A Fixed Indexed Annuity Success Story

Fixed Indexed Annuity


Fixed indexed annuities are fixed interest rate annuity products that derive the interest rate credited to the policy’s cash values based on movement in an index (the same way indexed universal life insurance derives an interest rate).

They often provide additional benefits through a rider that guarantees a level of income from the annuity. The accumulation of income benefits from these contracts are strong for the risk averse individual.

A Case Study

We were approached about a month and a half ago by a gentleman in his late 50’s (58 to be exact) who wanted our thoughts on his retirement income plan. He was about to change jobs to a lower paying–though less stressful–position at a different company and had a 401(k) balance at his previous employer totaling just a hair over $750,000.

His plan was to roll his old 401(k) funds to the new company plan and contribute around $15,000 per year for the next 12 years, at which point he figured he could retire.

He’d actually spent a lot of time reviewing his new employer's 401(k) plan and had selected the allocation he was going to use for his money–a CD-type account currently returning 1.25% annually.

Return would not be great, but he couldn’t lose principal.

Further, he had already done the math and determined that his $15,000 per year contributions for the next 12 years at 1.25% per year would put him right around a $1 million 401(k) balance.

When he retires (12 years from now), he’d follow the 4% rule and withdraw a little over $40,000 per year (a number he had already selected as his income need in retirement).  With a 1.25% per year return, he’d be several years past his life expectancy before he ran out of money (right around 92 years old for those who are interested).

He felt this was a pretty solid plan. His math certainly wasn’t off, but I did point out to him that his 1.25% CD account would need to continue to earn this interest rate and not a hair less for his calculations to work.

A point that he had already considered, but deemed unlikely since interest rates are so low. We disagreed a bit on the safety of this assumption.

Our Solution: Enter the Fixed Indexed Annuity

After doing some number crunching, I determined that we could place $550,000 into a fixed indexed annuity with a guaranteed minimum withdrawal benefit rider and 12 years from now he’d be guaranteed an annuity withdrawal amount of just slightly less than $45,000 per year.

And if the next 12 years S&P 500 performance is similar to the last 12 years (allowing the indexing feature to add to his account value and the guaranteed withdrawal benefit), his guaranteed annual withdrawal amount would be about $520 shy of $60,000 per year. I also designed this as a spousal benefit so his wife was also guaranteed the annual income if she out lived him.

I want to emphasize the point that those numbers are guaranteed for the rest of the couple's life.

So, worse case scenario, he ends up with a few thousand dollars more per year in available retirement income versus his original plan and best case scenario he ends up with almost $20,000 more income per year.

But there’s more than just that to get excited about…

Isn’t there $200,000 Left Over?

Why yes, yes there is $200,000 remaining that we don’t need for the annuity to achieve the income goal. What did I tell our new friend to do with that money?

Whatever he wanted to do with it.

I should point out and underscore this individual’s risk aversion and fear of market losses. The CD account in his new 401(k) plan wasn’t an accidental allocation.

He had lost money in the market in 2008 and again in 2013 when the bond market took its hits. Having a little over a decade before he planned to retire, he was nervous. As a result, he had no money in the stock or bond market and didn’t see a way to have any money in the market.

With our plan, he was free to get a little crazy with the remaining $200,000 and the $15,000 per year he plans to save for the next 12 years. If there’s a market correction, he can wait for recovery because he’s locked away the funds to handle his primary objective.

A Little Number Crunching…Just for Fun

For what it’s worth, I decided to calculate the money he’d have if he nets 6% on the money that will transfer to his new 401(k) and subsequent savings. He could be sitting on about $650,000.

That’s $650,000 over and above the money he needs for income purposes. That places him in a significantly more secure situation than he would have been in, had he stuck to his original plan.

And maybe he doesn’t have $650,000 12 years from now, maybe only has $300,000. That’s $300,000 of emergency/play/whatever money he didn’t have under his old strategy.

But if he Invested the whole thing in the Market…

There are those who would point out that if he placed the entire $750,000 in the market and saved his planned $15,000 per year at a 6% net return he’d have about $1.75 million. Surely he could generate his planned income with that and have plenty of money left over.

I don’t disagree.

But that plan is dependent on netting 6% per year for the next 12 years. Our plan isn’t dependent on his netting anything for the next 12 years. And remember, just because you’ve achieved a certain return for a certain number of years in the market doesn’t mean you get to keep it if you don’t sell.

As long as you hold the position, you are always one day (or a few days) away from bad news that changes your actual return.

If he had netted 6% per year for 11 years and then a 2008 level correction took place, he’d end up with less money than had he just stuck with the original plan at 1.25% per year.

Safety in your Portfolio opens Doors

You only get one crack at the whole retirement savings thing.

If you get it wrong, you can’t go back and do your 40’s, 50’s, or whatever over again. Safety in your portfolio gives you options and also keeps you from staying up late at night worrying about the growth of your investments.

It can also afford you the opportunity to partake in riskier bets with potentially great payoffs.

But it’s also good to have some degree of a plan. Fixed indexed annuities are a great way to ensure retirement income guarantees with some of your retirement assets and can dramatically shift the amount of worrying you need to do about how you’ll generate enough income once you retire.

2 Responses to “A Fixed Indexed Annuity Success Story”

  1. Andy baker says:

    Hey guys – LOVE the case study. Would like to know more about the individual. Marital status? Kids? Debt load? How much were the estimated annual SS benefits?

    More case studies!

    Andy Baker

  2. Justin says:

    This is one of the greatest annuity articles I have read to date. I think it illustrates a perfect example most retirees find themselves in. I know my step-father lost 50% during the last downturn and got half way out, he stuck the rest in safer alternatives.
    Great retirement planning article!

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