The Fixed Indexed Annuity (FIA) Discussion A compelling question is where do people safely invest in the retirement years? If your projected retirement expenses exceed guaranteed income sources such as Social Security and pensions, you may want to cover that deficit with the certainty of a FIA. FIAs have two accounts: your actual cash value (CV) account and an Income account Value (IAV) used to determine your lifetime income. The cash account is credited interest based on the performance of a broad index, typically the S&P 500. If performance is positive, you get a credit up to a limit, known as a cap. Negative performance is ignored; you simply get no additional interest credit for that period. Your lifetime income payments and any fees are subtracted from your cash account value. Your income account can receive an automatic annual credit, known as a "rollup". A typical free rollup is around 4%. If you include an income rider for a small fee (typically 1%), you can get a 5-7% net guaranteed annual rollup during your entire deferral period and perhaps a 5-10% initial bonus. Rollups end when lifetime payouts begin and you can not access the income account except by lifetime payout. A typical payout factor at age 65 is about 5%, and generally goes up or down 0.1% per year as an age adjustment, so a at age 70 you would get around 5.5%. Joint income reduces the payout by about 0.5% and is based on the age of the younger person but pays as long as either party survives. With a FIA, unlike an immediate annuity, you maintain complete control of your principal and any cash value at death goes to your beneficiaries. As an example, if a person aged 62 put $100k in a FIA with an 8% bonus and 7% annual rollup, at age 70 his income account would be $185k and would yield an annual income of about $10,200, guaranteed for life even if the cash account runs out. So a FIA is insurance in case you live well past life expectancy. By comparison, the S&P 500 has done under 4% gross of any fees since 2000. In 2015, we are entering the 7th yr of a bull market, which has not happened since 1904. A correction, possibly severe, is statistically probable in the next few years. Of course, you might do better in the stock market, but a FIA might be a reasonable choice for some of your money. Another plus for a FIA is that they are a good proxy for the bond portion of your portfolio. Reputable insurance companies invest most of your premium in AA or better bonds. So you get the guarantees of a bond and some of the income but none of the interest rate risk. So you can exchange some or all of your bonds for a FIA and lower your overall portfolio risk. On the downside, FIAs have a penalty period, where you lose a percent of your money if you surrender your contract early, typically from 7-14 years. That said, the issue may not as bad as you think. First, many companies offer a "free" 5-10% surrender amount every year. Next, you absolutely must have a more than adequate source of emergency funds outside the annuity to avoid raiding the principal and incurring surrender charges. The real point is that you must maintain the annuity money in tact somewhere and not access it under any circumstances if it is to provide income. So the money is really off-limits anyway whether it is in an FIA, CD, structured note or brokerage account. Bottom line: many people might be relieved of financial stress by using a FIA to cover an income deficit on a guaranteed basis. Very important, you can also ladder annuities to cover inflation. Another advantage is that once you turn on the lifetime payout, you don’t have to actively manage the account as you do a securities portfolio, which is convenient as you age and really helpful if you lose capacity and must be cared for. To be suitable, the FIA portion of your entire portfolio should typically be under 30-40%, or about what bonds would have been. Annuity companies generally require a through suitability analysis to guard against over allocation of your investable assets. Final thought: annuities provide excellent creditor protection in many states. Florida offers residents unlimited creditor protection on both the cash amount and also distributions from an annuity per statute 222.14.

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