Four Things Financial Professionals Need To Know About Fixed Index Annuities

 
Fixed Annuities play a large role in well-rounded retirement distribution plans. When the ‘age of pensions’ slowly began to fade away in the 1970-1980’s a large need began to develop for guaranteed income-generating financial plans. Though annuities sometimes get a bad rap in the industry because of their fee structures, sales charges, and rider-limitations, there is an absolute need for these products, as long as they are designed correctly to fit your distribution strategy, and you fully understand how to position them.

1. Fixed Annuities are designed to generate income: they take a lump sum and distribute it based upon a selected term, or provide a lifetime benefit that you cannot outlive. The pros include the guarantee payout options, which fight off market and interest rate risk during your retirement years. The disadvantages are that they can sometimes carry a sales charge, and factor in a mortality charge that is only specific to annuities and other types of endowment contracts. In addition, there may be penalties for accessing the cash before a certain time frame, so liquidity is something you need to address in your plan before purchasing an annuity.
2. When considering the ongoing changes in social security payouts and pension plans, fixed annuities can offer a safety net and support system for retirees living on a defined monthly or annual budget. One potential pitfall is that sometimes fixed annuities also have fixed payouts that do not incorporate adjustments to inflation. This can pose a risk for retirees living on a fixed income, as the rising cost of goods and services can eventually outpace the dollar-value payout of the annuity.
3. However, the fixed payout structure can be to your advantage, as annuities typically guarantee you a fixed rate of return as well. This helps diversify away from the traditional stock and bond market, and reduce the volatility of your total portfolio.
4. Perhaps the biggest potential benefit to a fixed annuity plays into your mortality tables and life expectancy when you consider the lifetime income annuitization method. When you annuitize, and begin drawing income from the plan, your monthly/annual payout is calculated through the amount of money in the annuity, the assumed rate of return on your money year-to-year, and your actuarial timetables. When the income is paid out in the lifetime benefit, you are guaranteed a payout as long as you are living. The contract is designed to pay out all of the money between your annuitization date and your expected/calculated ‘age of death’. Once you live past your assumed ‘date of death’ you continue to receive income payouts for the rest of your living years, and can often generate much more income form the contracts than if you stuck to the traditional methods of ‘pay as you go’. This is often the most efficient way to utilize ALL of the money you saved for your retirement years, regardless of how long you live.

If you haven’t considered implementing a fixed annuity into your retirement distribution plan, you may be overlooking one of the most valuable income-generating financial tools available.

Article by Andrew Kirwin

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