Fixed Indexed Annuities – The Basics

Troy Sharpe: What are fixed indexed annuities? How do they work? Are they truly safe? How do you earn interest? We’re going to dig into all of that in this video. After, you’re going to be more educated than many financial advisors in this country.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, certified tax specialist, and also host of The Retirement Income Show. Continuing along the video series about annuities, today is all about fixed indexed annuities. When I first got into the business and I was introduced to fixed annuities, fixed indexed annuities, I was a bit skeptical.

I always wanted to be the guy that was doing the stock portfolios and helping people plan and grow their wealth. I was introduced to fixed annuities. Like many of you out there, I had a healthy bit of skepticism. I had always heard that annuities had high fees, that you couldn’t get your money out, that it was locked in, that there was no death benefit, all of the things that many of you have heard, so I am the inquisitive type by nature.

I remember in high school, I got a detention once because, in my trigonometry class, I kept asking questions and kept asking questions. The teacher thought that I was just trying to be this class clown and just kind of steal the show, but I truly needed to know. I need to understand how things work before I personally feel comfortable with it. That’s just how I am. Same thing happened in college with me in my calculus class.

We’re in an auditorium with over a hundred people and my professor didn’t speak very clear English. With all these people there, about every five minutes if I didn’t understand something, I would be the one that raise my hand and say something. I don’t know if other people appreciated it because they were feeling and thinking the same thing or I was being annoying, but that’s just who I am. It’s my nature. I can’t help it.

When I first got introduced to annuities, I had skepticism and I had to dig into them, so I called insurance companies. I spoke to people who operate on the annuity desk. I interviewed them. I dug into the materials, the contracts, spoke to my peers, people who had been in the industry for a very, very long time. Over time, I started to become very comfortable with my understanding of how they work.
They are not perfect tools by any means, but they do have benefits. They do have downsides. I’ve come to learn that if used properly in a plan for the right person or the right family, they can add a lot of value. Now, with almost 15 years of seeing how annuities can work as part of an overall retirement plan, you don’t put all of your money into annuities and annuities aren’t right for everyone.

After 15 years of seeing how someone who allocates a certain portion of their retirement funds to a fixed indexed annuity, how it can help them feel more secure, remove uncertainty, provide predictable income, and also help people sleep a little bit better at night in times when the market is down, I have real-world experience and I understand the viability of these tools.

Just like myself, I want to start this educational series with academic research and help you understand some of the analytics that have gone on over the past few years that I wish was available when I first got into the industry. That’s going to create a fundamental understanding from an analytical perspective. I’m going to keep it simple, kind of high-level overview, and we’re going to have the link so you can actually read through all of these in the description down below, but that’s where I want to start today’s video before I get into the actual nuts and bolts of how fixed indexed annuities work.

We’re going to look at three reports briefly here. The first one is by Roger Ibbotson, PhD, and professor emeritus at Yale University School of Management. This report was done in 2018. It’s called Fixed Indexed Annuities: Consider the Alternative. We will have the link to this study in the description. I want to start with just the abstract. A fixed indexed annuity is a contract issued by an insurance company that provides the opportunity to earn interest based on positive changes in an index such as the S&P 500.

A fixed indexed annuity does not place your money into the stock market. It is a guaranteed insurance contract, but it earns interest based on the movements, the positive movements of an external index like the S&P 500. There are hundreds of these indexes out there, but the number one thing about fixed indexed annuities that make them attractive for many people is that they have 100% guaranteed downside protection, so you can never lose money if the market goes down with a fixed indexed annuity.

FIAs can help control financial market risk and mitigate longevity risk. Fixed indexed annuities can be used for two purposes, possibly both, but they are a safe accumulation tool and they can also provide a guaranteed lifetime income, but you do not have to take a guaranteed lifetime income or you don’t ever have to take income from your annuity. That’s one of the number one things I think is misunderstood about fixed indexed annuities.

They can be used just as a safe accumulation tool, but they also have options to help mitigate longevity risk, the risk of living too long, by giving you choices for guaranteed lifetime income, which we’re going to have a whole separate series about guaranteed lifetime income. To summarize point three, the analysis showed that the fixed indexed annuity, according to the parameters set out in this paper, outperformed long-term bonds from the period of 1927 to 2016 with better downside protection.

Then, finally, a fixed indexed annuity may be an attractive alternative to traditional fixed-income options like bonds to accumulate financial assets (tax-deferred) prior to retirement. Now, the study didn’t go into retirement, but they can also be a tool used to accumulate assets and/or distribute them in retirement as well. The second academic research paper that we’re going to briefly overview is from Dr. Wade Pfau.
Dr. Pfau is a PhD and also a CFA, which is a chartered financial analyst, which takes about three years to obtain. Our own chief investment officer, Chris Perras, is also a CFA. Dr. Pfau has written articles inside The Economist, for The New York Times, Wall Street Journal, Time, Kiplinger’s, Money magazine. He’s the author of the book How Much Can I Spend in Retirement? which I definitely recommend you read if you’re the type who likes to learn and actually understand the details and go deeper into retirement planning strategies. Excellent book and then also another book down here.

If we scroll down to the summary, and, again, I’m going to have all of these reports in the entirety in the description down below so you can read them. I’m going to summarize some of the conclusion points here. Although the interest credit is linked to an equity index like the S&P 500, the returns that you should expect would be more similar to bonds than stocks. This is not a stock market replacement.
It’s a big misconception that because the indexed annuities track the stock market that they should replace your allocation within the portfolio to the stock market. They should be considered, in my opinion, to replace the bond portion or the CD portion. Dr. Pfau goes on to say, “The principal is protected for FIAs while bonds can experience capital losses when interest rates rise.”

Continuing on down here, “Owners should not think about fixed indexed annuities as an alternative to owning stocks despite our results showing that the interest credited to an index annuity has the potential to be competitive with stocks net of taxes and fees while experiencing less volatility.” This is a tremendously in-depth research paper, the way their methodology is inside. Again, we’re going to link to it.
Fixed indexed annuities, they can perform quite well over time. We’ve seen them if you have the right type of contract. You can expect anywhere from 3% to 6% without market risk and that is very reasonable. He goes on to say here, net of fees and taxes, they can be very competitive with stock market returns although that’s not their design according to their research. They should be considered more as an alternative to bonds and CD-type investments, things with similar risk characteristics than stocks.

The last academic study that we’re going to look at is from BlackRock. Most of you have heard of BlackRock, I’m sure. The report is called Retiring with Confidence: A Case for Fixed Indexed Annuities in Accumulation. Again, they can be fine tools to use in the accumulation phase. If you’re 30 or 40, you shouldn’t be considering investing in this for accumulation in my opinion, but they can also be safe accumulation tools in retirement.

These studies simply focused on the accumulation phase versus the retirement phase. The executive summary here, an FIA allocation offers greater upside in the median scenario when suitably funded. The median scenario. That means according to the methodology when they did their analysis, you had the really good scenario where stocks performed excellently, the median scenario, and then the really bad scenario.
In the median scenario, FIA allocation offers greater upside. An FIA allocation reduces extreme bad outcomes in a balanced portfolio. FIAs improve median and worst outcomes for conservative and cash-heavy portfolios. Incorporating an FIA with an underlying volatility-controlled index can help provide more certainty around future portfolio values. A couple of keywords here. One, allocation.

You do not again put all of your money into a fixed indexed annuity just because it’s safe and it can earn 3%, 4%, 5%. It’s an allocation. It’s a portion of your retirement that you can consider allocating money to, but you definitely don’t want to get over-allocated. We’re going to look at some of the different allocations, 60/20/20, stocks, bonds, FIA, 60/40, and some of the numbers going back to the Roger Ibbotson white paper that they’ve done with their studies over time.

The main thing for this video though is just simply learn some of the basics. If you’re researching fixed indexed annuities or even if you already own one, you understand a little bit more than you did before watching this video. Okay, so, now, we’ve laid the academic foundation based on research and real-world analysis of how fixed indexed annuities can be a powerful part of an overall retirement plan, but you still have to understand how they work, the functionality, and not all fixed indexed annuities should be considered.

Some are definitely much better than others, but the aim of this video is to just help you become more informed and more educated about the general terminology and how they function within the contracts themselves. First thing we’re going to talk about is just your account value. Oftentimes, in an annuity, it’s deemed your accumulation value and it is based on your premium, which is how much you deposit plus any interest earned minus any withdrawals you take minus any fees.

That is your full value. Your full value is your death benefit, okay? It is also the amount that you can walk away with. No, your money is not locked into an annuity forever, a fixed indexed annuity. Now, you could choose to turn it into a guaranteed lifetime income stream and that’s a choice you make. Then your principal is at the insurance company while you receive an income.

With fixed indexed annuities, if you need to access your principal, you can still do that while you’re receiving a guaranteed lifetime income as long as the withdrawals you’ve taken don’t exceed the full account value. Now, I want to introduce this T-chart because we’re going to see this later when I get into the guaranteed lifetime income strategies and how they operate with respect to the accumulation value in the contract itself.

We have the accumulation value on this side. This is blank for now because I don’t want to get confusing, but we will refer back to this in subsequent videos. Right now, just think of your accumulation value, your account value. It’s like any other account you’ve ever owned. You put money in. If it earns interest, it increases in value. If you pass away, that money goes to your family.

The difference with the fixed indexed annuity, some of the primary differences are the money you put in is 100% safe from market losses. The market goes down, you won’t lose a single penny. Your gains lock in. If you make 4%, say $100,000 grows to $104,000, you’ll never have less than $104,000 unless you take money out. Your gains lock in and then interest is compounded.

If you earn interest next year, let’s say you earn 5%, you’re earning 5% on $104,000. Realistically, you can expect to earn on average somewhere between 3% to 6% per year with fixed indexed annuities. Now, it’s not a guarantee. If they underperform, you’re going to be closer to that 3% range. If you’re in one that’s designed specifically for maximum growth potential and the markets do well over the next 10, 15 years, you’re going to probably average closer to 5% to 6%, but they’re not designed to average 10% a year.

You can have double-digit returns. We’ve seen clients have double-digit returns many, many times over the years. 10%, 15%, 20%, even 25% in a single year. Now, that’s uncommon, but it is possible if you have the right fixed indexed annuity designed for maximum growth potential and the market cooperates. Most importantly, you’ll never lose money with a fixed indexed annuity policy.

A very important concept to understand is what we call a reset period. A reset period can either typically be over a one-year period, a two-year period, or a three-year period. The reset period is very important because that’s the length of time that you’ll track the market and interest is credited at the end of that reset period. If it’s a one-year reset or annual reset, interest will be credited every 12 months.

If it’s a two-year reset, interest will be credited every two years, and so on and so on. It’s very important because if the market is down, for example, with your reset period, you reset up here because you never lose money. When the market starts to come back up, you start to earn interest from where you left off. You don’t start way down here. It’s the length of time that determines when interest is credited. Because you never lose money, it’s a new horse race.

If the market drops and then it starts to come back up after your reset period, you’ll start to earn interest from where you left off. Very important concept. Here is a rudimentary chart that I drew up. The black line here represents the index that you’re tracking. This is just a basic concept. When the index goes up, according to the terms and conditions of your contract, and we’re going to get into that, the participation rates, whether that’s capped or uncapped, if there’s a spread.

The point here is that over a one-year period if you have an annual reset, when the index goes up, your contract earns interest. At the reset period, those gains that you’ve earned are locked in. If the market goes down the next year or the index goes down, you go sideways. You do not lose any interest. You don’t lose principal and you don’t lose interest. When the market starts to rebound or the index, we start to earn interest as well. At our next reset period, all the gains that we’ve made over that year are locked in.

Same thing here. Market goes down, we go sideways. Market comes back up, we start earning interest. You may remember the old fable, The Tortoise and the Hare. The fixed indexed annuity is like the tortoise. It’s plodding along. It’s slow and steady. It’s not designed to be this big roller coaster and you’re not trying to hit home runs. You’re just trying to hit some singles and doubles consistently. Worst-case scenario, you’re going to make a zero.

You’re not going to lose principal or interest that you’ve previously earned inside a fixed indexed annuity. It’s like the tortoise. This is why you shouldn’t have all of your money or it’s one of the reasons why you shouldn’t have all of your money inside the FIA. You absolutely still need some allocation to equities for long-term growth, inflation protection, et cetera. Now, for some of you, that may be 60%, 70%, 80% equities. Some of you may absolutely not be able to withstand the stock market. Maybe that’s 20%, 30%, 40%.

Okay, now, we’re going to look at how fixed indexed annuities earn interest. We’re going to break this down into three parts: crediting methods, crediting rates, and then also the indices that you can track, which those crediting methods and rates will, in combination, determine how much interest is earned. Crediting methods. There’s what we call a point-to-point method and a monthly sum.
Point-to-point is what I explained earlier. One point to the next point. Whether it’s a one-year reset or a two-year reset or a three-year reset, that is how long or the length of time that you’re tracking that particular index. At the end of your reset, point-to-point, the interest that you’ve earned, if any, is locked in. The other one we have here is monthly sum, so I’m going to do a video in this series where I get into more detail about these methods.

A monthly sum is designed to be used in a higher interest rate environment, and also when we expect the market to do really, really well. It’s the most aggressive crediting method inside a fixed indexed annuity contract because it tracks the monthly gains subject to a monthly cap. I’m going to get into more details. We do these. We don’t currently recommend anyone use a monthly sum crediting method just because it’s too volatile and it doesn’t make sense in this environment.

Okay, very important concept here, the rate that your fixed indexed annuity offers, so the crediting rates. Terminology, we have participation rate. Your rates could either be capped or uncapped and then something called a spread. Also, some companies refer to it as an index margin. There’s another company that actually refers to it as an asset fee even though it’s not a fee. It’s a spread.

The participation rate is exactly what it sounds like. It’s how much you participate in the particular index that you’re tracking. Some indexes that have more growth potential, that are typically 100% equity, you may only have a 40% or 50% participation rate, but the index itself can grow more. If you participate in 40%, 50%, 60% of that, you can still have a good return. Other indexes are designed to earn maybe 4%, 5%, 6% on a consistent basis.

Those indices, you could earn anywhere from 100% to even right now over 200% of what the actual index performance is. We’re going to have some examples of this. Just understand that participation rates are how much you participate in the index you’re tracking. Indices that are made up of all equities, typically, you’ll have a lower participation rate, but the index typically can perform higher.
The indices that are designed to be more stable, more consistent, maybe they’re dynamic indexes that switch between stocks and bonds based on volatility in the marketplace. You’re going to have a much higher participation rate, but they’re all designed to really end up in between that 3%, 4%, 5%, 6% average annual return range and, again, 100% principal protection.

Capped versus uncapped. There’s a lot of misinformation out there in the marketplace if you read online. In some places, you’ll hear where you shouldn’t ever consider an annuity because there are caps. Yes, there are caps on some of the crediting methods and crediting rates inside a fixed indexed annuity. The other side of the story is, a Paul Harvey reference here, a lot of the crediting methods and rates are also uncapped, so you have no upside limitation on how much interest that can be earned.

If we’re going to consider a fixed indexed annuity, typically, we want our crediting methods and crediting rates to be uncapped. Spread is simply a reduction in earnings, so it’s not a fee. If you earn 10% in your FIA and you have a 2% spread, you are credited 8% interest. 10% minus the 2% spread equals 8%. Now, if everything goes down or if your index annuity earns 0%, the spread is not applied. You wouldn’t lose 2% in that example. You would just make a zero for the year.

Spreads are not fees. They’re simply a reduction in earnings or a reduction in interest credited based on the stated amount of the spread. Now, a very important point here. Upon your reset, whether it’s a one-year, two-year, or a three-year reset, when you receive your statement in the mail showing you how much interest has been earned in your account values, you’re going to be offered what’s called a renewal rate.
Based on the interest rate environment and how much volatility is in the market, those are the primary drivers of what your renewal rates will be. Your participation rate may adjust a little bit on your reset. It’s the renewal rate. If you chose a capped method, it may adjust a little bit. If you had a spread in your crediting method, it may adjust a little bit. If you had an uncapped strategy, it’s going to remain uncapped.
They’re not going to change it all of a sudden, take that away, and make it capped. They just simply may adjust the participation rate, so they may go up, they may go down. Typically, they stay pretty close to where they were at issue. If you had a 40% participation rate, it’s possible it could go down to 38% or 37% or 35%. It also could go up to 42%, 44%, or 45%. It’s primarily determined by the interest rate environment and how much volatility is out there.

The reason that they adjust is because there’s a pricing mechanism involved with determining how much you can participate in that external index. We’re going to get into this in another video inside the series here, but it’s just important to understand that upon your reset, you’ll be offered a renewal rate. In my experience of over 15 years of doing this, I’d say about 90% to 95% of the time, that renewal rate is very close to the range where the contract was originally issued.

If you had a 50% participation rate issue, you’re going to expect that participation rate to be within a fairly tight range to the downside or upside typically of where it was at issue. Now, the third thing we’re going to look at that determines how much interest you earn is the actual index that you’re tracking. I just have three examples right here, so everyone knows what the S&P 500 is.

The Zebra Edge, this is an index that most of you are probably not familiar with, but it’s one of the better indices out there that you can track inside a fixed indexed annuity. Then I want to start to introduce you to some new terminology here that we’re going to cover in the subsequent video because this is a series about annuities. S&P 500, low volatility, 8% risk control. Don’t worry about what that means. It will be explained.

The Zebra Edge, for example, we have the real-world performance here. After over the past five years, it has made about 29% over the past five years. It’s a real-world index that we can follow inside the fixed indexed annuity. Currently, the rates are anywhere from 100% participation to up to, I believe, 150%, depending on what state you live. It’s just one of the hundreds of indices that are available to be tracked inside a fixed indexed annuity.

Now, we’re going to start to put this all together, put some math behind it. If we’re tracking, our index is the S&P 500. We have an annual reset. Our participation rate is 50% and it’s uncapped. We’re utilizing the point-to-point methodology. We track the S&P 500 point-to-point. We participate in 50% of the upside, none of the downside, and there’s no cap to how much interest we can earn during that reset period.
If the S&P 500 is at 4,000 today which, as of recording this video, that’s approximately where it is. In one year, it increases to 4,800. That is a 20% gain. Our participation rate is 50% or 1/2. We would earn 10% for that reset period, one year, inside our fixed indexed annuity. This is very possible. I have seen this happen countless times where the market has gone up and a client has earned double-digit return over a single year. It is very possible.

If the market had gone down 4,000 to 3,000, this gain would have been negative. We do not participate in half of the downside. We get a zero. That’s our worst-case scenario is zero. We’ve seen them return 0% and we’ve seen them return 4%, 6%, 8%, 10%, even an upwards of 20% in a single year. Again, that’s not to be expected, but it is possible if we have the right crediting method in an uncapped product.
Now, example two, we’re going to look at the Zebra Edge Index. Now, this is an index that it does primarily track stocks, but it has what’s called a volatility control. It can go to cash in periods of high volatility. Because of that, it has a higher participation rate than something that just tracks the S&P 500. The Zebra Edge with a three-year reset, with 100% participation rate, uncapped, and a point-to-point methodology.
If the Zebra Edge I showed you earlier, it’s at 325 today. If it, in three years, has grown to 390, so just like the S&P, it’s at 4,000 today and I showed you what happens if it grows to 4,800, this 325, that’s the index level. 390 in 3 years, this is how we calculate it. The 390 minus 325, future value minus present value equals 65. We take the total point gain, 65 points divided by the initial starting level, 325. We get a 20% gain over that three-year period.

Now, we have to apply the other parts of the crediting calculation. It’s 100% participation and uncapped. We make 100% of that 20 over that 3-year period and there’s no cap. There’s no limitation on that upside growth, but it was a three-year reset. 20% over the 3 years has been earned divided by 3 years, about 6.5% a year. Now, because this Zebra Edge is a volatility-controlled index and, right now, this is available.
A lot of times, you’ll have choices inside your fixed indexed annuity. You don’t have to allocate all to one method. What is common is we’ll see one method where the Zebra Edge, for example, is 100% participation, no spread, or a second option where you can get a much higher participation rate but with a spread. We have choices. Upon your contract anniversary or your reset period, you can change how your funds are allocated inside that indexed annuity. Think of it as rebalancing possibly.

Here, doing the calculation. Same as before, the index was at 325. It grows to 390. It’s a 20% gain, but we get 150% of that. 150% of 20% equals 30%, but there was a 1.5% annual spread. That equals to 4.5%, 1.5%, 1.5%, 1.5%. We subtract the spread. It’s a reduction in earnings from the gain. 25.5% over 3 years or 8.5% per year. In this example, because the index performed quite well over that three-year period, the option or the method that gave us the choice of a higher participation rate with the spread outperformed the method that gave us a lower participation rate, 100% with no spread.

Some people may say, “Troy, well, I don’t know what’s going to happen. Let’s allocate 50% of my deposit to the one with the spread and higher par rate. The other 50%, let’s go to the 100% par and no spread.” That may be an option for you. Another option may be to allocate across different indices inside the same fixed indexed annuity. Maybe 50% goes to the Zebra Edge and then 50% goes to the S&P 500.
Now, this is just a hypothetical example of indices that are out there in the marketplace. The company that actually offers the Zebra Edge, I don’t believe they have an S&P 500 option inside that particular contract, but other companies do. Maybe you would put some money into this particular strategy and somebody into an S&P 500-type strategy with a different company.

For example purposes, let’s say we did this inside the same contract upon the reset period ending, so a three-year period, we could reallocate. Maybe you say, “You know what? We don’t really feel good about the S&P 500 over the next few years. We want to allocate more to the Zebra Edge.” In the next reset period, we would possibly go 100% to the Zebra Edge because it’s designed for more consistent and stable returns.
I’m just using the Zebra Edge as an example, but there are literally hundreds of these indices out there. Again, I don’t want to be redundant, but I’m going to have a specific video in this series that gets into all of these indices, how we determine which ones we feel most comfortable with, the transparency of the indices, the backtesting, the real-world performance. We’re going to dive deep along the indices inside these vehicles as this series continues.

Now, something that’s also very important here is fixed indexed annuities come with what’s called surrender charges. When you put your money into a fixed indexed annuity, the insurance company is using that premium to go out and buy long-term bonds. They’re buying real estate. They’re buying long-term investment grade, high-quality stuff, but insurance companies don’t invest for two years. They invest for 10, for 30, for 50 years.

They have an infinite life expectancy, so they can’t have everyone putting their money in and taking it out, putting it in the next day and taking it out. If they did that, they want to be able to offer guarantees of principal protection, reasonable opportunity to earn interest, lifetime income. They simply want to be able to offer the guarantees that they did, that they do if people were constantly putting their money in and out.

They have to be able to project their book into the future, the value of their assets, and also how much money they owe people. This should be a typical surrender fee schedule. You put your money in. If you decide, day one, you want to take it all out or year one, you’re going to be hit with a pretty big fee. You are. The exit fees diminish annually. They get lower and lower and lower.

Typically, it’s about 1% per year until you get to your 10 or however long the surrender charge period is. Then after the surrender charge period is over, you can walk away with your money. All principal and interest that was accumulated with no cost, no fee, no penalty, or you can let it sit there and continue to earn interest just as it has over the previous years. If you pass away at any point during the surrender charge period, surrender charges are not applied.

They’re not designed to keep you away from your money. They are designed to protect the insurance company to make sure that they can offer the promises, the guarantees, the benefits, and not have people moving in and out trading these investments essentially every day, every year. Now, let’s say you do need to access some of your money inside the annuity, can you access it? Well, yes, most fixed indexed annuities are going to allow you to access 10% of your account value per year.

If you need to access money, you can. There are just simply limitations. If you go above and beyond that free withdrawal provision, in this example, 10%, some companies are 5%. Some companies may offer a little bit more. This is pretty standard, 10% per year within the industry. If we allocate $500,000 to a fixed indexed annuity contract and we need to make a withdrawal, you can. You go in and you take out $50,000, 10% of the account value. There’s no cost, no fee, no penalty.

Let’s say you need $100,000 and it’s year 5. Well, assuming the account value has grown up to $600,000, 10% of $600,000 is $60,000, so you could take that free withdrawal in that year 5. No penalty whatsoever. The other $40,000 that you need to get to your withdrawal limit or withdrawal need, that $40,000 would be hit with a surrender charge. In this example, hypothetically, it’s 5%.

You’re not charged the surrender fee on the full $100,000 need. You’re only charged on the amount that exceeds for that year, the free withdrawal amount. You could get the full $100,000 out. You’d be charged 5% on the $40,000 that exceeds the 10% of the account value. The total fee there would be $2,000 to access that money. Just understand, there is a fee if you go above the 10% withdrawal.
It’s another reason why you don’t allocate too much money to fixed indexed annuities. They are not perfect tools. One of the big downsides is the surrender charge period and also the limited liquidity. If you have $1 million or $2 million and you allocate $200,000 or $400,000 or $600,000, whatever that number is, you shouldn’t be going into this to access more than a 10% withdrawal. If so, you’ve put too much money into that particular strategy.

Now, in years like this when the market’s down, a lot of clients will take advantage of that free withdrawal provision, not touch the equity portfolio, and go and take a 10% free withdrawal to meet living needs. You have that flexibility of choosing where you take income from in retirement. The surrender charge schedule, it truly is the backbone of the contract. Without it, the insurance company simply could not provide the guarantees, the protection, the opportunity for reasonable growth, lifetime income choices, et cetera.
Now, hopefully, you are far more educated about fixed indexed annuities right now than when you turn this video on. We’re going to continue this video series expounding on some of the particular topics that we talked about in today’s video, as well as income planning and safe growth planning strategies that can be used in conjunction with a stock portfolio and a bond portfolio. We’re going to cover all of that, so stay tuned for this series and we look forward to seeing you on the next video.

Fixed Indexed Annuities – The Basics
Fixed Indexed Annuities – The Basics

In this episode on Annuities, we're taking a look at Fixed Indexed Annuities. Everything you need to know to start getting a basic understanding of how they work and the choices you have to make within the Annuity before getting one.