By: Cory Carlton
In 2018, the stock market suffered the worst December since the Great Depression. We saw the headlines, we heard it on the news, even our President talked about it. So, what does this drop in the stock market mean to you, and what might you do about it?
For nearly a decade, the stock market had generally gone up, but 2018 was the first year we recorded a loss since November 2009. Although not completely unexpected, the severity of the downturn is catching many investors off guard.
A bull market like we have experienced is bound to have some corrections, but when that bull market turns into a bear market, we often get emotional or desperate and break the foundational rule of investing and “sell low.”
Adding to fears is the unusual levels of volatility in the market. Often, we forget that this is what the market does. It goes up and it goes down. Still, this volatility adds to fears of losing money and not getting out of the market on time. So, what can you as an investor consider? Buying a fixed indexed annuity (FIA).
Many people hear the word “annuity” and automatically believe some of the bad press about this product. Professor of finance at the Schulich School of Business at York University, Moshe Milevsky wrote, “Saying you don’t like annuities is like saying you don’t like funds. What type of funds. Hedge funds? Venture capital and private equity funds? Exchange-traded funds? Mutual funds? The word annuity without a descriptor isn’t informative. There are life annuities and term-certain annuities, fixed annuities and variable annuities, immediate annuities and deferred (or delayed) annuities.”
There are many types of annuities and the purpose of this article is to help you understand how FIAs could make sense.
Fixed indexed annuities are not right for everyone. However, the modern FIAs are exceptional options for investors who are in the middle of a bear market and need stability and safety but don’t want to miss out on potential future gains. One unique benefit of some FIA products is the ability to recapture some of the money that may have been lost in December by something called a premium bonus.
There is a lot that goes into an FIA but here are the highlights that most people find appealing about FIAs…
The aforementioned premium bonus gives a percentage of the total amount deposited back to the policy holder. For example, if an annuity company is giving a 10% bonus and you buy an annuity for $100,000, the company will give your account $10,000. Many people like this option and if you currently have an annuity that has some surrender charges, this is a way to eliminate those charges and put yourself into a more suitable annuity for your current situation.
Safety is one of the most desirable benefits of FIAs. Here is a simple example. If you invested $200,000 into the S&P 500 Index at the beginning of 2018, by the end of the year it would have decreased to $186,000. If you had put that same money into an FIA, you would have lost nothing and had at least $200,000, if not more if you purchased an annuity with a premium bonus.
An FIA’s ability to not lose principle is one of the chief reasons many Americans have it as part of their overall portfolio.
Let’s talk about growth for a moment. Fixed indexed annuities of the past sounded great but often had a low cap on them. Meaning that you could only earn up to a low percentage, such as 2.5% max, and nothing more. The good news, you would never lose anything. The bad news, you would never earn more than 2.5% on your money.
The FIAs of today do not have those limitations. Some are uncapped and others have high caps. So, if the market goes up 20%, it is reasonable to believe that you could earn around 17%.
Here is an example of how the caps and floors in an annuity could work. Here is an individual with $1,000,000 (the number the mass media says you should have for retirement, but we believe this is wrong and we can tell you why another day). This is what happened in the S&P 500 between 1998 and 2009.
S&P 500 1998 -2009
With Cap & Floor
This does not take into account any fees due on the investments in a brokerage account or for the annuity. There is 70% more money in the annuity with the cap (10% and many of today’s FIAs have higher caps or no caps) and floor.
So, what is the difference? The annuity does not give you more growth potential. In this example it actually limits your growth potential. The biggest benefit is the 0% floor and not being able to lose what you have gained.
So, does it make sense for you to have a portion of your money protected from volatility and still give you reasonable growth potential?
It may make sense. Reach out to us and we would be happy to complete a free analysis of your situation and see if a fixed indexed annuity may make sense for you.
About the author: Cory Carlton is one of the Co-Founders and CEO of Both Hands Financial Group. His focus is helping people understand the options available to them through products like fixed indexed annuities. Protection plays a major part in people's retirement. Cory likes to show people how they can plan financial defense while not giving up on growth potential.