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When most people think of retirement planning, they tend to immediately gravitate towards stocks and bonds, but there are many other viable options. One of these that is lesser known but gaining rapidly in popularity is called a fixed index annuity (FIA) fund.
As a kind of retirement fund, FIAs are a safe place to grow your money. They guarantee a base interest rate for a specified number of years - and may pay off more if you catch market upswings, but with an FIA you also will never lose money off of your principal on a downswing.
The Three Key Advantages Of FIAs
If you are looking for the best way to balance potential gains against investment security going into retirement, an FIA will often be a wise choice. You can even gain more over the course of several consecutive years with an FIA than you would have with a volatile stock or bond. Here's why.
1. No Negative Balance.
If you invest $100,000 into the stock market and it loses 10% in year one but regains 10% in year two, you end up with basically the same $100,000 two years later that you started with. But, if you put that same $100,000 into an FIA when the stock market drops by 10% your $100,000 stays where it is… you do not lose. So now, as the market begins to regain the 10% in year two, your $100,000 actually begins growing from $100,000 vs having to recover a deficit first. This is a dynamic feature of an FIA, which can make a big difference over the long run.
2. Premium Bonuses
Not only do FIA’s offer you features like a minimum gain and zero loss, but many also come with a special premium bonus of usually 5% to 10% of accumulation value. This is often offered when the FIA is first funded, which means the bonus begins to earn interest on day one along with the rest of your money placed in the FIA. Wouldn’t it be nice if you could place $100,000 of your own money in a vehicle that would turn it into $110,000 the moment you snap that safety belt?
Requirements Of FIAs
As with any type of retirement vehicle, there are some limitations that you’d need to be sure you were comfortable with before placing your money in an FIA. First of all, as it's an annuity fund, you do lose liquidity of your money for a little while. Meaning, you would have to allow the annuity company to keep your money in the account for a specified number of years; a common example is the first 6 years the annuity is in force.
The upside of this limitation is that it does allow your money the ability to gain interest and grow in a safe environment during that initial period of time, without the risk of losses against your principal.
The downside is that if you were to withdraw the funds early (before you were “allowed”), there would be a surrender charge that you’d have to pay. But, most FIA’s do give you the opportunity to withdraw a limited amount each year during that initial time period, without penalties. A common example is 10%. FIAs are typically named after how long the agreed upon period is, for example, FIA-7 for seven years, FIA-10 for ten years, etc. so you’d be able to assess the time period before purchasing the annuity, in order to make sure it was something you’d be comfortable with.
As with anything, it’s important to seek the help of a professional who can best guide you through this process to ensure that you are not only growing but protecting your retirement income. The FIA is not the right vehicle for everyone’s retirement income but it definitely has a solid purpose in today’s market- especially for those of you who are ages 50s - 70s and who might be more interested in protecting the income you’ve built over the years. To learn whether an FIA might be right for you or to talk in-depth with an experienced advisor, contact Summerlin Benefits Consulting today!