“I, Robert Klein, take you FIA, to be my Fixed Index Annuity, to have and to hold from this day forward, for better or for worse, for richer, for poorer, in sickness and in health, to love and to cherish; from this day forward until death do us part.”
While you don’t say a traditional wedding vow when you purchase a fixed index annuity (“FIA”), you do make a long-term commitment. This is especially true when you purchase a FIA with an income rider. Divorce is generally an expensive proposition. This applies to FIA’s as well.
In order to realize the benefits of fixed index annuities, including upside potential with downside protection (See the July 18, 2011 post, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities), you need to stay invested, i.e., not take withdrawals, for five to ten years, or potentially longer, depending on the particular FIA.
Of the 245 FIA’s available today, 147, or 60%, impose surrender charges for ten years or longer, with 182, or 74%, having surrender periods of eight years or longer. There are only two FIA’s that have a surrender period of less than five years, both for four years. Surrender charges are generally assessed using a declining schedule, with 148, or 60%, imposing a charge of 10% or more in the first year. Generally speaking, the more severe the surrender charge provision, the greater the potential benefits.
While most FIA’s allow you to withdraw up to 10% of the value of your contract in any year without a surrender charge, you shouldn’t plan on taking advantage of this provision when you purchase a FIA. You should only invest funds that you’re confident you won’t need for at least the duration of the surrender charge period. This assumes that you haven’t purchased an income rider.
When you purchase a FIA with an income rider, you extend your commitment – to life. In addition to the time period you must remain in any FIA to avoid potential surrender charges, plan on keeping your FIA for the duration of your life, and your spouse’s life, if married. You need to do this in order to optimize your return. Unlike most fixed income investments that have a fixed rate assigned to them, this isn’t the case when it comes to a FIA with an income rider.
Return on a FIA with an income rider is measured by the total amount of income withdrawals received over one’s lifetime. In order to maximize your lifetime income withdrawals, you need to generally do two things: (a) maximize your income account value in order to optimize your annual withdrawal amount (see the March 19, 2012 post, Income Account Value vs. Accumulation Value – What’s the Difference?) and (b) once you start your withdrawals, keep your FIA in place for the rest of your life.
FIA’s have unique features that can result in lifetime retirement income that exceeds that of other investments provided you have the staying power. Are you ready to make a long-term commitment? If so, say “I do.”
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.