Fixed index annuities lock in gains

Which Way Is The Market Going?

Stock market indexes have been for the most part rising this year;  high enough that some portfolios have made up for their losses from the last market decline.  Some investors and their advisors are starting to think of themselves as Albert Einstein’s of the market investing.   Although over the last 40 years I have yet to meet one who feels that way over the long term.  The equity markets have a way of equalizing financial pain or causing one to eat humble pie.

The question on everyone’s mind:  How high and how long will stocks go?  TV experts fill air time day after day with theories, usually a new one each day.  Same with some advisors; you know those who when asked will lean back in their desk chair and begin to expound on Monte Carlo Simulations, withdrawal rates, market direction, historical signs and graphs…

My answer is always simply – “I do not know, my crystal ball is just as foggy as the next guys.”  To which the reply is something along lines “Yeah but you are paid to know.”   I’ll let you in on a financial planning secret – no knows which direction the markets will turn next.  Markets will go up and markets will go down, that is what markets do.  Oh sure sometimes if a guy guesses enough he or she will be correct at some time causing them to look “smart.”  As for me I’ll admit I don’t know and work with my clients to transfer market risk from them to an insurance company.  After 9/11 that is what I did with my own personal retirement funds using fixed index annuities and they have paid off with good returns, no declines and peace of mind.

The first fixed index annuities were developed in 1996 and at first I like many others thought they were too good to be true. However, the last 17 years have demonstrated index annuities are in fact very good secure retirement products.   When you purchase an index annuity none of your funds are invested in any equity market.

Fixed index annuities lock in gains
Gains in a fixed index annuity are real gains not just paper gains.

Rather the annuity owner selects a market index like the S&P in order to determine the interest rate the insurance company pays them for the previous 12 months.  If the index has increased in value a portion of that increase is paid as interest to the annuity, if the index has gone down no interest is paid.  However, the annuity does not decrease in value while it resets the index value to the lower level so that when the index regains its loss part of the regain is interest paid to the annuity after the next 12 months.  Annuity principal and any interest credited are guaranteed to not go down.

An old investment cliché: “You don’t suffer a loss until you sell a stock- Until then it’s just a paper loss.”   Well, then the reverse would be true regarding gains:  Until you sell stock gains are just unrealized paper gains.

Is it time to turn your paper gains into real dollars?

For help you may ask questions in the comments  Or contact me privately: Tim Barton Chartered Financial Consultant