What if you could have an investment that you knew you could not lose? Would this get you excited, or would you be thinking, “This is too good to be true”? I want you to imagine you and a friend are going to Las Vegas. This does not mean you are a gambler, but let’s pretend for a moment that you are sitting in Caesars Palace at the roulette table. The dealer tells you that you are in luck; he is going to let you place your money on black. He says if the ball lands on black, you win – but the really great news is that if it lands on red, you can keep all of your money. In other words, you can only win and you can never lose what you started with. You know as well as I do that you would want to play all the time because you would always be a winner.
Let’s spend some time talking about the advantages of a Fixed Indexed Annuity (FIA). Let’s go back to the statement, “This is too good to be true.”
First, FIAs have been around since the mid-90s and have been modified over the years. Here is how they work to get the Las Vegas kind of result we just talked about. A company purchases bonds with your premium, which in turn buys options. These options mean that the bonds can make money depending on whether the market has an upturn or downturn, called puts and calls. I know you might be saying to yourself, “What does all of this mean?” Here is the simple truth: If the market goes up, you gain, and if the market goes down, you do not lose. We call this the “Zero is your Hero” strategy. Now, you may ask, “How can I get an FIA?”
Second, an FIA is a long-term investment of usually 10 years, but some carriers may have strategies that last more or less time depending on what you are looking for. Like most retirement funding choices out there, long-term is usually better because your principal has a chance to grow over time. FIAs can provide accumulation without risking your principal. If you are looking for something short-term, then this strategy is not what you want – it is not a get-rich-quick scheme.
Additionally, most carriers will offer a bonus on your premium. For example, if you invested $100,000, you could possibly receive a 10% bonus, which would bring your total to $110,000 on day one. The bonus can be a great feature because your principal grows immediately. This helps offset any early withdrawals that may fall under the surrender charge. Most carriers will let you take a 10% withdrawal each year without penalty, but if you wanted to take more than 10%, then you may be subject to a surrender charge. I want you to always keep in mind though that you are thinking long-term with an FIA.
Third, an FIA can provide income for life. You might ask, “How does this work?” I will show you with a real-life example. I have a client who had a 401k. He had accumulated $140,000 from his employer and was ready to retire with his spouse. Their goal was to take their Social Security benefit each month, but they could not maintain the lifestyle they wanted without additional income. They had decided to put the money in the bank and take out $600 each month to supplement their income. The problem though was that they would run out of money after 20 years. Then what? Well, we know what inflation could be in 20 years, right? What if they lived longer? The national statistics show that for a couple who is 65, there is a 40% chance one of them will live to be 95. I gave them a different strategy that would allow them to get $1,400 a month for the rest of their lives, even when one of them dies. Let’s do the math. Say they draw on this money each month for 25 years – that would amount to $420,000. Which strategy would you prefer?
One last thought. You could be wondering, “What about the company using my money to make money?” Let’s do a comparison with a bank. First of all, banks are not in the savings business, but the lending business. They pay you less than 1% to hold your money, but loan it out at 4-6%. That is a pretty big profit margin.
We have clients all the time who ask, “When is the right time to transition into an annuity?” The answer is not “one size fits all,” but here are some general observations. First, when are you going to retire? If you decided to retire at 66 and had a 401k, it would probably be important for you to begin thinking about no longer risking your money, but instead placing it in a strategy that will benefit you. Second, when do you have plans of taking your Social Security benefit? People go back and forth all the time asking themselves if they should take it at 62, 66 or 70. This is hopefully another stream of income for you that you will be counting on for a lifetime. You want to maximize as much as you can, so deciding when to take it is crucial. Third and very importantly, how long do you want to risk your money in a 401k, etc.? Our philosophy is, the older you get, the more conservative you become with your money. You have worked hard to get what you have accumulated, and we do not want to see people lose their money like we saw in 2008. Finally, clients ask how much money should be put into an annuity. This is an excellent question, and the best way to answer this is to make sure you have liquid funds, or as I call them, “rainy day funds.” All of us have those days, and some have more than others. A good rule of thumb is to make sure 15-20% of your funds are liquid.
It’s important to find an advisor who sits down with clients and listens to their goals and objectives. This advisor should develop a strategy that will fit your needs on an annual basis and see to it that those goals are being met. It is crucial for your advisor to know what you want to do before he or she starts advising or suggesting strategies that might best suit you.
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