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Fixed Indexed Annuities: The Next Generation

Gary Scheer

If you are 55 years of age or older, chances are you regularly receive invitations to seminars and lectures on such topics as “How to Secure Your Finances in Retirement”, “How to Maximize Your Social Security Benefits”, “How to Create a Guaranteed Income for Life”, “How to Enjoy Stock Market Returns with No Downside Market Risks”, and more.

Quite often, these presentations focus on the benefits of including fixed indexed annuities, also known as indexed annuities, as a “safe money” strategy for one’s retirement income planning.

Traditional, fixed or multi-year guaranteed annuities (MYGAs) are often compared to certificates of deposit. Created by insurance companies, they offer a guaranteed interest rate for a set period of time, typically three to 10 years. These rates are often considerably higher than those of bank CDs for similar time periods. Interest in these annuities grows on a tax-deferred basis, and often can be accessed on a penalty-free basis prior to the annuity’s maturity date.

In contrast, fixed indexed annuities enable savers to earn more than the minimum interest, by linking or tying the participant’s gains to an external market index through the use of call options. The Standard and Poor’s (S&P) 500 Index is the most broadly-used index in fixed indexed annuity product offerings. The investor’s principal is invested in the issuing company’s general account, most of which is made up of “investment grade” corporate and government bonds.

If the market rises between the inception of the annuity and the lock-in period of one to as many as five years, the investor will realize a portion of the gains. These gains are then added to the principal automatically, thereby creating a new asset base. Should the market decline during the next lock-in period, the original principal, plus the previously locked-in gains, will stay intact.

In other words, fixed indexed annuities credit interest when major market indices rise, and preserve that interest when markets fall. Owners of such contracts accept a ceiling on the potential gains in the market, in exchange for a floor underneath their investment.

Since the first indexed annuity was introduced to the public in 1995, the industry has grown from one company and one product to over sixty companies and hundreds of indexed annuity offerings. These products should not be confused with investments. They are actually savings vehicles that provide a legitimate opportunity to outperform other “safe-money” vehicles. Due to competition and innovation, some indexed annuity providers offer cash bonuses for all deposits made into the plan for a period of one to three years. Interest is earned on the original principal and the bonus.

One of the primary reasons people purchase an indexed annuity is to generate a consistent, predictable income in retirement, without being negatively affected by stock market volatility and other risks that affect retirees and those approaching retirement. Most fixed indexed annuities offer an income rider, also called a Guaranteed Lifetime Withdrawal Benefit (GLWB) or a Lifetime Income Benefit Rider (LIBR).

These riders are often optional and usually have fees associated with them. When the rider is triggered, the contract holder will effectively turn on a guaranteed income for their entire life, and possibly the life of their spouse, if they are married. As a result of mortality credits available only in fixed and fixed indexed annuities, contract holders can continue to receive a guaranteed stream of payments no matter how long they live, even if they spend down their principal.

In the last few years, some of the newer indexed annuities offer leveraged payouts with features such an “income doubler”, should an annuitant qualify for long-term care benefits. An income rider can be viewed as “income insurance”. Since people insure their homes, cars, lives, and other valuables, insuring one’s income may be a wise choice as part of a sound retirement income plan.

With concerns about another major market downturn on the horizon, like what we experienced in 2008, a sideways stock market, and a seventh year of near 0% interest rates, several insurance companies have designed innovative fixed indexed annuities with alternative and proprietary indices.

This new generation of indexed annuities offer allocation options, without the interest rate caps of the products that preceded them and employ “volatility-controlled” or” volatility-managed” strategies. Insurance companies employ sophisticated strategies to link policy assets to the market during times of low volatility, and move to cash and or short-term bonds when volatility exceeds a pre-determined level. Some indexed annuities, offered by multibillion dollar insurance companies, offer savers the opportunity to participate in as many as 12 different asset classes, both inside and outside of the United States, all with a “no-loss” guarantee.

This idea was given even more credence by Jim Paulsen, the chief investment strategist at Wells Capital Management. Upon recently acknowledging the upswing in stocks in the NASDAQ composite, Paulsen warned that since our nation has been in the third longest period in post-war history without a correction, we might be in for a full-blown correction. He advised investors to look outside the US. “Stock markets in Europe and Japan have underperformed U.S. stocks for the past couple of years or so, thereby making them a much better value”.

Clearly fixed indexed annuities are complex financial instruments and should be considered as part of an overall financial and retirement income plan. As a member of a conservative industry with a long history of protecting the public’s assets, most insurance companies feel it is suitable to place no more than 50 percent of one’s investable assets into annuities.

With changes in social security on the horizon, the decreasing number of Americans with defined-benefit pension plans and longer life expectancies, the next generation of fixed indexed annuities may be a good place to grow and protect your “safe money” assets.

Retirement income planning is not a do-it-yourself proposition. Your likelihood of success in living the retirement of your dreams, and not running out of money in your “golden years”, is greatly increased through counsel from a knowledgeable professional who specializes in working with people nearing retirement or in their retirement years.

About the Author:

Recognized as one of the leading retirement experts in the nation, Gary Scheer has helped thousands of individuals and families in New York, New Jersey, and across the nation prepare for a secure, successful retirement.

For more information about income for life, contact Gary Scheer at or at (973) 539-4100.


Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Gary Scheer, LLC and RWA are not affiliated. Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors.


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