When you get to a certain point in life, there’s a tendency to want to downsize and simplify. That large, two-story house with all of that land becomes a burden. That expensive exotic car that you had to have years ago is no longer necessary.
The same thing applies to investments. Let’s face it, for the average person, the inner workings of most investments are difficult to understand, if not over one’s head. Not to mention how the investment fits into your financial, or retirement income, plan. Add on the risk factor associated with many investments and it can contribute to many sleepless nights.
Welcome fixed index annuities (“FIA’s”). There are basically two flavors – (a) a base product and (b) a base product with an income rider. The key to investment simplification with both is long-term commitment. Per last week’s post, Fixed Index Annuities – A Long-Term Commitment, FIA’s have unique features that can result in lifetime income that exceeds that of other investments provided you have the staying power. If you do, FIA’s are an opportunity to simplify your financial life.
Per last week’s post, staying power was defined as (a) five to ten years, or potentially longer, depending on the surrender charge schedule of the particular FIA, for the base product, or (b) lifetime if you purchase an optional income rider. Assuming that you only invest funds that you’re confident you won’t need for the duration of the surrender charge schedule for the base product, or for your lifetime if you purchase an income rider, this should simplify your financial life going forward.
There are four parts to simplification as it’s applied to FIA’s assuming that the funds used for investment are coming from a traditional diversified investment portfolio:
- Reduced risk
- Known lifetime income stream beginning at a specified age
- Elimination of investment management
- Reduction or elimination of investment management fees if applicable
Depending upon the types of investments in the portfolio that’s used for your FIA purchase, the risk reduction associated with a FIA can be significant. Please refer to the July 18, 2011 post, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities. Furthermore, the overall risk level of your entire investment portfolio, including your FIA, will generally be reduced as a result of your investment in a FIA.
Known Lifetime Income Stream Beginning at a Specified Age
Unlike a traditional investment portfolio that doesn’t provide for lifetime income, assuming that you purchase an income rider with your FIA, you will have the benefit of a known lifetime income stream beginning at a specified age. In addition, you will have the flexibility to increase your lifetime income to the extent that you defer the start date of your income. Please refer to the January 9, 2012 post, 5 Things You Receive From a Fixed Index Annuity Income Rider – Part 1 of 2.
Elimination of Investment Management
With a traditional investment portfolio, there’s ongoing investment management that’s required, including, but not limited to, investment selection, monitoring, and periodic rebalancing. Whether you do it yourself or hire someone else to do it, investment management is time consuming. With a FIA, there are limited investment choices. These typically include a fixed account and three to five indexing strategies. Once you make your initial investment allocation, although you can typically change it on the anniversary date of your contract, it’s often not necessary to make any changes. Please refer to the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth.
Reduction or Elimination of Investment Management Fees if Applicable
To the extent that you transfer funds from a professionally managed investment portfolio to purchase a FIA, those funds will no longer be subject to ongoing investment management fees. If you purchase an income rider with your FIA, an income rider charge will be deducted from the accumulation value of your FIA, however, it generally won’t reduce the amount of lifetime income that you will receive from your FIA.
In order to optimize the benefits that you receive from a FIA, it’s important to work with a qualified retirement income planner. Please refer to the August 27, 2012 post, Retirement Income Planner Key to Success When Investing in Fixed Index Annuities.
Looking to downsize or simplify your financial life and have staying power? Take a look at fixed index annuities.
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.