be higher based upon the product, in addition to other compensation.

Annuity contracts may be subject to caps and charges, including yield or rate caps, interest caps, participation rates, interest rate spreads, and surrender charges. Each of these may be subject to change over the life of the contract.

Terms like “guarantee”, “peace of mind,” “safety,” “principal protection,” “lifetime income, “guaranteed income,” or other guarantees are associated with fixed insurance products. No such language refers in any way to investment advice, investment advisory products, securities, or recommendations provided by Oak Harvest Investment Services. Investing involves risk. Rates of return are not guaranteed unless otherwise stated. All guarantees relating to insurance products are dependent on the financial strength and claims-paying ability of the issuing insurance company. Guarantees may be subject to various restrictions, limitations, or fees, which can vary depending on the issuing insurance company. Annuities have limitations and are not appropriate for all circumstances or individuals, and they are not intended to replace emergency funds or to fund short-term savings or income goals.

Lifetime income may be available on certain products through an optional rider at no cost or for an additional cost, depending on the specific product and contract. Taking withdrawals prior to turning age 59 ½ may result in tax penalty fees in addition to ordinary income taxes. Withdrawals from annuities may trigger charges or reduce the contract value and death benefit. Insurance products are not insured by any federal government agency and may lose value.