Ask Mr. Annuity: Fixed Indexed Annuities Are an Excellent and Safe Savings Plan

Mr. Annuity’s Jeff Dorman reports that a fortune cookie advised him that “The stock market may be your ticket to success.” It’s apparent that people who listen to what fortune cookies tell them may lose a lot of money. Dorfman says that Ask Mr. Annuity “is based not based on risk, but reward.” Steve explains where those rewards can be found in this report.

Steve says that his book, “Annuities: The 21st Century Retirement Plan,” was written for all the people who lost trillions of dollars during the 2008-2009 financial crisis. The whole point of the book is to explain how people can put money away so that income is guaranteed for them when they retire.

An annuity, Steve says, is a contract with an insurance company that can take the place of a pension plan for the 80% of Americans who no longer have one. Annuities come in several forms. One is a fixed annuity, which works somewhat like a certificate of deposit. Another type of annuity is a variable annuity, often sold by stockbrokers. It allows an annuity holder to gain when the stock market goes up, the holder is exposed to risk if the market goes down. Steve points out that the market goes up and down, and in the last ten years, there have been two major corrections in the market, plus the current turbulence in the market because of developments in China.

In 1996, the insurance industry devised the fixed indexed annuity. These products eliminate the volatility of the variable annuity while providing a better rate of return than the fixed annuity. The fixed indexed annuity allows the holder to benefit if the market goes up but avoids the penalty if the market drops. And these annuities don’t have fees. “It gives you not only a guaranteed return of your money but a guaranteed return on your money.”

Sometimes people with 401(k) or 403(b) plans don’t know where they can safely move their money. Steve explains that setting up a fixed indexed annuity while one is still employed is a great way to guarantee that there will be a good return on retirement. As Jeff notes, this is a savings plan, not an investment plan. The fixed indexed annuity guarantees a return and eliminates risk. The term can be from five to fifteen years.

A holder can take money out immediately or let it grow for a while. Since this is a tax deferred situation, no taxes are due until the money is withdrawn. This instrument offers triple compounding, a great way to build wealth. Another benefit is that you can receive a bonus when you open a fixed indexed annuity. Some companies will offer a six percent premium bonus (if you invest $10,000, you get an immediate $600 bonus added to your payment). And the insurance company may pay a bonus for as long as three to five additional years.

A young saver might want to start with a $100 monthly payment into the annuity, which the insurance company would automatically withdraw each month. If you change jobs, you can roll over your 401(k) or 403(b) into a fixed indexed annuity.

As to getting your money out of the annuity, Steve explains that people need to reach age 59-and-a-half before they start withdrawing because of government regulations. A retiree can set up a withdrawal of a certain percentage of the annuity each month, to be automatically deposited in the bank. If you die before the money is all withdrawn, the balance goes to beneficiaries.

Another choice is to receive income for life. The insurance company will pay a determined benefit for life, and you can include your spouse, if you desire. A guaranteed income benefit may come with a fee to the insurance company because it is taking a risk on how long the holder will live.

Another option is to remove all the money when the annuity matures.

Steve Lance has been a teacher, a financial analyst for GE Capital, and is the author of "Annuities: The 21st Century Pension Plan." Steve Lance along with his co-host Jeff Dorfman ask and answer questions each week that are the concerns of today’s savers retirees on  Ask Mr Annuity. The Financial Network is a featured network of Sequence Media Group.