Ep. 187 – Fixed Annuities – Best Rates in Over a Decade

Looking for a positive during this current negative high-interest rate market? How about looking into fixed index annuities? We’re experiencing the best interest rates environment that we have witnessed in the fixed annuities arena in over ten years.

A fixed index annuity is an insurance product that acts as a bond alternative with a protected principle by the insurance company. Annuities are even more attractive today than ever as markets, including the typically safe bond market, turn volatile.

In this episode of the Secure Your Retirement podcast, we discuss fixed index annuities and why they’re the best bond alternatives in the current volatile market. Listen in to learn the primary reasons why someone would consider a fixed index annuity in their retirement plan.

In this episode, find out:

  • Fixed index annuity – the bond alternative that offsets the equity side of the market.
  • A fixed annuity can provide a lifetime income similar to a pension.
  • A point-to-point method – how to calculate a fixed annuity interest from beginning to end.
  • How a fixed annuity protects you from downside loss of principle.
  • Why the fixed index annuity is a more attractive alternative to bonds in the next ten years.
  • The surrender charge schedule – the time you commit your money to an insurance company.
  • Understanding what it means to have money in a fixed index annuity from a restrictive point of view.

Tweetable Quotes:

  • “The bond side of the market, which is supposed to be our safety net, is very volatile.”– Murs Tariq
  • “If the fixed index annuity is down, you don’t make any money, but you also don’t lose any money.”– Radon Stancil 


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:Welcome, everyone, to our Secure Your Retirement podcast. It is an exciting time in some ways, if you want to look at things in a positive way. Let’s just look at them from that angle because we could sit here all day and talk about a lot of negative things going on in the world, but I think we’ve got something pretty positive to talk about today. And really, we’re going to discuss the best by far rates, interest rate environment that we have seen in the fixed annuity arena in over a decade. So if you looking around, you listen to the news and you’re thinking, “Man, interest rates are going up, inflation’s going up,” well, there’s a byproduct to that, and that is our earning power goes up. So today, we’re going to talk a little bit about how that is going, what it looks like, what that environment consists of, why we would use an annuity in an overall portfolio arrangement.  
 But before we get into any details or even trying to explain these rates and how you would get the interest, we feel like we need to take just a moment here and take a step back and get the foundation of why we would ever talk about a fixed annuity in an overall retirement plan investment strategy.  
 So I’m going to let Murs just kind of open this up and say, okay, why would we ever even consider it, number one, and what context would we ever consider it?  
Murs Tariq:Yeah, and we’ve done several podcasts on these before and reach out to us, we can get you the list of them, so you can really, if you wanted to dive deep into how they work and what a fixed index annuity is, we can get you the list of that.  
 But high level, I mean, we believe that there’s really two major reasons as to why someone would consider a fixed index annuity in their retirement plan. Number one, and really the most common, the most popular use that we have today is a safe alternative investment to the stock market. So we all know this year, pandemic year, the market is extremely volatile. We also know that this year and with rising interest rates, the bond side of the stock market, which is supposed to be our safety net, is also very volatile. As we’re recording this right now, the AGG, the bond, the aggregate index, a very commonly used index to quote how bonds are doing is down 14% year-to-date here in 2022. So that’s not a safe place to put money, whereas it used to be you could rely on a bond to do that for you and to offset the risk of the equity market.  
 So now, enter in the fixed index annuity. It’s an insurance product and here’s why it works. As a bond alternative or a safe place to put money. The insurance company is going to guarantee that your principal is protected. Bonds don’t have that guarantee. We’re seeing them lose money today. Fixed index annuities do have that guarantee so that’s the major, major piece is that it’s going to have a risk. It’s going to offset risk to our equity side of the market. We call it a bond alternative. It’s still going to make a decent rate of return. It’s going to make that bond-like return, if not better, and so that’s why we do call it a bond alternative. That’s reason number one, really they’re to offset risk, a nice bond alternative to your equity side of the portfolio.  
 Number two is if someone is looking for a vehicle that is going to provide them, and I say this guaranteed lifetime income, so kind of like creating your own pension. You work for a company and they didn’t have a pension plan, and you want to see a paycheck coming in every single month, guaranteed no matter how long you live. They are annuities out there that are going to provide those guaranteed lifetime income riders and they come with caveats that we would want to explain to you, too, but they work really well for someone that is searching for that.  
 So that’s really the main two reasons as to why would you ever incorporate a fixed index annuity into your retirement plan.  
 Now today, we’re going to talk about the fact that they’re even more attractive than they were years before. The main reason is that when you have an inflationary environment, when you have the Fed raising interest rates, there is pain with that, the thought of a recession, prices going up, but also two companies really benefit, two types of companies, one is a bank and one is an insurance company. An insurance company is using this to make the arena of the fixed index annuity even more attractive.  
Radon Stancil:Yeah. As we paint this picture and, as Murs said, and I just want to reiterate, if you put the annuity in as a bond alternative, we can accept the risk of the market a little bit more. And if you take a scenario where most of our clients, we do a risk conversation with them, and the vast majority of them, when we take them through this whole idea of loss versus reward, many of them say, “I don’t want to see my money down more than around 10 to kind of the high side is 15%.” That means if I had a portfolio mix of money in the market, money in a fixed annuity, and the market’s down 20 and I had 50-50, 50% in each of those categories, I’m only down 10%. In fact, I’m probably not even down 10 because the annuity probably made something. But even if the annuity made zero, I’m only down 10 to 15% so I’m right in that range of my risk tolerance.  
 But what’s so exciting right now for years, because of stock market-type returns as well as a very, very low-interest rate environment, many times when we would talk about an index annuity, especially if we were talking about the S&P 500, the caps that we could be able to make, the amount of money that we could be able to make was really low in the category of somewhere around 3% sometimes, only 3% on the upside.  
 Now I’m going to explain how that works, but the environment is very, very different today. So to get your mind wrapped around how you would get interest credited through a fixed annuity is the interest will be credited. In our scenario, we like to use what are called a point-to-point method. That means you’ve got a beginning point and an ending point to calculate what your interest is going to be, and there’s going to be an index that’s underlying what that calculation is based on.  
 Let’s just use the example of the S&P 500. It’s something that many people understand and that they can follow it very easy. Let’s say that you started an annuity and the beginning date was today. Well, that’s my beginning point. My ending point in this example will be one year from today. So basically if the index is up, I make money. If the index is down, I don’t make money, but I don’t lose any money. Now the way they do this in order to be able to price it is they’re going to say, I can make everything the index will provide up to a cap in the example that we’re talking about.  
 Now, if I told you that the cap was only 3%, you’d say, “Ah, that’s not that interesting.” And because of that, just so you know, sidebar here, the industry, the insurance industry created a lot of low-volatility indexes that did very well, that have done great, where we’ve seen people make a very decent rate of return. But now because of the interest rate environment, this S&P structure now is attractive again.  
 Now, by the way, in all the annuities, we have multiple options that we can pick. So we can pick the S&P, we can pick other indexes, so we can diversify many times between five and seven strategies. I’m just trying to illustrate, though, what interest rates have done when you look at the S&P. So go back two years ago, S&P cap would’ve been around 3%. We are seeing right now caps as high as 13%.  
 Now think about that. If you go into this and the S&P next year, from now to next year is up 10%, you make 10%. If it’s up 12, you make 12. If it’s up 13, you make 13. If it’s up 14, you make 13. But the key is, if from now to next year the index is down 10%, 20%, 30%, you don’t lose anything. So yes, I give up some upside, but I protect myself on the downside.  
 Now think about that, though, in the context of a bond alternative. We are not trying to compare this particular idea to the stock market. That is the wrong comparison. But if I have the ability to go over into an arena where I have no downside, loss of principal, but I can earn 5, 6, 7% on average because, again, we’re not trying to say you’re going to make 13 every year, but make 4, 5, 6, 7 in that range, that’s an extremely attractive proposition today, instead of bonds. The outlook right now for bond, the bond environment is not that good for the next 10 years, for the next decade and so keep that in mind as you think about this entire structure.  
 Murs, can you just give us a high level, though? We always tell people, look, there’s always things you got to know about anything. There are some things you need to know about the structure as far as liquidity and some of the things around that area. So could you just cover that for us briefly?  
Murs Tariq:Yeah, and I think that the two main things are going to be liquidity and access.  
 Typically, you’re going to have a period of time, if you go into a fixed index annuity, a period of time where you’re committing your money to the insurance company. Typically, that’s about 10 years and it’s called a surrender charge schedule. So you’re in there, you’re committing for about 10 years, but you’re not giving up a hundred percent access.  
 What the insurance company says is that, “Hey, you’re making a long-term commitment with us and, by the way, because you’re doing that, we’re going to guarantee your principal. You’re not going to have to worry about downside here, and we’re also going to make you a decent rate of return. But we know that there may be times that you need access to your money. So we are going to give you, usually the number can vary, but usually it’s going to be about 10% of access.” So say someone puts in a hundred thousand dollars into a fixed index annuity, they’re going to have access annually of 10% of the balance. So 10,000 after the first year, and say it grows, it’s going to be 10% of whatever the balance is in that calendar or that contract year.  
 That is something that you need to know about it. But at the end of the day, the way that we are structuring these and thinking through these is from a holistic liquidity approach. Take the client that’s got 500,000 or a million dollars in retirement savings, we’re never going to suggest, “Hey, let’s put 900,000 into annuity and put a hundred thousand into the stock market” because they may run into some liquidity issues there. So typically, we’re seeing clients, on average, put somewhere in the realm of 20 to 30 to maybe up to 50% of their assets into these annuities.  
 So now let’s go extreme, let’s say is a 50-50 split, 50% of their 401(k) or IRA goes to an annuity and they’ve got a million dollars. So 500,000 goes to annuity, 500,000 goes into the stock market for growth and with some volatility attached to it. What we know is that the stock market is liquid, it’s going to provide a return, it’s also going to provide some risk, but it’s liquid. So we’ve got access to 500,000 there. Then in an annuity, we’ve got 500,000 there that’s got 10% access, so 50,000 a year. So you combine the whole picture together, that million dollars, we’ve got access to 550,000 in a given year.  
 That’s something that we want to make sure we’re paying attention to and you, as a client, you’d want to understand how that works, too. But those are the main things that you would, from a restriction perspective, is that typically you’re committing to it for a period of time and you’ve got a portion of access to it. I think if you understand those two things, there’s nuances with every annuity and the different index options and everything like that, and we’re here to walk you through that, but those are the two main ones.  
Radon Stancil:All right. There are many different options within the side of this world. We just gave some examples a day and kind of talking about how they work. There’s always different things that we’ve got to consider.  
 So if you’re hearing this and you think, “Hey, I would like to at least understand, I’d like to have some questions answered,” feel free to hop on our website, pomwealth.net. Go to the top right-hand corner. You’ll see a button that says Schedule Complimentary 15-minute Phone Call. You’ll see our calendar pop up. You can schedule right there with us, and we’re glad to hop on the phone and be able to try to talk you through or answer any questions you’ve got, send you information, do whatever we can to help you look at this.  
 We understand that all things are not right for all people, and so we’re not saying that is the case here in this particular situation. So if you would like more information, let us know. We’d be glad to be able to provide it.  
 We’ve also had a blog written on this, if you’d like to read about. It’s right on our website, right at pomwealth.net. Go to the blog page.  
 Thank you so much. We appreciate your time today. We look forward to talking to you again next Monday.