Although the Dow Jones Industrial Average (DJIA), with its close of 16,472 on Friday, is up 1,000 points from its August 24th low of 15,370, it’s still down almost 2,000 points, or 10%, from its May 19th high of 18,351. Putting things in perspective, a 10% decline is an overdue correction given the fact that the DJIA has experienced six straight years of gains, ranging from 5.5% to 26.5%.
Nonetheless, there are a lot of people who are approaching retirement, have recently retired, or have been retired for years, whose appetite for the stock market roller coaster isn’t what it use to be. With reduced sources of dependable income such as pensions, potential large out-of-pocket extended care expenses, uncertain inflation and income tax rates, and the possibility of being unemployed for 30 to 40 years, who can blame them?
Fixed Index Annuities Insulated from Stock Market Declines
If you’re in this situation and you own a fixed index annuity, or FIA, especially one with an income rider, you’re probably sleeping better at night than a lot of other people. For starters, FIAs are insulated from stock market declines. Interest is credited each contract year based on a fixed account if selected and performance of chosen stock market indices and index crediting methods, with rates capped at specified amounts. No interest is credited in years when performance is negative.
As an example, let’s say that you invested $100,000 in a fixed index annuity on August 24, 2014 and tied the performance to three different stock market indices and index crediting methods. On August 24, 2015, the contract anniversary date, the performance of each of the three indices and associated crediting methods was negative. When you receive your annual statement, no interest will be credited to the value of your contract.
Lifetime Income Unaffected by Income Rider Charges
If your FIA contract in the foregoing example includes an income rider, the value of your contract probably declined from the previous year, even though you weren’t penalized for negative performance and even if you didn’t take any withdrawals. This is due to the fact that an income rider charge, that’s generally in the range of 0.75% to 1.25% of either the income account value or accumulation value of your contract, is deducted from the accumulation value on a monthly, quarterly, or annual basis.
Assuming that you added an income rider to your FIA contract for the purpose of receiving a known future sustainable lifetime income stream with a flexible income start date, the income rider charge won’t reduce the amount of income that you will ultimately receive. While it will reduce the accumulation value of your contract, this won’t come into play unless you and your spouse, if married, die. When this occurs, the death benefit that’s paid to your beneficiaries, which is generally equal to the accumulation value of your contract, will be reduced accordingly.
Let the Good Times Roll
This is a good time to own a FIA, especially one with an income rider. Even if the DJIA declines three years in a row as it did from 2000 to 2002 or if it declines 34% in one year, as it did in 2008, the value of your contract will be unaffected by performance. Whether you’re a current or a future retiree, if your contract includes an income rider, you will also receive the ultimate benefit: a known income stream beginning at the date of your choosing for the rest of your life. Let the good times roll.