Andrew Corbman discusses the pros and cons of fixed index annuities, focusing on their potential as an investment product in lieu of stocks and bonds.
As of 2015, fixed index annuities were inching closer to stocks, bonds, and ETFs as the investment product of choice among retirees. From notching $38.7 billion in sales in 2013 to $48 billion in 2014, they were described as a good buy by many in finance and the academe. However, FIAs are under-appreciated as a retirement investment because of a few unscrupulous financial advisors exaggerating the convenience and returns associated with them.
For starters, Andrew Corbman explains the technique behind fixed index annuities. According to the Insured Retirement Institute, an FIA guarantees a minimum rate of interest over a fixed period. Additional interest may also be credited based on how well a specified broad market index is doing. Most fixed index annuities use the S&P 500 index. For instance, let’s say an FIA has a participation rate of 50% of the value of the S&P 500, and the S&P 500 changes by 15%, 7.5% is credited to the FIA account on top of the guaranteed interest rate.
While these numbers might seem very optimistic, Andrew Corbman cautions retirees against viewing FIAs as their main source of retirement income. As it is, too many investors see an FIA as a product that carries a lot of upside with no downside. However, only the second part is true – the additional interest, or “upside”, is not guaranteed. In many cases, the FIA’s issuing carrier can change the terms of the upside at their discretion.
Most FIAs sold to retirees nowadays come with income riders, which is separate from the additional interest. Andrew Corbman thinks that this is where most people get confused about the nature of an FIA. They think that they are getting an annuity, instead of thinking of the income rider as an extra. However, this should be treated basically as an extra.
For Andrew Corbman, retirees should get fixed index annuities as a way of protecting their money, especially if a retiree is averse to the risk that comes with other kinds of investment products. In addition, while the fixed interest is lower than the income that securities often earn on a good year, the fact that it is fixed ensures a steady stream of income that a retiree could use for as long as he/she owns the FIA account. In other words, they are low-risk, low-reward investments.