I Bought My First Fixed Index Annuity

Actually my wife and I each bought one. The reasons we’d never purchased a fixed index annuity in the past were that we’re not particularly risk-averse and we had time to recover from any market downturn. The reason why we bought now was the recovery time-frame had shortened because retirement is looming. Although over the long-term the stock market has been a good bet, that isn’t always true when you’re looking at five or six year time spans. I was concerned we would need to start withdrawing from our investments before we recovered from the next bear market.

We felt we needed guaranteed income to cover our expenses during retirement, so we created a retirement expense budget. The budget is, of course, an estimate, but we tried to include everything, added a bit more, and then added a bit on top for inflation. We then subtracted what the Social Security calculator says we’ll get in benefits and what was left was our guaranteed income gap.

To fill the gap we purchased FIAs with guaranteed lifetime withdrawal benefits. I wanted the most certainty, so the one I chose had the most predictable joint lifetime income – and the highest annual fee. My main concern was money coning in each year, especially if I die first, and knowing the exact amount of that future check when I bought.

My wife wanted a lower annuity lifetime benefit fee and the potential for more income, so the FIA she chose doesn’t have as strong a base income guarantee, but offers the potential for higher income than I’m getting if she earns more interest during the deferral period. Her guaranteed base income is little lower than mine, but she could wind up getting a higher lifetime income than me when she begins to tale withdrawals. 

Might we get a higher income if we just left the money in the market?
Sure, and that’s why a large portion of our assets continues to be in investments.

If we want guaranteed income, why didn’t we just buy immediate annuities?
With the FIAs we have access to the cash value. The odds are we’ll be taking out more than we earn, so the account value will go down, but we have control over the account. If we needed to we could cash in the annuity and take whatever is left. And, like a life immediate annuity, even when our money is gone the FIA annuity company keeps paying for as long as we live.

Do I believe we would have run out of money early if we hadn’t bought the annuities?
No. I’ve done the math. The reality is we’ll probably both be dead before our accounts go to zero.

Then why did we buy?
It comes down to peace of mind. I know the income my wife and I will get from the annuities and it doesn’t matter what the financial markets do. This is the one piece of our portfolio we don’t have to worry about (it’s also the part of the portfolio my widow won’t have to mess with). Finally, if our minds get foggier in the future this is again the one thing we don’t have to fuss with.

The trigger that caused us to take action and buy the annuities was doing the budget and seeing the guaranteed income shortfall (as a side note, my annuity income is more than enough to cover our real estate taxes and homeowners insurance, so I feel like it is our “always have a home” annuity). Planning for retirement gets very real when you’re looking at the hard dollars you will need in a rapidly nearing future.

This article was written by:
Dr. Jack Marrion
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Dr. Marrion’s research on senior decision making and the financial world have been featured in hundreds of publications including: Business Week, Kiplinger, Smart Money, and The Wall Street Journal. He is the author of six books and a frequent media guest.