2-Step Fixed Indexed Annuity Strategy for Secure Retirement

In this article, we will see how someone can take a portion of retirement savings and use a two-step annuity strategy to generate lifetime income during retirement.

Here are the topics we will discuss:

• What is an annuity?
• What is a Fixed Indexed Annuity(FIA)?
• FIA types and the 2-Step Strategy
• Simulation

What is an annuity?

An annuity is a contract with a life insurance company that provides certain benefits in exchange for a deposit of money, known as a premium. One of the main uses of annuities is to create income during retirement. While Social Security is a government pension program, annuities can act as a private pension plan.

What is a Fixed Indexed Annuity (FIA)?

In a Fixed Indexed Annuity, earnings are linked to a stock market index, offering potential for higher returns. The funds are not directly invested in the market, but the returns credited to your account depend on how the selected market indexes perform. There is always a ceiling and a floor. The floor is usually 0 percent, meaning you never lose money due to market downturns. The ceiling, also known as the cap, varies by company and product. For example, if the cap is 10 percent and the market gains 15 percent, you are credited only 10 percent. If the market drops by 15 percent the next year, you do not lose anything because your floor is 0 percent.

FIA types and the 2-Step Strategy

Based on the purpose, FIAs can be broadly categorized into accumulation-focused and income-focused. Accumulation FIAs are designed for growth, while income FIAs are designed to generate steady retirement income.

When you invest in an FIA, many companies offer an initial bonus. This bonus is usually smaller in accumulation FIAs and larger in income FIAs. A smart approach is to start with an accumulation FIA to take advantage of the bonus and potential growth, and then, as you near retirement, move the funds into an income FIA to secure another bonus and guaranteed lifetime income.

Simulation

Use case: A 45-year-old male moves $200,000 into an accumulation-focused FIA first and later transfers it to an income-focused FIA.

Products : Athene Performance Elite 10 Annuity for accumulation and Nationwide New Heights Select 9 for income.

Let us start with the Athene Performance Elite 10 Annuity at age 45 with an investment of $200,000.

This product offers 13% bonus. That means your $200k starts with $226k. The chosen allocation is 50 percent in the BOFANFCC Index and 50 percent in the SPXFCDUE Index. If the BOFANFCC Index earns 10 percent in a year, 77 percent of it, or 7.7 percent, is credited to your account. If the SPXFCDUE Index earns 10 percent, 60 percent of it, or 6 percent, is credited. If the market performs poorly and the indexes show a 10 percent loss, you get zero credited, but you take no losses.

Let's review the projections on this product.

This illustration assumes the index performance repeats its past 10-year trend. At the end of 10 years, the account value grows to $458,115. During the years when the market performs poorly, you can see 0.00 percent credits, but your principal remains protected.

Now, at age 55, you move this $458,115 into an income annuity. Let us see how the Nationwide New Heights Select 9 Fixed Indexed Annuity with the High Point 365 Select Lifetime Income Rider and bonus performs.

You receive an initial bonus of 30 percent, bringing the benefit base to $595,549. Starting at age 67, you can withdraw $83,527 per year for the rest of your life. This income is guaranteed regardless of how long you live, world events, or market performance.

If you are interested in learning more about this strategy, reach out to me at sraghuve@gmail.com

That's a wrap this week. Happy Learning!