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Fixed Index Annuity Basics

Mark Goldfinger

When my clients ask me to list the most important ingredients required when looking to create and maintain a stress-free retirement plan, I explain to them that there are three basic financial requirements: a guaranteed income which they cannot outlive; little or no risk of losing their money/savings, and the ability to grow their money through participation in a growing stock market and NOT a receding stock market.

I then inform them that there are financial tools that will help meet these three requirements, and they are all ears! Yet, when I mention the word “annuity,” some of them will pull back, as if I said a naughty word. I believe that this pull back happens because no one ever took the time to explain to them how fixed index annuities work, and most importantly, no one ever took the time to review their financial goals and objectives to help create their own retirement income projection plan. Should the plan indicate a need for additional and guaranteed future income, a fixed index annuity might well be the perfect financial tool to keep them from ever running out of money no matter how many years they are blessed to live.

So let’s look at fixed index annuity basics, and why it has become the go-to tool for baby boomers.

First of all, in a fixed index annuity (FIA) -sometimes referred as a hybrid annuity, the client’s money is never invested directly in the stock market. An FIA is a fixed annuity with an interest rate linked to the performance of a stock index, for example, the S&P 500. A fixed index annuity allows a client to participate in market gains according to their contract, while avoiding market losses if the market declines. Unlike a variable annuity, an FIA offers safety of principal and a guaranteed minimum return. The guarantee is based upon the claims paying ability of the issuing insurance company. Some fixed index annuities offer an up-front bonus as well. Many fixed indexed annuities have caps that limit your investment gains. Additionally, fixed indexed annuities have a surrender charge, a penalty for making an early withdrawal above the free withdrawal amount. In most cases you’re allowed to withdraw 10% every year without surrender charges.

If selected, 100% of the client’s principal can be invested in the bond market, and the annuity is guaranteed that it will NOT lose money due to stock market volatility. The insurance company (using their own funds) will purchase stock market index options. When these options are profitable, the insurance company will take a small slice, and will then credit the bulk of the index option profits as paid interest into the account value of the annuitant. The stock market, therefore, is merely a yardstick for how interest will be paid. If the index options were to expire worthless (without making any profits), the annuitant’s account is not affected in the slightest, and the principal remains unchanged. This is similar to a “heads, I win” and “tails, I don’t lose” strategy that other investment strategies cannot offer.


It is important to note that as no two fixed index annuities are alike, no two index crediting methods are alike. Some annuities offer “uncapped” index interest crediting, while others offer “capped” credits. I am a strong believer in those annuities that offer an “uncapped” strategy, since it can provide greater account growth when the markets (hence the indexes) are having big upward movements.


A roll-up is when an insurance company offers a guaranteed return on your investment, for income purposes only, in the years prior to taking withdrawals. I often meet with clients who come to my office stating they have an annuity contract that guarantees them a return of 6, 7 or 8%. Typically, what they actually have is a guaranteed rate of return for income purposes that is then multiplied by the withdrawal rate to get what their income payment will be. Let me reiterate, in most of these contracts, the guarantee is only for the purpose of figuring what the income payout amount will be, not the actual contract value. Sometimes, this roll-up rate will be called the “income base,” GMWB, or “guaranteed minimum income amount.” To clarify these terms, it is important to read the prospectus if it is a variable annuity, or the statement of understanding for a fixed indexed annuity.

For our purposes, let’s call it an “income base.” Some income bases grow at varying rates: 5, 6, 8 or 10%. Some offer simple interest, while others offer compounded interest. Some have high water marks, and some have “step-up” provisions, where gains are permanently locked into the contract benefit base.

Withdrawal Rates

The withdrawal rate varies by contract depending on the age of the client. Do you want single or joint life payout? How about steady or increasing payout? The account or the income base is then multiplied by the withdrawal rate to get the guaranteed lifetime income amount. Withdrawal rates differ significantly by insurance carrier, so it is important to understand what the withdrawal rate will be for an annuity that you are looking to purchase for income purposes.

The recent market volatility is a classic example of why baby boomers are having a tough time determining how they can make their portfolio survive the next thirty or more retirement years. The last thing they would ever want to do is go back to work (in their late 70s or 80s) because their money ran out. This is one reason why fixed index annuities have become the go to choice of investment tools for the baby boomer generation, and why it should continue to remain No. 1 for the next 15 years, as our nation’s 50 million baby boomers transition to seniors.

About the Author:

Mark Goldfinger graduated from Bernard Baruch College in NYC with a double major in finance and marketing, and earned his MBA from St. Johns University.   In 1990, he moved to Southern California, where he has been providing comprehensive financial services for his growing list of satisfied clients.

To contact him, call (310) 770-5944 or email Visit to learn more about Mark and his practice.


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1 Comment

  • LaNell Barrett says:

    Hi. I put my entire inheritance in indexed annuities. Three accounts. Prior to signing over the accts, I was over and over grilling the salesman about the things I needed, or at least wanted, from it…he added yet more false beneficial bs.

    My hearing took a really bad turn to the point of being considered disabled at age 55, after a 40 yr non-stop work history. And was not able to hear/understand my way through interviews. So I at that point would needed some income, but also did want at least a little growth. Leaving an inheritance is extremely important to me. The SWORN interest rate was repeated 6%, never less, and if I did not withdraw the full yrly amount of the interest, it would add to the principal.
    When taking income time rolled around the first three years, the salesman would ask how much money I needed. Everytime, I would reply ‘half of the 6% from each acct’, and he would stutter around a few times and whatever amount he’d mention, I’d take less.
    Now I’m informed there IS no 6-6.5%, and by 12 more yrs of only taking out way less than 6%, I will have NO MONEY.
    I was much better off with Fidelity Investments lowest risk interest earning acct. Figures which he had looked over and foo-fooed as being ‘a huge risk and not making money’.

    My financial future is over, apparently. But I want all to know there are annuity pushing Madoff’s out there. The name of the liar that has destroyed me is Kevin O’Donoghue in Naples Fl

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