The ABCs of FIAs (Fixed Index Annuities)

A Conversation with Jim Poolman

[Editor’s Note: Jim Poolman is Executive Director of the Indexed Annuity Leadership Council, a coalition of life insurance companies that offer fixed indexed annuities (FIAs). He outlined the benefits of this stable retirement savings vehicle for the readers of Financial Poise.]

What are Fixed Index Annuities (FIAs)?

FIAs are contracts between you and an insurance company. Regardless of market swings, this financial product guarantees a minimum rate of return for a fixed number of years. Interest is earned based in part on changes in a market index which measures how the market – or part of the market – performs. Other characteristics of FIAs include no risk to your principal, tax-deferred growth, and the ability to create an income stream you can’t outlive. State insurance commissioners are the regulatory authority and states must have life insurance licenses to sell the product. For FIAs, the insurance company assumes the risk.

What is the Indexed Annuity Leadership Council (IALC)? How can it help retirement savers?

The IALC is a consortium of life insurance companies working together to educate retirement savers on FIAs as part of any balanced financial retirement plan. Its mission is to help educate the public, including retirement savers, reporters, regulators, and financial professionals about FIA benefits.

These products provide a source of guaranteed income, principal protection, and interest rate stability in retirement. The IALC also educates Americans about retirement savings and planning. They provide access to retirement tools, such as customizable calculations and retirement planning materials.

Why are FIAs a good choice for one’s retirement portfolio?

In March 2018, the Indexed Annuity Leadership Council conducted research on the state of America’s workforce. They found that nearly 80% of workers are, above all, looking for a lifetime income. FIAs meet Americans’ number one retirement need by offering a steady, guaranteed, lifetime income stream. Additionally, FIAs are a key component of a diversified financial plan. They offer:

• Protection against stock market volatility
• Tax-deferred growth
• Portfolio balance
• Predictable earnings

Jim, can you explain why or why not this retirement vehicle would be a good choice for high-net-worth individuals?

FIAs provide a guaranteed return, versus equities, which can fluctuate and be more volatile. Most high-net-worth individuals traditionally invest in a mix of stocks and bonds. The addition of an FIA will add more balance to their overall portfolio along with added security that everyone needs.

[Editor’s Note: Fixed Index Annuities can be an excellent retirement savings vehicle. A few caveats are in order. This is an insurance product, not a security. The principal protection and stability come with the trade-off that returns are comparable to a certificate of deposit. FIAs can be subject to substantial commissions, fees, and early exit penalties. Do your due diligence on that front before signing on the dotted line.]

You mentioned the IALC released research in March 2018 on the state of America’s workforce. Can you tell us more about what you found?

The IALC released a study, “The State of America’s Workforce: The Reality of Retirement Readiness,” in March 2018. The study found retirement readiness is significantly impacted by a worker’s industry and company size. The data found that eight in 11 blue- and gray-collar industries perform below the overall average for America’s workforce. But when comparing retirement-readiness scores across occupations, two of those industries, protective services and engineering, are better prepared for retirement than the entire white-collar industry. The data showed that access to employer-sponsored plans, like 401(k)s and pensions, correlates directly to retirement readiness.

Did your recent study find retirement readiness improved for individuals who diversified their financial portfolio with an FIA?

Our data showed that 59% of individuals about five to 10 years from retirement who feel prepared for their golden years have a 401(k) plan. Only about 39% of unprepared workers do. Further, pre-retirees who feel most prepared are

• five times as likely to have individual retirement accounts (IRAs)
• eight times as likely to have mutual funds
• and 10 times as likely to have an annuity

Owners of annuities, particularly FIAs, may feel prepared given the insurance product is one of the few that offers a lifetime income and principal protection from market swings.

It is important to remember that while there is no one right answer — or guaranteed sure thing — a balanced financial plan is a proven strategy for income growth and wealth protection. Diversifying can mean a mix of 401(k) funds, IRAs and Roth IRAs, FIAs, mutual funds, stock investments, and more.

What is the future for FIAs?

With today’s people living longer and healthier lives, Americans are very concerned about having money to last a lifetime. This makes an FIA very appealing because it offers the guaranteed income people want in a retirement savings vehicle.

Additionally, sales for FIAs have recently increased. That indicates that more pre-retirees are learning how this product is valuable in a balanced portfolio for retirement or long-term planning. As in the past, FIAs will continue to evolve, responding to individuals’ demands and needs. The future of retirement and financial planning is changing, and an FIA is a retirement savings vehicle Americans will likely want in their retirement portfolio.

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

• Basic Investment Principles 101: From Asset Allocations to Zero Coupon Bonds
• Valuing Real Estate Assets
• Basic Investment Principals 101

You may also like:

• Life After Bonds: Non-traditional Investing Advice for Boomers

This is an updated version of an article originally published on April 5, 2019. Image Credit: Indexed Annuity Leadership Council.]

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