If you read no further than this line, then remember this: If you are retired, Principal Protection and Protected Growth are everything. Full stop.

Passive investing, when coupled with an objectives-based financial plan and asset allocation strategy, is a superior way to invest for most people. It puts the “beat the market “strategy to shame!

The late John Bogle told us long ago to buy the market, stay invested, keep expenses low and seek a high level of tax efficiency. You cannot argue with Mr. Bogle on these points. Full stop.

We further amplify his unassailable wisdom that investors should not chase returns by trying to follow some fancy stock picking scheme. In other works, go passive and be the market.

Passive investing is arguably the superior strategy for most investors, in both long term taxable accounts and qualified retirement accounts. However, some investors, namely retirees, may need to sidestep the market’s vagaries without fully bailing out, and this is where fixed index annuities can satisfy that need.


Passive investing delivers on two guarantees: You will make money when the market makes money, and you will never earn less than the market, minus very small internal fees on most Exchange Traded Funds (ETFs).

That second of the two guarantees, “never earn less than the market,” is very comforting to patient long term investors who understand that it’s about “time in” and not “timing” in the long run. An abundance of historical performance data provides assurance here.

The phrase, “never earn less than the market,” also implies when the market goes up or down, your passive ETF goes along with it. This is very assuring to investors who want to participate in the market but do not want to pick individual stocks.

This is an attractive strategy for most long-term investors, but still may not be a good enough approach for others, namely people nearing retirement or already retired, who still want to participate in the equities markets but can’t afford to take the risk of loss.

Retirees, and those soon to retire, can’t afford to lose money. Period. Losing money in the market is not a viable alternative for most retirees who simply have less time to wait for the turnaround to earn their money back. “Loss math” is brutal.

But is there a way to win at investing, but not lose?

For retired, growth-minded investors there is one financial instrument that they may find especially attractive during peak markets (when declines are most likely), a fixed index annuity (FIA). At its heart it’s a passive investment with a twist: An FIA allows you to go “risk off.” while preserving the opportunity to protect and preserve wealth. Switching to a “risk-off” posture means taking profits from risk based assets in your portfolio, especially those stocks in your tax-deferred retirement accounts that have done well, and investing them into insured, principal-guaranteed solutions.

Using index investing at their core, FIAs are a fairly new animal, constructed and refined by the largest and most financially sound insurance companies. FIAs are not investments, per se; they are insured instruments that offer risk-averse investors positive returns by way of interest crediting methods that are based on the underlying index performance.

The majority of an investor’s funds are actually held in low-yielding cash or equivalent positions, like zero-coupon bonds, for safety and stability, with a minority stake dedicated to buying futures contracts on stock indices to create higher return opportunities.

…buy the market, stay invested, keep expenses low and seek a high level of tax efficiency…

S&P 500 is the most prevalent index futures contract found in fixed index annuities, but index futures contracts from other sectors of the market are also used to construct smart portfolios that can be allocated to stocks (domestic, international, small, medium and large) and fixed income (corporate and government bonds from around the planet).

FIA investors never own these stocks, bonds or indices directly; rather, along with the ownership of their big cash-equivalent position, they participate in the performance of the varied futures contracts that make money when returns on the underlying indices are positive.

“Gunning for average is your best shot at finishing above average.” -John C. Bogle

If you’re retired and you fear losing money in a declining stock market, you simply have less time to earn back the losses you’d suffer on a direct equity portfolio. The FIA may be a solution if you can withstand a 0% return when markets fall.

You read that right. 0% as in zero.

Remember the main promise of the FIA is that you will not lose money in a down market, so if the market corrects 20% downward, you would earn a 0% return. Meaning no loss. Winning by not losing! (In reality, most contracts require some minimum return on your money, 1% annually being the most prevalent.)

These specialized financial instruments offer investors a safer way to participate in the upside of the market move, sometimes “capped,” (that is, you get a stated percentage of the upward move), and sometimes “uncapped” (you get the entire upward move) depending on the issuer and specific contract features.

But what is universal to these fixed index annuity contracts is they guarantee the downside.

…That is, you are guaranteed to not lose your original principal in a market downturn…

Sure, 0% is nothing to write home about, but when your friends are losing 10%, 20% or more in a market correction, you are going to feel pretty damn smart, and possibly the star of the cocktail party!

Losing money in the market is not a viable alternative …“Loss math” is brutal.

One of the soundest moves that new retirees can make is to “freeze” their existing portfolio gains by selling mature, profitable positions in their IRA or 401k plans, and transfer the profits into a personal IRA Rollover account using a fixed index annuity. This strategy turns existing paper profits into the liquidity required to preserve wealth and reduce market risk.

For instance, a growth-oriented investor with a $400,000 (including $150,000 embedded gains) 401k is ready to reduce risk in a very mature bull market. She sells off the positions, thus freezing the value, locks in the gains and takes market risk off the table by transferring her assets into the FIA. If the market goes up, she wins. If the market goes down, she doesn’t lose.

But job one in retirement is generating income. There’s no way around it, you need a paycheck. For retirees who have already nailed down their income requirements, an FIA is likely the best choice to seek growth while eliminating market risk.

Wow! Fixed Index Annuities are the best thing ever and there is simply no downside, right?

Well, no.

Liquidity and penalties are the chief considerations before ever plopping a single hard-earned dollar into an FIA. Or any investment, for that matter.

The largest drawback is the early withdrawal penalty that one would incur if they pull their money out of the annuity contract before it reaches full maturity, most contracts running from five to seven years. So, the first lesson is that while this financial instrument has many beneficial benefits, because of the penalty, you should not consider it a liquid part of your portfolio. It is long-term money.

However, these contracts generally have a “liquidity window” feature: that is, you could withdraw up to 10% of the account’s value annually without incurring the early withdrawal penalty.

“never earn less than the market”

While this penalty is universal to all contracts, the specific contract that you may be considering should be thoroughly discussed and  researched through your trusted advisor or Certified Financial Planner.

A few words about annuities in general.

“Annuity” has become a bad word in the financial press.

Some “sophisticated” financial journalists will tell you that all annuities are junk. Avoid them at all costs. In my long experience I have never met a journalist that has experienced sitting face-to-face with a senior citizen who was terrified at the prospect of losing money or outliving their money and offering a specific solution to the problem. Bear in mind, not all financial journalists abide by this limiting assumption.

And what about that super-huge money manager in California, with an ego even larger than California, who writes articles damning insured financial instruments designed to protect investors against loss and create lifetime income? Do his “solutions” offer these essential benefits? His opinions aside, his company earns extravagant fees in both up and down markets.

You win, he wins. You lose, he wins. No ax to grind there, right?

Cut through the clutter, and focus on the facts.

Annuities were developed to be a “personal pension,” a retirement solution that promises to deliver a lifetime income to the retiree. In that space, they have worked remarkably well. A defined benefit pension plan is actually a big group annuity. If you retired from a company, a union, a municipality or the federal government, and you get a check every month, you have an annuity. 

Annuities come in lots of flavors and they’re universally reviled in the financial press. Why? What the press gets right is that some commercial annuities are oversold by overzealous salesmen, whether they fit or not, whether they are the right solution or not, or whether the investor needs it or not. So, on that point, we are agreed. Annuities are oversold. So are actively managed, high commission mutual funds. So are IPOs. So are electric cars, junk food, climate catastrophes, skinny jeans, and, well…fill in the blank. I agree, annuities and many other products are oversold.

But what the press gets wrong, though, “annuity” is a homogeneous term, even though annuities come in many sizes, shapes and flavors. Just like stocks and bonds, annuities are financial instruments.They are designed to fill a very specific need. They either work for you, or they don’t. Period.

Some annuities, like fixed rate annuities, are simple and have few moving parts. They deliver a guaranteed rate of return and a guarantee of principal return, making them a very low risk choice for investors seeking income and stability.

But what if you don’t need the income and you are still actively seeking growth? How do you pull that off at the tail end of a long running bull market that continually tests its historical highs and then falls back with the volatility of a two year old?

If you are about to blow the dust off of your financial preparedness plan, take a look at fixed and fixed index annuities if your goals are to reduce risk, create guaranteed lifetime income, insure against market losses and preserve wealth. They may be the “just right” investment solutions for you.

WealthKeep specializes in helping clients attain financial wellness, retirement preparedness, and utilizing insured and guaranteed financial strategies for retired individuals who cannot afford to lose money.

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