Are Fixed Indexed Annuities (FIAs) Bad for Retirees?

Ron Tetley | June 19, 2014 | Fixed Annuities, Index Annuities

The answer you receive to this question will depend on the person you ask. I’m of the mindset that if it works for my client, I like it. If it doesn’t work for my client, I don’t like it.

First, we need to understand that every investment in the world is designed with a specific goal in mind. Let me give you an analogy to help it sink in. Automobiles are all made with a specific intended use. If you needed to haul 15 people around town, you would not buy a two-seater sports car. If you did and tried to use it that way, you would not be happy with the results. It is not the car’s fault though; you should have bought a 15-passenger van. If you need to haul garbage to the dump, you do not buy a Cadillac and throw it in the back seat. You should buy a truck because it doesn’t matter what you put in the back. Just like cars, investments are designed for a specific use. If you use them the way they are intended to be, you will get the right results. If you use them in a way they are not designed for, you will be frustrated and try to blame the investment for not working correctly. However, it is not the investment’s fault; you should have been in a more appropriate investment for the result you were looking for.

There are many types of annuities to look at, but let’s look at one particular type called a fixed indexed annuity.

The retirees I work with all have a common desire: They have worked hard all their lives to accumulate what they have, and they want to keep that money safe while still earning a moderate rate of return. Most of them will probably never touch it, and when I ask them, they say they have not needed any of it for several years and do not expect to need any of it in the near future. Your timeframe for when you may need to access the funds will help determine the correct product to allow for this distribution without any charge or penalty. There are also terms that allow you to access more, if not all, of your money in cases of emergency (i.e. nursing home, extended stay, terminal illness, etc.). These are nice features, because even though you may not have the need today, it’s still comforting to know that in emergencies, you can gain access to your money without penalties or charges.

No one wants to be charged a fee for accessing his or her money, which is why it is important to think about the true purpose for your money. Once you understand that purpose, then you can start looking for investment vehicles that meet your purpose. When you match an investment up in this manner, the investment will allow you to use your money the way you intended to without any charges or fees.

Now, let me answer the question in the title of this article. If you have identified what your purpose and use for your money is, and you are able to match that up with an FIA that allows for all of that plus access in emergencies, then it could be a good product for you. If you identify your purpose and use for your money, and you cannot find an FIA that allows you to use your money the way you would need, then it may not be a good fit for you. The key is working with someone who knows these products and can help sift through them to see if one is appropriate for you and your goals. It does not matter whether you are a retiree or not.

You shouldn’t have all of your money in the stock market, just as you probably should not have all of your money in an FIA. But for retirees, I have found that more often than not, there is an FIA that is appropriate and will help you with a portion of your monies, allowing you to use your money the way that you intended, without sacrificing control or tying it up with fees or charges. For most retirees, the correct FIA can be just what you were looking for but did not realize existed. If you want to gain protection without sacrificing access and use of your money, then an FIA may be a good investment vehicle for you.

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