Thrifty Thinking: Fixed Indexed Annuities

Retirement is the American dream—having the financial freedom to travel, relax and spend quality time with friends and family.

But, what if the stock market drops? Diversifying your portfolio is a tried and true way to have the money you need, but new data released from the Indexed Annuities Leadership Council (IALC) shows that only 9% of Americans are focused on diversifying their portfolios. Diversification is key to managing financial risk, especially for Baby Boomers who are closer to retirement.

Jim Poolman, Executive Director of the IALC, says: “While the market continues to perform well, everyone remembers the downturn in 2008. It’s important to take the steps needed to balance your portfolio to protect against market swings.”

IALC data shows that many American don’t know how to get themselves on track for a comfortable retirement lifestyle. Here are more startling facts that dispel long-held finance fiction:

• The average American only has $100,000 saved for retirement—and it has to last for 30 years
• 42% of Americans rely on friends and family for financial help, and 10% on social platforms
• 3 out of 4 investors don’t realize fixed indexed annuities (FIAs) help balance portfolios while also providing a steady income stream

To achieve financial diversity, start by researching a wide variety of products to find the ones right for you. Look at products you may not have considered before, such as FIAs, which can help protect your nest egg from market downturns, guarantee income throughout your entire retirement, and offer growth without experiencing the downside of the market.

Many Americans think they are financially savvy, but new research shows the average American only has $100,000 saved for retirement—and it has to last for 30 years. Worst yet, only 9% of Americans are thinking about diversifying their portfolios, which means that most people will be at risk if the stock market crashes. 

One commonly held myth is that any retirement account can generate guaranteed lifetime income. In fact, one in five Americans incorrectly believes a 401(k) allows you to receive guaranteed payments throughout your retirement, regardless of how the stock market performs. In reality, only annuities, including FIAs, offer the option to guarantee a steady income stream for your whole retirement.

Another common misconception about FIAs is that they are too complicated and complex. In contrast, almost half of Americans clearly understand FIAs main benefit of providing income for the rest of their lives. FIAs offer a simple story: growth potential without risk of loss due to market downturns and a steady income stream in retirement.

While the stock market continues to perform well, everyone remembers the down turn in 2008. It’s important to take steps toward balancing your portfolio to protect against market swings and avoid a retirement crisis.  As an investment strategy and a way to balance a retirement portfolio, FIAs are appealing because they transform savings into predictable income.

Interested in seeing more myths debunked by the IALC’s Jim Poolman? Visit http://fiafacts.org/ and be sure to follow us on Twitter @IALCouncil.

I had a chance to interview IALC Executive Director Jim Poolman to discuss the benefits of proper retirement planning and how diversity is a critical part of a well-balanced portfolio.

Why are so many Americans overconfident about their finances? 

I think one of the reasons that Americans are overconfident is they think they are properly prepared as long as they have a savings account with a lot of money in it. But, people are not adequately projecting what their retirement expenses will be. Americans are living longer and longer after retirement, so if they were to do proper planning they would probably find out that they haven’t saved enough for retirement. 

One of the other things that's important is that Americans aren’t properly projecting what their medical expenses will be. We have found, both through our surveys and other information that is publicly available, that out-of-pocket medical expenses in retirement can run around $250,000. People are not taking that into account when making plans. 

I give credit to those people that are saving, but it's important to do a check up to make sure you are saving enough to be where you want to be at retirement age. That’s incredibly important. We're finding that many Americans are having to work longer once they realize they haven’t saved enough, and we want to help prevent that moving forward. 

How much should adults have saved before retirement?

I get asked this question all the time, and the answer is that there is no set answer. Everyone’s situation is different. The amount I’ll need for my retirement will be different than the amount you need or my best friend needs or my neighbor needs. It’s important to sit down and figure out what you want to do during retirement and then figure out how much you’ll need to save to make that happen. And you’ll need to factor in things like the out-of-pocket medical expenses that I mentioned earlier. There are several calculators on our website, www.fiainsights.org, that can help, or you can talk to a professional. That’s something we encourage everyone to do. 

Why is it important to diversify portfolios?  

It’s important to diversity—you never want to have all your eggs in one basket—and there are two ways to look at diversification. One is the vehicle in which you save for retirement. For example, many people utilize a 401k for retirement, and they should, because that can provide you with free money in terms of a matching contribution or a profit-sharing contribution from your employer, if they offer such a plan. But, people should also consider saving outside of those plans by buying, for example, a fixed index annuity or other vehicles that they can also save and supplement their retirement income with. 

The other piece of diversification is how you are investing that money or how you're saving that money, and what products you're utilizing. Are you using mutual funds, are you using stocks, are you using products like a fixed index annuity or a certificate of deposit at a bank? It is important to diversify your risk. If I'm 60 years old and I plan on retiring by the time I'm 65, I shouldn’t have all of my money in the stock market, because if the stock market were to go through a large correction of 15% or 20 % in loss of value, I don't have the time to regain that back over a very short period. 

So it's important to diversify your risk by using products like stocks and mutual funds, as well as safer or more secure products like a certificate of deposit or a fixed index annuity that can provide you guaranteed income and does not have the risk of loss of principle. In other words, diversification will definitely help you sleep better at night. 

About the Indexed Annuity Leadership Council
The Indexed Annuity Leadership Council (IALC) brings together a consortium of life insurance companies with a commitment to providing consumers, the media, regulators and industry professionals complete and factual information about the use of fixed indexed annuities. Namely, that these products provide a source of guaranteed income, principal protection, and interest rate stability in retirement as well as balance to any long-term financial plan. To date, IALC member companies have more than 1.3 million policies in force with more than $84 billion in assets.

Data trends were compiled from Toluna’s online panel in April 2017, among n=1000 adults (ages 18 and over).