Fixed Indexed Annuities:
Turning Retirement Savings Into Retirement Income
A retirement account balance tells you what you have. It does not automatically tell you how long it will last.
By Fortis Insurance Solutions
One Plan. Four Pillars. Protect. Retire. Bank. Leverage.
For much of your working life, retirement planning tends to revolve around one goal:
Accumulation.
Save more. Contribute to the 401(k). Build the IRA. Invest. Grow the account balance.
But retirement eventually changes the question.
Instead of asking:
“How much have I accumulated?”
you may need to start asking:
“How much dependable income can my savings produce—and how long can that income last?”
That distinction matters.
Because a balance is not income.
A statement is not a plan.
And when your paycheck eventually stops, the job of your retirement money changes. Some of those dollars may still need to grow, but other dollars may need to provide stability, liquidity, protection and dependable income.
That is where a Fixed Indexed Annuity, or FIA, may deserve consideration as one component of a broader retirement-income strategy.
What Is a Fixed Indexed Annuity?
A fixed indexed annuity is an insurance contract issued by an insurance company.
It provides the opportunity to earn interest based in part on the performance of one or more external market indexes. However, your money is not directly invested in the stock market or in the index itself.
Depending on the contract, indexed interest may be calculated using participation rates, caps, spreads or other crediting methods. Because of those methods, an FIA should not be expected to earn exactly what the underlying stock market index earns.
That is an important distinction.
The purpose of a fixed indexed annuity generally isn't to outperform the stock market.
Its potential value comes from combining several features that can become increasingly important as retirement approaches:
Protection. Growth potential. Tax deferral. And, when structured appropriately, lifetime income.
1. Protection From Market Downturns
One of the primary concerns many people develop as retirement gets closer is protecting money they have already accumulated.
When you are 30 or 40 years old, you may have decades to recover from a major market decline.
When you are approaching or already in retirement, the equation can be different—particularly if you are withdrawing money while your portfolio is declining.
Fixed indexed annuities are designed so that negative performance of the underlying market index does not directly create a corresponding market loss in the indexed account.
For example, if an index declines significantly during a crediting period, an FIA generally does not simply pass that market decline through to the contract owner the way a direct market investment could.
That does not mean an annuity can never lose value under any circumstances.
Withdrawals, surrender charges, rider costs, market-value adjustments where applicable, or taking money outside the provisions of the contract can affect the amount available to you. Guarantees are also dependent upon the financial strength and claims-paying ability of the issuing insurance company.
That is why understanding the actual contract matters.
The objective is not simply “safety.”
The objective is understanding what is protected, what is guaranteed and what conditions apply to those guarantees.
2. The Opportunity for Indexed Interest
The second component is growth potential.
With a fixed indexed annuity, interest-crediting strategies can be linked to an outside index such as the S&P 500 or another available benchmark.
If the applicable index performs positively during the measurement period, the contract may receive an interest credit according to its specific crediting formula.
But there is an important word in that sentence:
Formula.
If an index increases 12%, that does not necessarily mean your annuity will be credited 12%.
A participation rate may determine how much of the index increase is considered.
A cap may place a maximum on the interest credited.
A spread may be deducted before interest is calculated.
Different contracts can use very different methods.
This is why comparing annuities solely by looking at an index name can be misleading.
The better question is:
How does this particular contract calculate interest, and how does that feature support the job I need this money to perform?
3. Tax-Deferred Accumulation
Annuities also provide tax-deferred accumulation.
Generally, interest credited inside an annuity is not taxed each year as it is earned. Taxes are deferred until taxable amounts are distributed. The eventual tax treatment depends on factors including whether the money used to purchase the annuity was qualified or nonqualified and the manner in which distributions are taken.
This can be particularly relevant when an annuity is purchased with nonqualified, after-tax money.
However, there is an important planning distinction when IRA, 401(k), 403(b) or other qualified retirement money is involved.
Those retirement accounts already receive tax-deferred treatment.
Therefore, when qualified money is used to purchase an annuity, the reason for considering the annuity should generally involve the insurance features of the contract—such as income guarantees or other applicable benefits—not simply tax deferral.
And tax-deferred does not mean tax-free.
The tax consequences of withdrawals and income distributions should always be evaluated based on your individual circumstances and, when appropriate, with a qualified tax professional.
4. Creating Income You Cannot Outlive
For many retirees, this may be the most important conversation of all.
Accumulating money is only the first half of retirement planning.
The second half is determining how that money is going to become income.
Social Security may provide one source.
A pension may provide another.
But for many households, there remains a gap between the income those sources provide and the amount needed to support the retirement they envision.
Certain annuities can be structured to provide guaranteed lifetime income.
Depending on the contract, this may involve annuitizing the contract or using an optional guaranteed lifetime withdrawal benefit or income rider. Some riders may involve an additional charge and have specific rules governing withdrawals and future benefits.
This is where retirement planning begins to move beyond simply asking:
“What rate can I earn?”
and toward a potentially more important question:
“How much income can this portion of my retirement assets reliably produce?”
Those are two very different objectives.
Accumulation Value and Income Value Are Not Always the Same Thing
This is one of the most important concepts to understand when evaluating an income-focused annuity.
Depending on the contract, an annuity with a lifetime-income feature may have values used to calculate future guaranteed withdrawals that are different from the contract's actual cash or accumulation value.
That means a number appearing on an illustration for purposes of calculating future income should not automatically be interpreted as money that can be withdrawn as a lump sum.
The terminology and mechanics vary by carrier and contract.
This is why an annuity illustration should never be evaluated by looking at one large number in isolation.
You need to understand:
What is the actual account value?
What is the surrender value?
What value is being used to calculate income?
How much guaranteed income can actually be received?
When can that income begin?
What happens if additional withdrawals are taken?
Those questions reveal much more than simply looking for the biggest illustrated number.
What a Fixed Indexed Annuity Is NOT
Understanding what an FIA does is important.
Understanding what it does not do may be even more important.
It is not the stock market.
You do not own shares of the underlying index, and you should not expect to receive the index's full return.
It is not a bank account.
An annuity is an insurance contract. It is not FDIC-insured, and its guarantees depend upon the issuing insurance company's financial strength and claims-paying ability.
It is not designed to be short-term money.
Deferred annuities are generally designed for longer-term objectives. Many contracts have surrender-charge periods, and taking substantial withdrawals early can have financial consequences.
It is not automatically appropriate simply because someone is retired.
The right strategy depends on your income needs, time horizon, liquidity requirements, existing assets, Social Security, pensions, tax situation, legacy objectives and overall retirement plan.
And perhaps most importantly:
An annuity should not be the entire retirement plan.
It should have a specific job within the plan.
The Question Isn't “Are Annuities Good or Bad?”
Retirement products are often discussed as though they fall into two categories:
Good or bad.
That is usually the wrong conversation.
A better question is:
“What job does this money need to do?”
Money needed for emergencies has one job.
Money intended for long-term growth has another.
Money intended for legacy may have another.
And money that must help produce dependable retirement income has yet another.
A fixed indexed annuity may be appropriate for someone who wants to allocate a portion of retirement assets toward protection and future income while maintaining the opportunity for indexed interest.
For another person, it may not be the appropriate solution at all.
The strategy should determine the product—not the other way around.
Seven Questions to Ask Before Considering a Fixed Indexed Annuity
Before moving retirement assets into an FIA, consider asking:
1. What specific problem am I trying to solve?
Is the objective accumulation, principal protection, income, legacy—or some combination?
2. When will I need income?
Income beginning next year may require a very different strategy from income beginning eight or ten years from now.
3. How much liquidity do I need?
Money that could be needed unexpectedly should be evaluated carefully before committing it to a long-term contract.
4. How is indexed interest calculated?
Understand caps, participation rates, spreads, crediting periods and available indexes.
5. Is there an income rider?
If so, understand its cost, income calculation, withdrawal percentage and restrictions.
6. What happens if I withdraw more than the permitted amount?
Excess withdrawals can potentially reduce future guarantees and other contract benefits.
7. How financially strong is the issuing insurance company?
The guarantees inside an annuity ultimately depend upon the claims-paying ability of the insurer.
From Retirement Savings to Retirement Structure
Retirement planning eventually reaches a point where having money is no longer enough.
You need to know what each portion of that money is supposed to accomplish.
Some assets may remain positioned for growth.
Some may provide liquidity.
Some may address legacy goals.
And some may be positioned to help create the dependable income that replaces the paycheck you once received from work.
That is the bigger conversation surrounding fixed indexed annuities.
Not:
“How high can this account grow?”
But:
“How can the assets I have accumulated help support the retirement I actually want to live?”
At Fortis Insurance Solutions, we believe retirement planning should begin with your objectives—not a product.
We evaluate your projected income, retirement assets, Social Security, pensions, tax considerations, liquidity needs and the retirement income gap before determining what strategies may deserve consideration.
Because retirement isn't simply about accumulating the largest possible balance.
It's about turning what you've built into a structure designed to support you for the years ahead.
Ready to take a closer look at your retirement income strategy?
Contact Fortis Insurance Solutions to schedule a retirement income review and determine whether your current assets are positioned not only to grow—but to eventually become the income your retirement will require.
This material is intended for educational purposes only and is not intended as tax, legal or investment advice. Annuity products, features, guarantees, surrender periods, withdrawal provisions, indexed crediting methods and optional riders vary by insurance company and contract. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Consult the applicable contract and appropriate financial, tax and legal professionals regarding your individual circumstances.
Schedule Your Strategy Session Today
Retirement income planning is about more than choosing a product. It’s about understanding what you have, what income you’ll need, and how each part of your retirement strategy is supposed to work together.
Let’s take a closer look at your current retirement assets, projected income, and whether a fixed indexed annuity has a role in your overall strategy.
Fortis Insurance Solutions
One Plan. Four Pillars.
Protect. Retire. Bank. Leverage.
Helping Families and Professionals Build Financial Systems That Endure.