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Is a fixed index annuity right for you?

Protecting part of your portfolio with a fixed index annuity can allow you to diversify more aggressively.

Matthew Gray, Senior Vice President of Product Innovation at Allianz Life, discusses how to evaluate if a fixed index annuity could be a good choice for you and your financial portfolio.

 

We know that having a comprehensive lifetime income plan is essential for a comfortable retirement. But for whom does a fixed index annuity make the most sense?

Pretty much anyone saving for retirement unless they have so much saved that they won’t ever have to worry about running out of money! Fewer and fewer people have pensions, Social Security isn’t likely going to be able meet your full income need in retirement, and 401(k) balances can fluctuate a lot and don’t typically guarantee lifetime income. A fixed index annuity can add protection, insurance, and confidence to a financial portfolio. It’s a solid backstop and can be the cornerstone of a guaranteed retirement income plan.

A fixed index annuity can help people who want to take advantage of market growth but don’t take action because they’re afraid to lose money. With a fixed index annuity, they don’t need to worry about daily volatility or losing money if the market drops but they can get some growth if the market goes up. One great feature is that a fixed index annuity allows you to “set it and forget it” for at least a year (or longer if you decide you’re happy with your index allocation choices). You don’t have to be looking at the market every day, which can be a welcome relief for those who are prone to worrying.

Is there a certain type of person who should NOT consider a fixed index annuity?

For those with ultra-high net worth, who don’t really need to worry about creating or maintaining their retirement income sources, maybe not. However, if they want to diversify their portfolio with a conservative solution, a fixed index annuity could still be a good option. On the other end of the spectrum, for people who are currently living paycheck-to-paycheck, I would rather see them focus on building an emergency fund before considering the purchase of an annuity. Anyone considering an annuity should weigh their own personal situations and unique circumstances.

What are some of the benefits of a fixed index annuity?

People can avoid “FOMO” — the fear of missing out — with the ability to benefit from market increases while having the protection from market downturns, which is a feature unique to fixed index annuities. Fixed index annuities also offer tax-deferred savings on any interest your annuity may earn. Then there’s the benefit of knowing you can’t lose your principal and credited interest to market drops and the ability to focus on the things that are truly important to you. Focusing on the “daily churn” in the market can be time-consuming and emotionally draining. With a fixed index annuity in your financial portfolio, you don’t have to be as concerned when the market drops while not being left behind if the market goes back up (although in years of market drops, you will not earn any additional interest).

What are some of the potential drawbacks to a fixed index annuity?

You typically don’t get the full upside when the market is up as the companies issuing annuity contracts can use methods such as caps, spreads, or participation rates that limit the amount of market increases your contract receives, which is the trade-off you make for being protected when it’s down. Additional-cost riders you add to your annuity could reduce principal if a contract earns zero interest or less than the cost of the rider in a year. There are things to consider about the liquidity of your money when it’s in an annuity — you can typically withdraw up to 10% of your principal yearly without a penalty, but if you need to take out more than that during the year, you will incur a penalty fee. There’s also the potential to lose out if interest rates rise considerably after purchase since annuities in the future could offer stronger value.

How can a fixed index annuity help round out or diversify a portfolio?

The value of your annuity’s principal doesn’t drop when the market is down so it’s not very correlated to other asset classes, which makes it a very good diversifier. This can allow you to be more aggressive with the rest of your investments because part of your portfolio is protected. Diversifying your portfolio with an annuity can give you a nice balance of protection and potential growth in your retirement plan. If you’re fully allocated to the market and your investment portfolio drops in a given year, you have to recover all that before seeing further gains. However, if you add a fixed index annuity to your portfolio, past interest credits in the annuity are fully protected and you don’t have to recover any losses before capturing future interest because of the powerful annual reset feature.

Any final thoughts on what makes a fixed index annuity through ReadySetSM by Allianz Life a good choice?

Not long ago, I attended a company event with about 150 people. About one-third were Allianz employees and the rest were financial professionals who sold annuities from several companies including Allianz. The presenter asked how many people in the room owned an Allianz product. At least two-thirds of the hands went up. Then the presenter asked how many people in the room had friends and family members who owned Allianz products they had recommended to them. Again, about two-thirds of the hands in the room went up. We believe in the strength of our products; we purchase them ourselves and we recommend them to our closest friends and family members. We are proud of what these products do for people.

 

Matthew Gray is the Senior Vice President of Product Innovation at Allianz Life Insurance Company of North America, Inc. Gray has spent his entire professional career as an actuary with Allianz Life, developing new products and helping create the Allianz Life dynamic hedging platform. He is a Fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and holds a Series 7 securities registration. He earned his Bachelor of Science degree in Mathematics from the University of Minnesota.

 

Any distributions are subject to ordinary income tax and, if taken prior to age 59 ½, a 10% federal additional tax.