I have spent my career looking for new ways for retirees to create income — particularly safe, lifetime income — and at the same time meet their objectives for legacy, inflation protection, liquidity and risk management.I think about results, not specific products, so although annuity payments have been at the core of my research and approach, I have incorporated other types of income sources into my Go2Income planning method, too. The latest is called a fixed index annuity (FIA), which has become a trillion-dollar industry because it protects your investment during bad markets while getting higher returns than fixed-income portfolios in most scenarios.It's our job at Go2Income to do the analysis for investors like you.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What is a fixed index annuity?
Just like other types of annuities, you purchase an FIA from an insurance company. It offers the tax-deferral benefits of annuities and, similar to new forms of investment vehicles like buffered ETFs, it provides downside protection against returns along with upside capture of a portion of positive returns. I asked ChatGPT about FIAs, and it defines them as: “A type of annuity contract that offers a guaranteed minimum interest rate combined with the opportunity to earn additional interest based on the performance of a specific financial market index, such as the S&P 500.”
There are many forms of FIAs, but for this article I’m simplifying the analysis of our research:
We used the S&P 500 index (without dividends reinvested) as the benchmark for market performance.
We focused on the ability of the FIA to efficiently accumulate savings for subsequent distributions or exchanges to a lifetime annuity.
We excluded the plethora of FIA riders that turn the product into its own mini plan for retirement income.
We used a popular FIA formula that translates market performance to an FIA credited rate on a contract designed for accumulation and does that translation on a monthly basis.
Our results confirm that FIAs allow you to minimize (or avoid) much of the risk of down markets. They also confirm that an investor needs to hold the contract for longer periods. In other words, stay the course. The negative is that you may not fully benefit from a boom either.
How do you evaluate an FIA to help you manage risk?
For an investor, the challenge in analyzing the FIA is the age-old question: Compared to what? Is the FIA an alternative to a fixed-income portfolio, a balanced portfolio of stocks and bonds, a variable annuity with income protection, a buffered ETF? And of all the hundreds of FIA designs on the marketplace, which do you pick to analyze?
To start the process, we chose products designed for the efficient accumulation of retirement savings and no riders. Our stock market measure was the S&P 500 index. While looking at the last 30 years of investment results, we studied holding periods of 10 through 25 years and compared them to market returns of the S&P without dividends and Treasury yields.
We also evaluated the FIA in terms of the usual client benefits of (1) principal protection, (2) upside capture of market performance and (3) annuity tax benefits. I added one that is often missed but may be the most important: (4) stay the course.
Downside protection
Using our model, we looked at all 10-year periods (a 10-year hold is necessary to avoid surrender charges) and compared the FIA vs the S&P 500 over the same 10-year periods. You will see it beats the lows but doesn’t achieve the highs, just as it is designed to do.
(Image credit: Jerry Golden)
Our study assumes the FIA contract continues to use the same formula and terms through the life of the annuity.
Upside capture
You might wonder, while digesting that slow and steady rise in FIA value over a decade, whether it might just be easier to invest your money in reliable bonds. But our FIA outperformed the 10-year Treasuries during the same period most of the time.
(Image credit: Jerry Golden)
Conclusions
Having analyzed the product on an independent and stand-alone basis, how do you include it in your plan for retirement income? What percentage of savings? What does it replace in your current portfolio? How do you efficiently convert to secure income? What’s your planned holding period? How do you use its annuity tax benefits?
Looking ahead
Now that you know what an FIA offers, our next article will discuss more of the planning considerations, for example, pairing an FIA with a Go2Income plan for retirement income.When you to order your first plan or to make adjustments to an existing one, you will also be able to ask for a report on how an FIA might further enhance your retirement.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the or with .
Jerry Golden is the founder and CEO of He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at , where consumers can explore all types of income annuity options, anonymously and at no cost.
How To Invest Your Tax Return When thinking about how to invest your tax return, prioritize your financial health over aggressive – and risky – ideas like bitcoin.
Five Mistakes High-Net-Worth Individuals Make in Retirement Just because wealthier people have a lot of money doesn’t mean they don’t make mistakes. Here are five common ones that this financial adviser sees.
Five Tips for Nabbing Your Dream Home in a Tough Market Low inventory doesn’t mean you’re out of luck on finding a home to buy that’s right for you. These tips from a real estate insider could help.
Three Ways to Delay Claiming Social Security Benefits With Americans living longer these days, maximizing your Social Security is more important than ever. Here are some ways to make the most of your benefits.
Is There a Best Day of the Year to Retire? Taking into consideration the time of the month and the time of the year can make a difference in your retirement income.
Have You Reached 59½? Time to Rethink Your 401(k) Options A rollover IRA might be in order to help protect your retirement savings from potential (and potentially disastrous) market downturns.
How Sharing Equity Can Build a More Entrepreneurial Business Businesses that share equity with their valued employees can better motivate and retain top talent while reaping the benefits of an entrepreneurial culture.
Do You Know How to Create a Reliable Retirement Paycheck? Here are some do’s and don’ts (plus a never) for when it comes time to create your retirement income plan.
Five Estate Planning Things You Need to Do Now For a solid estate plan, you should put powers of attorney in place, designate beneficiaries, tackle tax planning and more.
