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Fixed Index Annuities: How Annual Reset Helps Protect Your Portfolio


It seems like fixed annuities have become much more popular lately. A lot of it probably has to do with all the market volatility.

It is natural for investors to seek safety when their portfolios are going up, then down, then up, then down…

High volatility in your investment portfolio can be very scary. Especially if you are retired, or soon to be retired.

For most retirees, probably even you, their investment portfolio will be the source of funds they use to supplement income from Social Security and their pension (if they are lucky enough to have a pension).

When their portfolio starts to decline in the market, visions of “living only on income from Social Security” dance through their heads. It’s not a happy dance.

That’s where fixed annuities come in, because they can not lose value when the market goes down. So they add stability.

And fixed index annuities are now being used more than ever, because they allow you to participate in a portion of the market’s upside, without going down in value if the market drops.

But the question arises: How do fixed index annuities not go down when the market declines?

Here is the answer…

Fixed Index Annuities Use Annual Reset (Mostly)

I don’t like to throw industry jargon around too much on this site as I think it confuses the issue more than communicates effectively.

But this is one phrase in the industry that is fairly easy to understand: Annual Reset.

It means that each year (Annual) whatever the fixed index annuity has grown to, that value will be locked in (Reset).

In other words, the new baseline has been “Reset” at the higher amount because the interest earned was credited to the account. And the upcoming year’s crediting period is reset to begin again.

When the new baseline is reset, that means that the gains that occurred during that 1-year period have now been locked in.

In the heading above I said they “mostly” use annual reset. There are some that will have a 2-year reset. And a very few will have a 3-year reset. This means the gains are not locked in until the end of a 2-year or 3-year period.

While it’s better to lock in your gains every year, there are usually some very good reasons to go out for a 2-year or 3-year reset. And the benefits are typically better upside potential with more generous cap rates, spreads, or participation rates. 

How Does A Fixed Index Annuity’s Annual Reset Work?

There are a lot of different ways interest can be calculated on a fixed index annuity. Let’s keep it simple by using the annual point-to-point.

On the fixed index annuity issue date, the index will be measured. It doesn’t matter what index we use for this example, but a common one is the S&P 500.

So let’s say it stands at 1,500. After one year has passed we look at where the S&P 500 stands on the fixed index annuity’s first year anniversary date. If it has increased to 1,600, that would be an increase of 6.7%.

Let’s say the annuity has a limit (or a cap) of 4% growth each year using this strategy. That means interest in the amount of 4% would be credited to the fixed index annuity. Remember, the tradeoff of having no market downside risk of loss is that you don’t get to participate in the full upside of 6.7% in this example.

So in this example, a fixed index annuity that started at $100,000 would grow to $104,000 at the end of one year.

The $104,000 is the new baseline for the annuity. If it experiences 4% growth in the second year it will be 4% on this new higher amount of $104,000.

If the market tanks in the second year, then the baseline value of the annuity will stay at $104,000.

What’s Really The Big Deal About A Fixed Index Annuity’s Annual Reset?

It’s all fine and good to see how this works. But what’s the big deal with this? How does this benefit me that much?

Well, here’s where the rubber meets the road:

The portion of your portfolio that you use to own a fixed index annuity, can not go down when the market goes down. This means, when the market has a correction your overall portfolio will have more stability. It will not go down by as much as it would have if it had been fully invested in the market.

This can help you worry less about how your portfolio is doing. It reduces the volatility of your overall portfolio. In almost all cases it would not make sense to put all your portfolio in a fixed index annuity. But for a portion of your portfolio, it may provide some extra stability that gives you more peace of mind.

Conclusion

Hope that helps you understand how annual reset works. But more importantly I hope it helps you understand “Why” a fixed index annuity may be beneficial to many retired investors as a part of their overall investment portfolio.

There are so many fixed index annuities available today, that it is more important than ever that you avoid buying one that’s not designed to meet your specific goals.

If you are considering owning a fixed index annuity and have some questions about them, then feel free to schedule a time on my calendar for us to chat. CLICK HERE to do so.

If you know anyone that could benefit from this information, be sure to forward this to them. Or share it on Facebook with your friends by clicking the Facebook icon to the left of the screen.

Best regards,

Chris

Fixed Index Annuities


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Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors. Chris Hammond is insurance licensed in TN.