Retirement Planning: Win or Tie?

Index Annuity


For sixteen years I made my living coaching football.  The fans were always behind me 100 percent-"Win or Tie."  For the last twenty years I've been in the retirement planning business.  Now I make my living pursuading people to put some of their retirement money in a safe place where it will generate a reasonable return.  In this business I can guarantee "Win or Tie".

How can that be?  Well, an insurance product called a fixed index annuity allows your retirement money to earn interest that is linked to an index, usually the Standard and Poors 500.  If the index goes up your account is credited with some of the gain.  You Win. What if the index goes down?

Even if the S&P goes down, your account value stays the same.    There it is sports fans, "Win or Tie."

How does this work?  An insurance company takes the interest earned on your annuity to a Wall Street investment bank.  The insurance company buys a financial product known as a call option.  A call option gives the insurance company the right, but not the obligation, to buy into the S&P 500 index at today's price for up to one year in the future. If the S&P rises, the company exercises the option and buys the index at the low price and then sells on the open market at the higher price.  The profit is credited to your account as interest.  Again, you win.  If the index falls the insurance company doesn't do anything.  The option expires and your account value remains the same for the year.  When this happens, you tie.



The illustration above is from the period January 1, 2000 to January 1, 2012.  The example above assumes $100,000 initial with no withdrawals. The market value is based on the S&P 500 Index.  This hypothetical index annuity product illustration assumes crediting method of a 5% annual point-to-point cap and annual reset.  The hypothetical  Income Rider Value assumes a 7% annual rate of return for income purposes.  The illustration values represent gross returns.  Assumptions are not guaranteed.  Past performance does not guarantee future results.

 Your account value resets each year.  If there is a gain, your account value locks it in forever.  There is never a big gain year that gets wiped out by a poor market the following year.  Does the dotcom meltdown and the subprime mortgage blowup ring a bell?  Both of these catastrophes followed near-record S&P levels and wiped out half the value.  Even today when, "the market is back," I hear folks say, "If this market would just keep on rising I'd be back to where I was in 2000."


With an index annuity your money is not in the stock market. If the index rises, your account is credited with some of the gain.  If the index falls, your value stays the same.  And all gains are locked in.  Year over year, a graph of an index annuity performance looks like a staircase, stepping up with gain.  When the index falls your account value remains a solid base, ready for the next move up.  An index mutual fund graph, where your money is in the market, resembles an accordion.  Sharp rises in good years with corresponding sharp losses in poor years.

If you’re looking to take the risk out of your retirement planning you may want to consider an Index Annuity.  With an Index Annuity there will be years you won't gain all the upside in the market, but you won't lose when the market melts down.

The closer you get to retirement, "Win or Tie," makes a lot of sense.