Discover how Fixed Indexed Annuities (FIAs) can offer growth potential while safeguarding savings from market losses.
The long-term growth appeal of the stock market is undeniable, and for many, it is an important part of their retirement planning. However, it is important to anticipate market cycles and safeguard a portion of assets needed for income during retirement.
When the market declines, recovering lost value isn’t as simple as gaining the same percentage back. For instance, if your investment drops 20%, a 20% rebound won’t restore your original $100,000—it would only bring you to $96,000. To fully recover, you’d actually need a gain of over 25%.
But what if you could limit the impact of market drops while still participating in potential index growth?
That’s the advantage of an FIA. With downside protection, your balance doesn’t decrease during a market downturn. So, even if you earn a more modest return—say 8% instead of 20%—you may still come out ahead because you avoided the initial loss. This highlights the real power of protection in volatile markets.
Introducing the Fixed Indexed Annuity
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- An FIA is a type of contract that links its growth to the performance of a market index, like the S&P 500®.
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- There is typically a cap or participation rate, that limits how much of the index’s gain you receive.
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- If the index goes down, your account doesn’t lose value due to the market decline—you earn 0%, and do not suffer a loss.
How Does an FIA Protect Against Volatility?
Protecting Against Market Drops with the “Floor”
First, the annuity limits your downside with a “floor”—a lowest-possible interest rate, regardless of the size of the market drop. A typical floor might be 0%, meaning that, instead of experiencing a 10% drop, your annuity sees no drop at all.
Upside Potential with the “Cap”
Insurance carriers offer this protection by purchasing financial options tied to the index rather than investing your money directly into the market. This strategy naturally limits how much index-linked interest you can earn in ‘up’ years. The most common limit is called a ‘cap.’ In our example, let’s assume there’s an 8% cap. If the index goes up 10%, your credited interest is capped at 8%. However, if the index goes up 6%, you get the full 6%.
Who Should Consider an FIA?
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- Individuals seeking a balance between growth potential and principal protection
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- Conservative investors wanting to participate in market growth without risking their initial investment
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- Pre-retirees who are maxing out traditional retirement vehicles and want to shelter additional funds from annual taxation
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An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. Cap rates are subject to change at any time. The interest credited is limited by either placing a cap on the amount of interest that can be earned (“cap” rate) and/or requiring a specified rate that must be surpassed (“spread rate”). If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information. Annuities are designed to meet long-term needs for retirement income. They provide guarantees of principal and credited interest, subject to surrender charges, and a death benefit for beneficiaries.
The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed. This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC. S&P and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC.
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