I have never seen so much confusion and negative conversation about any financial product in my 30 years of being a Financial Advisor–the market-based annuity. This article is meant to shed some light on when an annuity could work for your Retirement plan while also addressing its downsides.  Given the hundreds of annuities available to consumers, it’s crucial to be well-informed. 

Think of annuities as tools in your financial toolbox: sometimes, a hammer is just what you need, and sometimes it’s not.

Variable Annuities

These are the most expensive annuities but they offer the highest upside potential. Many firms offer more than 30 investment options other than their own proprietary products, allowing seamless shifts between them without charges. Several offer some of the best “Growth” and “value” investment funds available anywhere. If you’re looking for a financial tool to offer tax advantages with maximum growth potential, this can be your product. 

Variable Annuity Features

• A wide array of investment options.
• Unlimited growth potential.
• Tax deferral benefits.
• Guaranteed Minimum Lifetime Growth riders
• Guaranteed Lifetime Payout riders
•  Death Benefit riders
• Surrender fees spanning 5-10 years.
• Annual fees between 1%-5%.
• Provision for a 10% free annual withdrawal.

Triggering Fixed Index Annuities

These are a relatively recent addition to the market. Think of them as a tool in your financial toolbox that offers a fixed growth rate without the risk of negative returns. For instance, if the S&P 500 Index (excluding dividends) concludes the contract year with a positive return, you would receive a predetermined rate, like 8%. If the index ends the year in the negative, your return is zero – there’s no loss. 

However, if the index’s performance exceeds the set trigger rate, your return is capped at that trigger rate. This appeals to those wishing to protect their accounts with limited downside and a very competitive rate of positive return.

Triggering Fixed Index Annuity Features

• Choice from several popular indexes (e.g., S&P 500, excluding dividends)
• No obvious annual fees
• Some offer Guaranteed Lifetime Payout Rider options 
• Tax deferral benefits
• Death Benefit riders
• Surrender fees for 5-10 years
• 10% free annual withdrawal
• A flexible trigger payout amount based on interest rates.

RYLA Annuities

These are new hybrid products. Using a variety of indexes from which you can choose, your account is protected by a 10% or 20% downside floor, and it offers corresponding, albeit limited (though substantial), upside potential. For instance, if you invest $100,000 and the account value drops by up to 20% in the subsequent years, the insurance company would restore your balance to $100,000. 

However, if the value declines by 25%, the insurance company will compensate you, resulting in your account only being down by 5%. There is significant upside potential, but it’s typically not as great as with a Variable Annuity.

RYLA Annuity Features

• Choice from several popular indexes (e.g., S&P 500, excluding dividends)
• Your downside over a period of time is limited to above the insurance loss you choose, such as 10% or 20%
• Upside typically surpasses Trigger-Style Annuities.
• Some offer Lifetime Payout riders
• Some offer Death Benefit riders
• 10% free annual withdrawal
• Some have no additional contract fees
• Surrender fees across 5-10 years
• Tax-deferred growth

Fixed Index Annuities

These annuities utilize well-known indexes, such as the S&P 500 (excluding dividends), or sometimes proprietary indexes, like one from Blackrock. You have the potential to match the index return, though there might be a cap or spread (contact me directly for a detailed explanation) that limits your growth potential. Some of these annuities guarantee no negative returns.

Like the previously mentioned triggering annuity, this annuity appeals to those wanting to mitigate or eliminate downside risks while aiming for competitive positive returns.

Fixed Index Annuity Features

• Choice from competitive indexes
• Zero downsides with select providers
• Capped or limited growth potential
• Some offer Lifetime Payout Riders
• Some offer Death Benefit Riders
• Tax-deferred growth
• Surrender fees over 5-10 years

Short-Term Variable Annuity

This is another hybrid product but at a more affordable price point. Several companies offer a variable annuity with boundless upside potential and almost no additional features, known as riders. It’s designed to provide tax-deferred growth with reduced fees, and even the option to buy out any early withdrawal penalties. It’s essentially a stripped-down version of the pricier Variable Annuity that comes with multiple riders. These products are great when seeking tax-deferred growth with reduced expenses and without additional features. 

I recommend this when the purpose of dollars invested here are primarily for inheritance and estate planning purposes and the client really doesn’t plan on using these assets during their lifetime.

In conclusion, despite television and radio campaigns by today’s financial celebrities, annuities can be effective tools in helping you reach your retirement goals. Find out the details you need to make the best decision, and always the most informed one too.

Call me anytime at 925-314-8503 or elliot@prosperityfinancialgroup.com

All my best,

Elliot Kallen, President

The post Clearing the Air on Using a Market-Based Annuity appeared first on Prosperity Financial Group | San Ramon, CA.

Elliot Kallen Wealth Manager | Registered Principal

For more than three decades, Elliot has provided customized wealth management solutions for entrepreneurs, business owners, retirees, and millennials.

Elliot and his wife, Tammy, are passionate about giving back to the community through their 501(c)(3) foundation, A Brighter Day. Through his partnership with A Brighter Day Charity, the Kallen family has helped local teens and young adults recognize and access resources to cope with the risks of stress and depression.

He enjoys spending his free time with his family. Some of his hobbies include cooking, wine, golf, travel, and studying history.

He lives in Lafayette, California with his wife, step-daughter, and grandson.