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

Fixed Index Annuities are a tricky topic, and deciding for or against a bonus can be even trickier for your retirement planning. Is a bonus better for the long run, or is it better to say no to the bonus and go in a different direction? Well, what about the possible 10% return?! In this video, Troy Sharpe discusses Fixed Index Annuities, their bonuses, common sales pitches, and their impact on your retirement planning.

Bonus or No:

Troy Sharpe: 10% Guaranteed interest on your deposit in the first year, is this really Is it a good thing or should you say no to the bonus and go a different direction?

What we’re 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. 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. If that’s the case, you’re probably receiving
invitations to dinner seminars, to lunch seminars, to online solicitations of all these different annuity products and the salesmen have you targeted in their crosshairs. I want to educate you so you are 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 will never talk to, will never see will 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. This video, whether you work with us or not, 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 that you know that’s about to retire, maybe a friend or family member that’s approaching retirement so they can also have this information and they can make better decisions with their money as well. Now, I want to get ahead of some of the comments that I know will show up in the comment section and 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. Yes, annuities do pay sales commissions. When we’re talking about the fixed indexed annuity here, you’re looking at about a 5% to 7% 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. Trust me, when we’re talking about big dollars going into these financial tools, you’re going to have people out there that are selling them simply to get your money into that account so they can get paid that commission.

There are other bonuses and incentives that often times go along with selling one particular product or one particular company. Yes, those things are true that annuities pay commissions, it does not make them a bad financial tool.

It’s just how the compensation industry or the compensation in the industry is structured. 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, have an open mind, you will really learn the benefits
and the considerations and differences.

How to make a good decision when it comes to this financial tool. The fixed-indexed annuity is a legitimate asset class. It can provide 100% protection of principal, the potential for really good interest earnings. Your gains can be locked in, you can have compound interest. It reduces the variation of outcomes in retirement. There are so many benefits not to mention reducing longevity risk in case you’re worried about outliving your money.

There are so many benefits that only the fixed-indexed annuity can provide. Have an open mind as we go through this and you’re going to be surprised with what you learn. Now, before we get into the analysis, one important thing to understand here, 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. It’s not a stock market investment. It’s not a stock market replacement. Fixed-indexed annuities should be considered alternatives to bonds, CDs, and other low-risk monies.

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 or CDs in cash, but it’s not a replacement for stocks. Unfortunately, we hear that a lot of times like, “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. This is a high-risk alternative.

Honestly, most people in retirement should have both as a part of a comprehensive plan. For those of you who have never heard of a fixed-indexed annuity before, or maybe some of you have, but you have the features and benefits confused with possibly variable annuities or the types of annuities that immediately give you income or you’re thinking, “Hey, they locked my money up and I never have a death benefit, or I can’t access it.” 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 and considerations and the 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. Very volatile.

We all know that over time the stock market has done really, really well. This is 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%, 50%.

In short, when the market goes up, when you have a fixed index annuity that tracks the S&P 500, your account can increase in value. Every 12 months, typically, whatever gains that you’ve made, they’re locked in. Your principal’s protected. The interest that 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. Typically, there are no fees with fixed indexed annuities either. No annual fees that you pay. Now, a new innovation as of late is that you can choose to pay a fee to provide you more growth potential.

Essentially, you’re buying more growth potential and that’s available on a lot of different products in the market today. 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 that you can actually participate in. Of course, your principal is always 100% protected. We’re going to compare two of the most common today. Just the big point here is that when the market goes up, you can earn interest, your gains get locked in. You’re not paying annual fees typically, and then when the market goes down, you don’t lose your money. All right?

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 everywhere. Typically, from my experience, and look, I’m not trying to throw shade at anyone or salt or whatever the saying is, but if someone is only advertising the bonus that you could potentially earn, typically, they’re, I don’t want to say not looking out on your best interest, but they’re probably just trying to sell a product and 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 they tell me about what they heard in 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.

They’re actually not trying to fit a product into a more comprehensive plan that includes equities and bonds and tax planning and all the things we talk about as part of the retirement success plan. Be aware, first rule, when you hear someone advertising big bonuses, 10%, 20%, 30% bonuses, understand that’s a product pitch.

Now, most of you may innately know this, but the way it can be framed often is 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 that product that pays a bigger bonus upfront or one that does not, that is virtually identical.

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 that you can make 100% of the market gain up to 6% your gains lock-in. Never lose that.

You actually get this big 10% bonus up upfront. 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 some variations on those rules, but wide majority, if you pass away, all that money goes to your family. It’s yours.

We’re talking about cash bonuses here. Now, they do have vesting schedules. If you break the contract early, you’ll typically lose one 10th of the percentage of that bonus. I don’t want to go too deep here. We’re keeping it high level.

Now, the same identical product will have no bonus, usually even from the same insurance company, or at least from a different insurance company. Everything else is basically the same, no bonus with an 11% cap. That means if the market goes up 10, we make 10, gains lock-in will never lose it. The market goes up 20, we’ll cap out at 11. Gaines lock-in will never lose them.

The question becomes, should I invest, I’m using $250,000 as an example here. Should I invest my money into the no-bonus product with an 11% cap and more growth potential or should I get the 10% bonus with less future growth potential but hey, my 250 turns to 275 and I can still make up to 6% per year plus all my gains get locked in?

To answer this question, we have to do some math, some calculations, time value of money, but we also have to understand the historical performance of the stock market. If you look back over history, what you’re often going to see is about seven out of 10 years, so a seven-year period out of 10, the market is typically up. The market isn’t often up single digits, it’s usually up double digits, same thing on the downside, the three out of 10 years, the market is typically down, and it’s not typically down 1% or 2%, it’s down 15%, 20%, 30%, 40%, 50%, so understanding that context, we can say, okay, let’s be conservative in our assumption here, let’s say the market is only up six out of the next 10 years.

If I’m going to cap out because we typically see double-digit returns in the market in positive years, not guaranteed, but you don’t often see the market up 6% or 3%, it can happen occasionally, but not often. If the market is up six out of the next 10 years, and I cap out at 11, that’s 66%, 11% times six years 66%. Over a 10-year period, I’ve averaged 6.6%.

Now, with a 6% cap over here on the bonus product, same assumption if the markets up six out of the next 10 years, six years times 6% cap out is 36 divided by 10 is 3.6% per year on average. The question now becomes no bonus averaging 6.6% versus a 10% bonus averaging 3.6%, Now, I want you in the comments right now, which one do you think when we do this analysis, which one over a 10-year period, it’s going to turn out to be worth more money, the one with no bonus and the higher growth potential, or the one with a bonus but a lower cap.

All right, so on this side over here, we have assumed interest rates. As I said, with an 11% cap, we would expect to be somewhere in this range 6% to 7% after a 10-year period. I think that’s a very reasonable expectation as far as average rate of return but if the contract only average is 4%, your 250 is going to be worth 370. If that average is 5%, your 250 is going to  be worth 407, and so on. This one over here we start out, we put in 250 we get the big bonus so it’s up to 275 but because we have a lower cap, we have much lower growth potential.

Realistically, you should probably expect to be somewhere in this range 3% to 4%. It’s intuitive if you think about it, we’re
getting a 10% bonus but what the insurance company is actually doing is forwarding you, pre-paying you essentially 1% per year. When we look at the values here, if we earn 4% with no bonus, it’s basically the same as earning 3% with the bonus. If we earn 5% with no bonus it’s basically the same as earning 4% with the bonus. When you think about it intuitively it makes sense.

One thing to note here is that the bigger bonus product does give you a larger value. When interest gains compound year after year. Let’s say the market has a really good year and we go 66666, these numbers would be a little bit different but I just wanted to convey this point is what the insurance company is really doing with these carrots that they’re
dangling out for you is saying Hey what?

We’re just going to give you 1% per year of prepaid interest. Future gains can compound on top of that but we’re also going to offer this other product where we’re not going to give you any prepaid interest but we’re going to give you more growth potential. You and the insurance company are in this together but with how high caps are today because of the high-interest rate environment.

Let me be clear these rates today are the best that they’ve been in 20 years probably since fixed index annuities were invented back in the late ’90s. It’s an amazing opportunity to really secure today’s interest rates. This brings up another point. Insurance companies when they price these products, it’s what we call a new money method.

 

Meaning your money and the rates that you receive for the life of the contract are typically based on or are based on the interest rate environment at the time of purchase. Now the insurance company to protect themselves can vary the rate a little bit year to year. A volatility gets really high and uncertainty in the economy hits.

We might see the 11% cap out here in year three or year four. It might drop down to 10 it might drop down to nine. Often when things stabilize it’ll come back up to 10 or 11. These products are priced over the 10-year period based on the interest rate environment today. What that means is when we have a 10-year fixed index annuity or a seven-year fixed index annuity, what you’re doing is you’re essentially locking in today’s high-interest rate environment for the next seven years or 10 years.

Now, why is that attractive? Before we get back to the numbers this is what we call the SOFR rate curve. SOSR has replaced LIBOR and it’s because LIBOR was the London Interbank exchange rate and they were involved in a massive financial scandal. LIBOR no more. This is, essentially, the fed dot plot. Every single meeting the Federal Reserve, whenever they have them, they release a dot plot and all members of the FOMC the Market Committee project where they expect interest

rates to be in the future. This is what they project. This is actually the Federal Reserve dot plot and we see this is where we are today. Most members of the FOMC expect rates to go up a little bit. If we go up here, January, April. Rates go up a little bit. Then second half of this year into the future years, they expect interest rates to go down.

If we can lock in today’s higher interest rates for a longer period of time for a portion of our money, that may make sense to consider. Back to the numbers here. We can clearly see here, if you are a believer in capital markets and you think the markets are going to do somewhere around maybe 6% or 7%, just keep in mind when the markets do 7%, it’s often plus 15 minus 25, plus 35 minus 12, and it averages out to be 6, 7, 8, 9, 10.

You actually get this big 10% bonus up upfront. 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 some variations on those rules, but wide majority, if you pass away, all that money goes to your family. It’s yours. We’re talking about cash bonuses here. Now, they do have vesting schedules. If you break the contract early, you’ll typically lose one 10th of the percentage of that bonus. I don’t want to go too deep here. We’re keeping it high level.

Now, the same identical product will have no bonus, usually even from the same insurance company, or at least from a different insurance company. Everything else is basically the same, no bonus with an 11% cap. That means if the market goes up 10, we make 10, gains lock-in will never lose it. The market goes up 20, we’ll cap out at 11. Gaines lock-in will never lose them.

The question becomes, should I invest, I’m using $250,000 as an example here. Should I invest my money into the no-bonus product with an 11% cap and more growth potential or should I get the 10% bonus with less future growth potential but hey, my 250 turns to 275 and I can still make up to 6% per year plus all my gains get locked in? To answer this question, we have to do some math, some calculations, time value of money, but we also have to understand the historical performance of the stock market.

If you look back over history, what you’re often going to see is about seven out of 10 years, so a seven-year period out of 10, the market is typically up. The market isn’t often up single digits, it’s usually up double digits, same thing on the downside, the three out of 10 years, the market is typically down, and it’s not typically down 1% or 2%, it’s down 15%, 20%, 30%, 40%, 50%, so understanding that context, we can say, okay, let’s be conservative in our assumption here, let’s say the market is only up six out of the next 10 years. If I’m going to cap out because we typically see double-digit returns in the market in positive years, not guaranteed, but you don’t often see the market up 6% or 3%, it can happen occasionally, but not often. If the market is up six out of the next 10 years, and I cap out at 11, that’s 66%, 11% times six years 66%.

Over a 10-year period, I’ve averaged 6.6%. Now, with a 6% cap over here on the bonus product, same assumption if the markets up six out of the next 10 years, six years times 6% cap out is 36 divided by 10 is 3.6% per year on average. The question now becomes no bonus averaging 6.6% versus a 10% bonus averaging 3.6%, Now, I want you in the comments right now, which one do you think when we do this analysis, which one over a 10-year period, it’s going to turn out to be worth more money, the one with no bonus and the higher growth potential, or the one with a bonus but a lower cap. All right, so on this side over here, we have assumed interest rates.

As I said, with an 11% cap, we would expect to be somewhere in this range 6% to 7% after a 10-year period. I think that’s a very reasonable expectation as far as average rate of return but if the contract only average is 4%, your 250 is going to be worth 370. If that average is 5%, your 250 is going to be worth 407, and so on. This one over here we start out, we put in 250 we get the big bonus so it’s up to 275 but because we have a lower cap, we have much lower growth potential. Realistically, you should probably expect to be somewhere in this range 3% to 4%. It’s intuitive if you think about it, we’re getting a 10% bonus but what the insurance company is actually doing is forwarding you, pre-paying you essentially 1% per year.

When we look at the values here, if we earn 4% with no bonus, it’s basically the same as earning 3% with the bonus. If we earn 5% with no bonus it’s basically the same as earning 4% with the bonus. When you think about it intuitively it makes sense. One thing to note here is that the bigger bonus product does give you a larger value. When interest gains compound year after year. Let’s say the market has a really good year and we go 66666, these numbers would be a little bit different but I just wanted to convey this point is what the insurance company is really doing with these carrots that they’re dangling out for you is saying Hey what?

We’re just going to give you 1% per year of prepaid interest. Future gains can compound on top of that but we’re also going to offer this other product where we’re not going to give you any prepaid interest but we’re going to give you more growth potential. You and the insurance company are in this together but with how high caps are today because of the high-interest rate environment. Let me be clear these rates today are the best that they’ve been in 20 years probably since fixed index annuities were invented back in the late ’90s. It’s an amazing opportunity to really secure today’s interest rates. This brings up another point.

Insurance companies when they price these products, it’s what we call a new money method. Meaning your money and the rates that you receive for the life of the contract are typically based on or are based on the interest rate environment at the time of purchase. Now the insurance company to protect themselves can vary the rate a little bit year to year. A volatility gets really high and uncertainty in the economy hits. We might see the 11% cap out here in year three or year four.

It might drop down to 10 it might drop down to nine. Often when things stabilize it’ll come back up to 10 or 11. These products are priced over the 10-year period based on the interest rate environment today. What that means is when we have a 10-year fixed index annuity or a seven-year fixed index annuity, what you’re doing is you’re essentially locking in today’s high-interest rate environment for the next seven years or 10 years. Now, why is that attractive? Before we get back to the numbers this is what we call the SOFR rate curve.

SOSR has replaced LIBOR and it’s because LIBOR was the London Interbank exchange rate and they were involved in a massive financial scandal. LIBOR no more. This is, essentially, the fed dot plot. Every single meeting the Federal Reserve, whenever they have them, they release a dot plot and all members of the FOMC the Market Committee project where they expect interest rates to be in the future.

This is what they project. This is actually the Federal Reserve dot plot and we see this is where we are today. Most members of the FOMC expect rates to go up a little bit. If we go up here, January, April. Rates go up a little bit. Then second half of this year into the future years, they expect interest rates to go down. If we can lock in today’s higher interest rates for a longer period of time for a portion of our money, that may make sense to consider. Back to the numbers here.

We can clearly see here, if you are a believer in capital markets and you think the markets are going to do somewhere around maybe 6% or 7%, just keep in mind when the markets do 7%, it’s often plus 15 minus 25, plus 35 minus 12, and it averages out to be 6, 7, 8, 9, 10. With the fixed index annuity, you’re not participating in any of those big down years. When we have the up years, we’re getting up to 10% or 11%, whatever the cap is. In short, if you’re bullish or you think markets will perform somewhat as they have in the past, personally, I would go with the no bonus product for– if I’m going to do this for a portion of my retirement money and I’m going to believe that “Hey, I’m probably going to outperform this over here.”

Now, if you just think, “Hey, I don’t think the market’s going to do really well, I think it’s really going to struggle. I like the 10% burden in the hand and a little bit lower growth potential. Hey, I’m fine with that 10% bonus averaging somewhere between three to four. If that means my $250,000 that I deposit today don’t have to worry about losing a single penny, my interest gains are going to be locked in. If I pass away, the money’s going to my family. If I need to access my money, I can take some interest out typically up to 10% per year, principal or interest.”

You’re happy with your 250 growing to 369 or 407, somewhere in this range is a reasonable expectation. This may be appropriate for you. The point is if you go to a seminar or you hear someone advertising these big bonuses, not to just fall for the big bonus because typically, especially over a longer period of time, you should expect to earn more interest and have greater values if you go with the no bonus option. Now for those of you who follow the channel, you know it would not be right unless I actually talked about how to incorporate the fixed index annuity into a plan.

Now, there are literally dozens and dozens of ways of how we could incorporate these financial tools into a more comprehensive financial plan. I just want to share one with you because we’re planners. We’re not product pushers. We’re not just salespeople. We require relationships with our clients.

We’re always thinking about planning and as a planner, we view the fixed index annuity as one tool that’s in the tool belt that can help to mitigate market risk and all the other risks that I talked about before. Have a plan. How can we incorporate fixed index annuities into our overall retirement portfolio? This is very simple, but it’s a good concept to understand. Let’s say you have social security of $45,000, you and your spouse, and you decide, you know what? I have $1 million. I want to put $250,000 in this fixed index annuity thing.

I’m going to go with the no bonus, I want to go with the higher growth potential, have gains lock in every 12 months and you know what? As part of my income plan, my base living expenses are about 60,000 per year. I’m going to plan on taking 15,000 out from here and 45,000 from social security, this way over the next 10 years.

I know exactly where my income is coming from. Now, typically, you have a 10% annual withdrawal limit from the Fixed Indexed Annuity, FIA. We could go in and take out up to 25,000, we could take out 12, we could take out nothing if the market crashes, and we don’t want to take anything from that portfolio, let’s take out 25,000 from here.

If it grows to 350, let’s take 35 out. This is a very, very simple income plan. I’m not going to get into the tax planning with this, I’m just focusing on income and safe growth and we’re secure growth and how these can work together. We know over the next 10 years, we’re going to receive minimally $60,000 per year.

Our baseline expenses are going to be covered. Now, our go-go years, our fun years, hey, we’re going to live off maybe the dividends or interest or maybe we’re taking principal withdrawals or maybe some combination there and we’ll take 20,000 from the investment portfolio. Now, what will this best investment portfolio be worth after taking out 200 grand 20,000 times 10 in 10 years?

I don’t know. I have no clue because it could be worth $1.5 million dollars. If it’s not a good decade, the 715 might be worth 250. That’s the unknown. When we’re taking withdrawals from an investment account, there’s an element of uncertainty because if we get two, three years in a row or maybe two out of five or three out of five, we have no idea what this is going to be worth. It could be a really good six years, and then year seven, eight, and nine, the market stinks. We have no idea. Over here, we know we’re never going to participate in the downside.

We’re going to be able to take this money out. We’re going to be able to rely on that. We have more certainty now, we’re getting our baseline expenses covered for, but because we won’t lose, the worst-case scenario is 10 years times 15,000 is 150, so if the market never goes up in any year, we’ll take 150 out, we’ll be left with 100 but if we average that 6.6% with the 11% cap, and 10 years after taking $150,000 out, our $250,000 secure bucket after providing us income, is worth about 270,000.

Now, we’re starting to have a plan of how we’re incorporating more secure tools into the retirement portfolio. We don’t have to worry about this income. We don’t have to worry about the principal. We can sleep a little bit better at night, typically, and most likely this investment account, I would like to believe is going to be worth more because we’re only taking out about 2.5% there, the dividends should cover that but you can start now thinking and mixing and matching and building plans, understanding how some of these different tools could be used.

Hey, just a quick cut in here to let you know that if you have questions, 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, please share this video with someone who you think may be retiring, a coworker, a friend or family member, so we can help them have the education that you’re receiving today. Some high-level takeaways here.

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, et cetera. They have more safety than bonds. Real quick, I did want to show you this. This is the 7 to 10-year government treasury bond over the past two years. This is what it did. It was at 115. Today it’s trading at 95, government treasury. Bonds are not safe from market losses. You talk about liquidity, yes, we can go in and take money out just like the fixed index annuity but we have to take money out sometimes when the market is down and not just the stock market, the bond market can be down. This is AGG, which is an investment-grade corporate.

It’s the proxy for essentially corporate investment-grade bonds in this country. Same thing, over the past two years. We’re trading at 115, trading at 97 today. Look at this one. Some $30 billion or $40 billion is invested in this. This is a leveraged bond fund. It’s very popular because it pays a little bit higher interest rate than you can typically find. It was trading at 135 down to 106. Again, bonds are not safe. They have a role that we can incorporate as another tool inside a financial plan.

When we talk about the fixed index annuity here, number one reason we add something like this to a mix of other investments is to help smooth out the plan, smooth out the variable possible outcomes, but also, because it’s something that is not going to lose when the market goes down, when the stock market or bond market goes down, when interest rates rise, we take all that out of the picture. Take away number two, have a plan.

Don’t just go to a dinner seminar, buy an annuity because it sounds good and then you don’t know what you’re doing. Doctors are horrible at this. Typically, all the doctors we’ve worked at over the years, I don’t know what happens. When we do reviews and we’re trying to figure all this out, what they bought over the years, they tend to just have one of everything.

Don’t be a doctor when it comes to your financial investments. Have a plan, have a purpose for it. Understand how it fits into everything else, how you’re going to take income out of it. What are we doing from a tax perspective? This is why we call it the retirement success plan because this is exactly what we do. If you’re a new client coming over and you don’t have a mess to clean up there, we have a blank slate.

It’s a canvas where we can start to paint the picture of your retirement. If you do have a lot of different things from over the years, we’ll clean that up. It takes a little bit more work, but we can still make that orchestra, start playing that, that sound of the music that is your retirement goal. Take away number three, if you’re bullish and you believe the markets are going to do well over time, but you just want a piece of your money that isn’t going to go down if things go haywire, probably the strategy with no bonus is going to give you more earning potential, but it’ll probably earn more in that bullish environment.

If you say, you know what? Just give me the bird in my hand. I want the big bonus and I’m happy making 3%, 4%, 5%, that one may be right for you or if you think the markets are going to be down more than they’ll be up over the next 10 years, that one may be right for you. Take away number four. Do the math. If the insurance company is giving you a 10% cash bonus up front and it’s a 10-year surrendered charge period, essentially they’re pre-paying you 1% per year. Your non-bonus annuity can earn 5% to make up for the bonus annuity that only has to earn 4.

Take away number 5, a simple way to do the math as far as your expected rate of return. The market usually is up about 7 out of 10 years. Let’s lope one off there. Assume we cap out in those 6 years. If you have a 10% cap or 15% cap, just multiply it by 6 over a 10-year period because that’s a little bit more conservative, and then divided by 10 to get your average rate of return. I think that’s a pretty conservative estimate for what you should expect to earn over the long run. Take away number 6, these contracts do have exit fee schedules or surrender charges, but you can access your money.

They’re not trying to hide your money away, lock your money away. They just say, “Hey, if we’re going to provide you safety and guarantee your principal, give you the opportunity to participate in the market and with no risk, we just need to know that people aren’t going to be putting all their money into these contracts and taking it all out the next day.” Life insurance companies need stability on the balance sheet in order to provide you these guarantees. They usually allow about 10% per year access of your account value. If you put in 250 and it grows to 350, you could take out 35,000.

Don’t put too much money into these contracts. They’re just a financial tool that can reduce portfolio volatility, smooth out expected returns, but they can provide you income just like we showed you in this example, they can be a tool that’s used for just supplemental income to take whenever you need. Take away number 7. This is getting to be a lot of takeaways, but this is the last one.

We didn’t exactly cover this, but understand that if you bought an annuity in the past, I alluded to when your insurance company using what we call new money rates. The growth potential and the adjustments to the cap or any growth rates that you have are typically based on the current interest rate environment. What does this mean?

Let’s say you bought an annuity 3 years ago, or 5 years ago, or 7 years ago. The bonus annuity can be very important because what you could possibly do is use that bonus to pay any remaining surrender charges that you have on an old annuity to not only get you into a place to where your account value is much more than where you started, but your new contract will also have additional or usually much more growth potential than your old one. The bonuses could possibly put you into a position where you have more account value after surrender charges from the old contract and much more growth potential moving forward.

Now, the downside or the consideration there is that you will be creating a new exit fee schedule. Make sure you don’t need that money anytime soon except the 10% annual withdrawal provision. If you’re new to fixed index annuities and you didn’t quite understand all the terminology or follow along with everything I was saying today, click right here to watch Fixed Indexed Annuities – The Basics, a video I did about a year ago and that’ll really help you have a good understanding.