Chapter 1

Annuities: A Historical Introduction to Timeless Wisdom

If you knew exactly how long you’d live, planning your financial future would be simple. But life is unpredictable, and this uncertainty brings challenges when making long-term investment decisions. That’s where annuities come into play—a financial solution that helps safeguard against one of life’s greatest risks: outliving your savings.

 
A Financial Legacy That Stands the Test of Time
Did you know annuities have been providing financial protection and peace of mind for centuries? While often seen as a modern financial product, annuities originate from ancient times, offering stability and guaranteed income to countless individuals around the world.

 
The first recorded annuities date back nearly 1,800 years to the Roman Empire's annuities table, designed to secure income for citizens during their later years. Over time, annuities gained significance, spreading across Europe and into the Americas, evolving into the reliable solution we recognize today.

 
A major turning point came in 1808 with Britain’s Life Annuity Act, which bolstered the popularity of government-provided annuities. By the 20th century, annuities had firmly established themselves in the United States as well, providing security and income to generations of retirees.

 
Milestones in the History of Annuities
1918 – The industrialist Andrew Carnegie set up groundbreaking pension funds that evolved into TIAA-CREF (The Teacher’s Insurance and Annuity Association). This pivotal move introduced annuities as a secure option for educators.
1935 – President Franklin D. Roosevelt signed the Social Security Act, addressing the concerns of young workers wondering about their futures in old age. Today, Social Security remains one of the longest-standing lifetime income annuities.
1939 – Ida May Fuller, born in 1874, became the first American to receive Social Security checks. She collected payments for an impressive 35 years, living to celebrate her 100th birthday—a shining testament to the security annuities can provide.
1986 – The Tax Reform Act solidified deferred annuities as one of the few financial products offering unlimited investment potential with the benefit of tax deferral, making them a go-to choice for retirement planning.
1995 – The financial world was introduced to the first Fixed Index Annuity. A Massachusetts resident invested $21,000 in a Keyport KeyIndex annuity, which grew to an impressive $51,779.

 
A Testament to Stability and Security
Throughout history, annuities have proven their resilience and adaptability, standing strong through economic booms and downturns alike. They’ve been a trusted financial tool for Roman citizens, European pensioners, and American retirees. Offering guaranteed income and peace of mind, annuities remain a reliable solution for those planning their financial futures.
By choosing an annuity, you’re not just investing in your retirement—you’re joining a long tradition of people who have turned to this dependable tool to secure a worry-free future.

Chapter 2 

Introduction to Annuities Made Simple

Planning for a secure and comfortable retirement is one of the most important financial decisions you’ll make. Annuities can help ensure you never have to worry about running out of money for necessary expenses like housing, food, healthcare, and transportation. They are unique insurance products designed to provide a steady stream of income for life, offering peace of mind and financial stability when you need it most.

What is an Annuity?

An annuity is an insurance product often used as part of a retirement plan. Unlike traditional investments tied to the ups and downs of the stock market, annuities offer guaranteed income that you cannot outlive. Think of them as a way to turn part of your savings into a dependable paycheck for life.
Whether you’re already retired or preparing for retirement, annuities can help bridge the gap between your savings and essential living expenses. Their value lies in providing security, consistency, and the freedom to focus on what truly matters—like traveling, spending time with family, or pursuing hobbies—without the stress of financial uncertainty.

Why Choose an Annuity?
Annuities offer unique advantages that set them apart from other financial products. These benefits include:

1. Guaranteed Lifetime Income
With annuities, you’ll receive income for the rest of your life—even if your original savings run out. This means you’ll always have the funds to cover basics, regardless of market crashes or unforeseen financial challenges.

2. Freedom from Financial Worry
Knowing your essential expenses are covered allows you to confidently allocate other investments into higher-risk, higher-reward opportunities if desired. Your financial basics are secure, giving you room to plan, explore, and live.

3. Protection Against Market Volatility
Unlike stocks and mutual funds, annuities aren’t affected by market downturns. This means your income remains stable, even during recessions or financial crises.

4. Longevity Credits—A Unique Advantage
Annuities provide additional income in the form of “longevity credits” (or “mortality credits”), which reward you for living longer. These credits grow with age and can significantly increase your income over time. No other financial product offers this feature.

How Annuities Make Retirement Easier

Here’s how annuities can transform your financial plan:

• 
   Covering Necessary Expenses

 
Imagine never having to worry about paying for essentials like housing, healthcare, or utilities. Annuities ensure these needs are always funded, giving you lasting peace of mind.

• 
  Flexibility for the “Fun” Stuff

 
With your foundational expenses covered, you’re free to direct discretionary income toward things you enjoy—traveling, gifting to loved ones, starting a business, or simply savoring time with family and friends.

• 
  Focus on Life, Not Finances

 
Managing investments can get increasingly difficult as you age. Annuities eliminate this burden by simplifying your financial life. Experts like economist Dr. David F. Babbel have highlighted how annuities can help retirees avoid common mistakes in asset management, especially as cognitive abilities decline with age.

Trusted by Financial Experts

Even some of the world’s most well-known financial experts rely on annuities for their own retirement planning:

• 
  Former Federal Reserve Chairman Ben Bernanke holds significant personal investments in annuities, trusting them to secure his financial future.
•  
  The U.S. Government Accountability Office (GAO) recommends annuities as part of a balanced retirement strategy, suggesting seniors use them to ensure guaranteed income for necessary expenses.
  When some of the brightest minds in finance turn to annuities, it speaks volumes about their reliability and value.

Additional Benefits of Annuities

1. Protection in Long-Term Care Situations

 
Some annuities double your income if you need care in a qualified facility, providing extra support when you need it most.

2. Death Benefits for Your Family

 
Annuities can include guaranteed death benefits, offering financial security for your loved ones. These may even include bonuses or interest earned on your principal.

3. Continued Payments, Even After Your Savings Are Depleted

 
Once your annuity runs out of its original principal, payments will continue for the rest of your life. This means you can never “run out” of income—unlike most traditional investments.

The Freedom to Enjoy Retirement

With all the guarantees and protections annuities offer, retirees can confidently enjoy their golden years. Rather than worrying about market risks or bad investment decisions, you can focus on living the life you’ve dreamed about—whether it’s traveling the world, pursuing hobbies, or simply savoring quality time with loved ones.

Take Action Now for a Worry-Free Future

Annuities combine the best of both worlds—financial security and personal freedom. They are the only products that ensure lifetime income while safeguarding you from market risks and costly financial errors.

 
Don’t leave your retirement to chance. Explore how annuities can fit into your financial plan and create a future filled with peace, stability, and opportunity.

If you’d like professional guidance on finding the right annuity for your needs, reach out to an expert financial advisor today. Your retirement security starts here.

Chapter 3

A Comprehensive Overview of Annuities: Types, Benefits, and Drawbacks

Annuities are insurance products designed to help individuals save for retirement and other long-term financial goals. They can also provide guaranteed regular income payments for a specified period, including the rest of your life.

 What makes annuities unique is their ability to ensure you will not outlive your income—they are the only financial product that can make this guarantee. Additionally, they offer these benefits in a tax-advantaged manner, making them a popular choice for retirement planning.

How Annuities Work

An annuity is initiated when you make a cash payment (called a premium) to an insurance company. This premium can either be a single lump sum—often funded by rolling over 401(k) or IRA funds—or a series of smaller, regular contributions, much like other savings vehicles. Regardless of the funding method, your premium is invested by the insurance company and earns interest over time.

 
Annuities have two distinct phases:

1. Accumulation Phase: The period when your premium earns interest and grows.

2. Payout Phase: The period during which you receive regular income payments, either for a defined term or for life.

Why Choose an Annuity?

Including fixed annuities in your financial plan can offer several key advantages:

Principal Protection: Safeguard your initial investment from market losses.

Tax-Deferred Growth: Earnings within an annuity are not taxed until withdrawn.

Guaranteed Income for Life: A reliable income that you cannot outlive.

Current Tax Savings: Potential for reducing taxable income during the accumulation phase.

Competitive and Guaranteed Interest Rates: Aim for consistent growth over time.

Liquidity in Specific Life Events: Access your funds without penalties under certain conditions.

 
Situations Where Annuities are Beneficial

Conservative investors seeking safety of their capital.
Individuals who desire steady, guaranteed returns over a long period.
Retirees looking for income that will not run out, regardless of lifespan.
Those wanting to fund retirement savings beyond IRA or 401(k) contribution limits.
Investors aiming to simplify wealth management without the responsibility of actively managing assets.
Those who seek to bypass probate costs and ensure a smooth transfer of wealth by contractual agreement.

Advantages of Annuities

 
1. Lifetime Income Guarantee: Annuities provide peace of mind by offering predictable income streams.

2. Tax Advantages: Tax deferral allows earnings to compound faster. Additionally, annuity income may reduce your Adjusted Gross Income (AGI), leading to potential tax benefits.

 3. Inflation Hedging (in Some Products): Certain annuities offer inflation protection to maintain purchasing power over the years.

 4. Reduces Tax Burdens: The ability to time income withdrawals can shift taxation to lower-income years, maximizing long-term savings.

 
Disadvantages of Annuities

 
While annuities offer many advantages, they are also associated with certain drawbacks:

Tax Implications Upon Lump-Sum Withdrawal: Receiving a significant payout all at once can result in a heavy tax burden.

Potential Inflation Concerns: Fixed payment annuities may not keep pace with inflation unless indexed.

Penalty for Early Withdrawals: A 10% penalty tax applies to funds withdrawn before the age of 59½.

Fees and Surrender Charges: High management fees or charges for early withdrawal can reduce your returns significantly.

Ordinary Income Tax Rates on Withdrawals: Payments are taxed at standard income tax rates, not the lower capital gains tax rate.

 
Key Types of Annuities

 
1. By Premium Payment Structure:

Single Premium Annuities: Suitable for individuals with large sums from sources like 401(k) rollovers, inheritances, or asset sales.

Fixed Premium Annuities: Ideal for those preferring to make regular, consistent payments.

Flexible Premium Annuities: Allows for irregular contributions, providing greater flexibility.

2. By Benefit Payment Features:

 Life-Only Annuities: Provide payments as long as the individual lives, offering the highest income but no death benefits to heirs.

Annuities with Refund Options: Ensure a portion of the initial investment is refunded to beneficiaries if the annuitant passes away prematurely.

Pension Maximization

 
What is Pension Maximization?

 
Pension Maximization is a strategy designed to help individuals maximize their retirement income while providing financial security for their spouse or heirs. This approach calculates whether opting for a lump sum or a higher monthly payout from an annuity, combined with purchasing a life insurance policy, results in greater benefits than traditional annuity options like refund and period certain guarantees. This strategy ensures financial protection for beneficiaries through either a cash payment or continued annuity benefits upon the annuitant's death.

It’s important to consult a financial professional to determine whether Pension Maximization is a viable option for your unique circumstances.

Refund Annuities

Refund annuities ensure that you or your beneficiaries recover the amount initially paid into the annuity.

• How It Works: If the total payments you’ve received before your death are less than the amount initially paid into the annuity, the difference is refunded as either a lump sum or through installment payments.
• Example: Consider a scenario where you pay $100,000 into an annuity and only receive $80,000 in payments before your death. The remaining $20,000 would be refunded to you (or your beneficiary) as either one lump sum or in installments.

Period Certain Annuities

These annuities guarantee payments for a specific period, even if the annuitant passes away before the period ends.

• How It Works: Payments are made for your lifetime or a fixed period, whichever is longer.
• Example: If you choose a 20-year period certain annuity but pass away after 10 years, payments will continue to your beneficiary for the remaining 10 years. 

Temporary Annuities

Temporary annuities are similar to period certain annuities but have a defined end date, even if you live beyond this period. Payments cease at the earlier of either the specified time frame or your lifetime.

Immediate vs. Deferred Annuities

Annuities are categorized by when payments begin: 

Immediate Annuities

Begin payments within a month to a year after funding.
Commonly used to convert a lump sum into an immediate and steady income stream.

 
Deferred Annuities

Begin payments after a specified period, often at retirement.
Useful for accumulating funds during the "accumulation phase."

Single and Joint Life Annuities

 Single Life Annuities

Provide income for the annuitant’s lifetime. Payments cease upon their death.

Joint and Last Survivor Annuities 

Cover two individuals. Payments continue to the surviving person after the first death, though the amount may be reduced (e.g., 50%-75% of the original payment).

Example: If a joint annuity pays $100,000 annually and includes a 75% survivor benefit, the remaining spouse receives $75,000 annually after the first death.

Investment Options for Annuities

1. Fixed Annuities
Interest rates are guaranteed for an initial period and subject to renewal rates later.
The annuity’s value does not decline with market fluctuations, offering stable returns.

2. Variable Annuities
Investment returns depend on the performance of sub-accounts similar to mutual funds. Returns are not guaranteed, and the annuitant bears market risk.

3. Equity-Indexed Annuities
Earnings are tied to market indices but without direct investment in equities.
Offer downside protection with guaranteed minimum interest rates but may cap potential returns through mechanisms like participation or cap rates.

Payment Structures

 
1. Fixed Payments
Provide a consistent, unchanging payout amount at regular intervals (e.g., $3,000/month).

2. Increasing Payments
Begin at a fixed amount but increase over time, either by a pre-set percentage or tied to market performance, such as a stock index.

3. Variable Payments
Depend on the market value of the underlying assets. These payments fluctuate but may have a guaranteed minimum.

Final Thoughts

Annuities are powerful tools for financial planning, especially for those seeking tax advantages and reliable retirement income. However, understanding their features, benefits, and drawbacks is essential in deciding whether an annuity aligns with your financial objectives.

Chapter 4

The Retirement “Red Zone”

If you are within 10 years of retirement or have retired within the last 10 years, this section is especially important. Many individuals actively plan and invest for retirement, but the final decade before and after retirement presents unique financial challenges that require careful consideration.

The Reality of Stock Market Losses

The stock market has historically gone through significant fluctuations. For instance, over a 15-year period, the stock market lost nearly 50%, regained its value, then experienced another steep decline before finally recovering. While the market has always recovered over time, enduring the interim periods of loss can be extremely challenging for investors.

Why Staying the Course Can Be Difficult

It’s one thing to read about these market fluctuations and another to experience them firsthand. During market declines, financial advisors and commentators often recommend “staying the course,” highlighting historical recoveries. But as the losses compound, many investors feel the need to withdraw their money, potentially locking in significant losses.

Emotional Impact and Practical Challenges

Not everyone has the emotional resilience to handle the volatility of the stock market. Real-life challenges—such as health issues, family changes, or loss of income—can make it even harder to weather market downturns. These difficulties often lead to decisions that result in permanent financial losses. 

An Example of Stock Market Volatility

Consider the experience of a retiree who spent years working hard, building wealth, and investing heavily in the stock market. For a long time, their portfolio grew steadily, delivering impressive returns during favorable market conditions. But when the market crashed, a significant portion of their wealth disappeared almost overnight.

Living Beyond Financial Graphs

This retiree relied on the assumption that, over the long term, the stock market delivers an average annual return of around 10%. However, life doesn’t follow a 50-year financial chart. Real-world events—such as health challenges, relationship changes, or aging—can disrupt even the best-laid plans.

Lessons from Hardship

Facing the stress of market volatility, this individual eventually shifted a portion of their investments to safer, more stable options. By doing so, they removed the anxiety of unpredictable markets and found peace of mind, allowing them to focus on enjoying retirement rather than worrying about financial fluctuations.

Diminished Capacity and Financial Risk

Aging can also lead to cognitive challenges, such as dementia or Alzheimer’s, that may impair decision-making. These changes often develop gradually, making them difficult to identify but potentially harmful to long-term financial health. A reluctance to acknowledge these limitations or hand over control can lead to poor financial outcomes over time.

Comparing Financial and Personal Risks

For example, just as adult children might step in to help an aging parent stop driving for safety reasons, retirees can take proactive steps to protect their finances. Moving investments out of volatile markets and into safer products, like fixed annuities, can help secure a stable financial future and avoid further losses. This approach provides greater security and reduces the risk of poor financial decisions later in life.

The Problem with Losing Time

Market losses significantly impact long-term wealth growth, particularly for retirees who do not have decades to recoup losses. For example, if a $100,000 portfolio loses 50% of its value, it is reduced to $50,000. To recover to the original $100,000, a 100% gain is required—not just the same 50% that was lost. This critical loss of time and value can be devastating.

Practical Example of Stagnation

Even an “average” 25% portfolio return over multiple years does not necessarily lead to gains if declines erode the base amount. Without proper safeguards, retirees risk spending years just trying to get back to where they started instead of moving forward financially.

An Alternative Solution

Fixed Annuities as a Safe Option

Many investors discover the stability of fixed annuities too late to recover earlier losses. However, the portion of their portfolios allocated to fixed annuities remains secure even during major market downturns like those around 2000 and the 2008 financial crisis.

The Benefits of Fixed Annuities

• Guaranteed Growth: Fixed annuities ensure moderate but consistent growth.
• Protection Against Market Loss: Unlike stocks, these investments are not subject to market declines.
• Peace of Mind: Knowing their savings are safe allows investors to focus on family, charity, and other life-enriching activities without constant financial worry.

Had the majority of their portfolios been allocated to fixed annuities, many believe they would be far better off today—both financially and emotionally.

Time Is Precious

Retirees face unique financial challenges that younger investors may not understand. Stock market fluctuations can result in significant losses, and the time required to recover those losses can often be too long for retirees to wait. Securing financial stability through products like fixed annuities offers retirees the dual benefits of avoiding losses and maintaining peace of mind. These strategies can play a vital role in ensuring long-term stability and quality of life.

Key Takeaway

When planning for retirement, consider financial products designed to protect your savings while providing steady, reliable growth. You don’t have to take unnecessary risks with your hard-earned money to achieve financial security and enjoy your retirement years.

Chapter 5

Withdrawing Money in Retirement

Many people believe they can withdraw 10% of their investment savings each year during retirement without running out of money. However, research shows even withdrawing just 4% annually might deplete savings too early.

To explain, let's examine a scenario where three individuals retire at age 65 with $1 million saved. Each plans to withdraw $45,000 in the first year and adjust this amount for 3% annual inflation, meaning $46,350 in the second year, $47,740 in the third year, and so on. A study analyzing 10,000 different retirement scenarios reveals insightful results.

Case Study Results

Miriam (No Annuity, Balanced Portfolio)

• Investment Type: 40% stocks, 40% bonds, 20% cash
• Outcome: Miriam’s strategy performed worst, with only a 45% chance of lasting 40 years.
• Shortfall: After 30 years, she would need an extra $270,000 to maintain her lifestyle. Alternatively, she would have to reduce spending or rely on family support.

Martha (25% in Annuity, Growth Portfolio)

• Investment Type: 60% stocks, 30% bonds, 10% cash ($750,000) + 25% annuity ($250,000)
• Outcome: Better odds—79% chance of lasting 40 years.
• Shortfall: After 30 years, Martha would need $97,000 more to cover expenses, but her annuity, offering $22,000 annually, significantly reduces the financial burden on her family.

Mary (50% in Annuity, Aggressive Portfolio)

• Investment Type: 85% stocks, 15% bonds ($500,000) + 50% annuity ($500,000)
• Outcome: Best option—92% chance of lasting 40 years.
• Shortfall: None. After 30 years, Mary not only maintained her lifestyle but also had $136,000 left. Her annuity ensured steady income and eliminated the need for family support.

Key Lessons Learned

1. Longevity Risk: The longer you live, the higher the risk of running out of retirement funds.
2. Annuity Benefits: Annuities can help reduce the risk of depleting your savings and lessen financial burdens on family members.
3. Market Timing Matters: The timing of stock market performance (good or bad years) when you start retirement withdrawals greatly impacts your portfolio’s survival.

Sequence of Returns Risk

A major challenge in retirement planning is “sequence of returns risk.” This refers to the order in which investment returns occur once withdrawals begin. For example, starting retirement during a market downturn can compound losses and reduce your portfolio significantly, even if average returns over time are positive.

Here's why it matters:

• Impact During Accumulation: When saving for retirement, poor market returns early in your career have less impact because your account balance is relatively small. It's easier to recover losses later as savings grow.
• Impact During Retirement: Withdrawing from a large portfolio during poor market performance early in retirement can erode savings quickly, making it almost impossible to recover later on.

Reducing Risks During Retirement

1. Include Annuities

Annuities provide a reliable source of income, reducing the reliance on market performance. Combining annuities with investments diversifies income sources, increasing stability.

2. Adjust Withdrawals

Avoid rigid inflation-adjusted withdrawals. A flexible approach—reducing spending when markets decline—can ensure your portfolio lasts longer.

3. Conservative Portfolios Early On

Starting retirement with a low allocation in stocks (e.g., 20%) and increasing over time reduces vulnerability to early losses.

4. Create a Safety Net

Use a bond ladder or fixed-income investments to cover basic living expenses. These “safe” assets protect against major losses in volatile markets.

Final Thoughts

Retirement planning requires more than just saving money—it’s about creating a strategy that ensures financial security throughout your lifetime. Including annuities, adjusting withdrawal methods, and managing market risks can significantly improve your retirement outcome.

If you're planning your retirement, it’s crucial to review these strategies and consult with a financial advisor to ensure your investments align with your long-term needs. 

Chapter 6:

Average Returns vs. Actual Returns

Understanding the difference between average returns and actual returns is crucial when evaluating investment performance. While average returns may sound impressive, they can sometimes paint a misleading picture. Here's a breakdown demonstrating how actual returns differ and why avoiding losses is key.

The Problem with Average Returns

Looking at the average performance of a stock market or mutual fund over several years may seem like a useful metric, but it doesn't account for the irregularities of market performance, such as years with losses. The following example highlights how this difference impacts real investment outcomes.

How Does 9% Beat 14%?

Consider two investors, both starting with $100,000 over a five-year period:

Investor #1

• Invested in a conservative mutual fund averaging 9% annual returns.
• Actual growth over five years resulted in a total value of $153,862.

Yearly Breakdown

• Year 1: $100,000 → $109,000 (9% growth)
• Year 2: $109,000 → $118,810 (9% growth)
• Year 3: $118,810 → $129,503 (9% growth)
• Year 4: $129,503 → $141,158 (9% growth)
• Year 5: $141,158 → $153,862 (9% growth)

Investor #2

• Invested in an aggressive mutual fund averaging 14% annual returns.
• However, variabilities in performance (including a major loss in Year 4) reduced the overall value to $141,120 by the end of five years.

Yearly Breakdown

• Year 1: $100,000 → $120,000 (20% growth)
• Year 2: $120,000 → $168,000 (40% growth)
• Year 3: $168,000 → $201,600 (20% growth)
• Year 4: $201,600 → $100,800 (-50% loss)
• Year 5: $100,800 → $141,120 (40% growth)

Key Takeaway

Despite a higher average return of 14%, Investor #2's actual end value was $12,742 less than Investor #1's. This difference occurred due to the compounding effect of losses. One year of negative performance significantly impacted the growth of the aggressive fund.

Why Losses Matter

Market declines, like the two notable 50% drops in the past decade, amplify the importance of avoiding losses. Compound interest, while powerful for growth, also magnifies the effects of losses during market downturns.

Lesson Learned

Experiencing even a single year of losses can significantly reduce your actual returns, regardless of the average return of your investment. This example underscores the importance of mitigating losses in investment strategies.

The Benefit of an Annual Reset

One strategy to eliminate market losses is by utilizing financial products that include an Annual Reset feature, often found in specific insurance products.

What is an Annual Reset?

• Protects your investments by resetting the baseline annually to lock in growth.
• Prevents losses by ensuring that your starting point for growth isn’t reduced during downturns.

Why It Works

Unlike traditional investments that cannot avoid the impact of market volatility, an Annual Reset safeguards your funds while preserving compounding growth. Over time, this strategy delivers consistent growth without the downside of losses.

Final Thoughts

The difference between average and actual returns highlights a critical consideration for investors planning for long-term financial goals. You must evaluate the potential impact of losses while aiming for growth. Leveraging strategies like an Annual Reset can help secure financial stability and ensure your investments work in your favor over time.

Take Control of Your Investment Strategy

Consider options that reduce or eliminate market losses to optimize your returns and protect your financial future. Investments are about more than just growth—they're about protecting your wealth along the way. 

CHAPTER 7

INDEX ANNUITIES (ANNUAL RESET FEATURE)

Annuities provide a strategic way to pursue stock market opportunities while ensuring a reliable income stream that can last a lifetime.

The chart below highlights the advantages of an index annuity with an annual reset feature. Unlike other investment options, an index annuity with annual reset protects your value during market downturns. This feature ensures that the annuity does not lose value, so there is no need to recover from market losses. Over time, this protection results in a higher overall value, as demonstrated in the 16-year period illustrated in the chart.

Chart: Advantages of the Annual Reset Feature

Protecting Value, Even When the Market Declines

The chart is a hypothetical example showing the performance of an index annuity with the annual reset feature over a 16-year period ending in 2013. Results will vary based on different timeframes. Shifting either the starting or ending dates would lead to different outcomes.

You don’t need to predict market trends to achieve your financial goals. An index annuity with annual reset can help you grow your assets steadily while safeguarding your investment during challenging market conditions.

Chapter 8

Advantages of Fixed Index Annuities with Annual Reset

Financial planning, particularly for retirement, brings unique challenges in times of market volatility. Fixed index annuities (FIAs) offer a combination of protection and growth potential tailored to the needs of retirees and savers with substantial IRA or 401(k) accounts. By providing tax deferral, guaranteed income, and a death benefit, FIAs ensure long-term retirement needs are safeguarded even during uncertain economic conditions.

Protected Interest Earnings

One standout feature of fixed index annuities is their ability to credit interest based on positive performance in market indexes like the S&P 500, Nasdaq, or Russell 2000. Instead of risking direct investment in these indices, your annuity’s performance is linked to their movements. This approach means:

• Market Upside Participation: Your annuity earns interest when the chosen index shows positive growth.
• Protection from Market Downside: During market declines, your principal and credited interest are safeguarded since your funds are not directly invested in the markets.

This means you cannot lose value due to negative market performance. With FIAs, your principal and accrued interest are locked in and protected even during steep declines in the market, providing unmatched financial security.

The Annual Reset Feature

The annual reset feature provides an additional layer of protection by recalibrating your index tracking point each year. Even if the market does not fully recover from past losses, this mechanism allows your annuity to build new value based on the market’s current low point. The benefits of the annual reset include:

• Captured Gains Without Risk: Once interest is credited, it becomes part of your annuity's value and can no longer be reduced due to future market downturns.
• Faster Recovery: You can begin earning additional interest credits without waiting for the market to return to previous high levels, maximizing growth potential over time.
• Inflation Protection: By avoiding prolonged recovery periods, you can safeguard your purchasing power against inflationary erosion.

For example, consider a scenario where you have $500,000 allocated to a market index which then declines by 20%. Without the annual reset, you might need years for the market to recover and bring your portfolio back to its original value. With inflation at just 3%, the buying power of $500,000 could diminish to $470,000 in the meantime. The annual reset ensures you're consistently moving forward, not stalling in recovery.

Managing Market Volatility with Fixed Index Annuities

From 2000 to 2015, the S&P 500 faced two major downturns, losing roughly 50% of its value each time. Such periods of volatility highlight the significant risks of long-term market exposure. According to market studies, the likelihood of declines breaks down as follows:

• A loss of 5% or more occurs about three times each year.
• A 10% or more loss happens annually.
• A 15% or more decline occurs approximately once every two years.
• A 20% or more loss happens roughly every 3.5 years.

These patterns underscore the risks inherent in market-based retirement investments, especially for retirees who rely on withdrawals. Unlike market investments, fixed index annuities provide a way to avoid these losses entirely.

Suppose now that the stock market declines twice and loses about 50% of its value
each time like it did during a 15-year period from the beginning of 2000 to 2015.

The above time period was chosen as an example to illustrate periods of growth and
decline in the S&P 500® index from the beginning of 2000 to the beginning of 2015.

Over a recent 15 year period, the market index twice lost close to -50% of its value.
in the beginning of the period, it lost -47%, then after a recovery, it lost -57% before
it recovered from those loses.

During this period, the market index went through multiple unpredictable changes
of growth as well as declines.

Income Stability in Retirement

One critical difference between accumulating assets during your working years and withdrawing funds in retirement lies in the impact of market volatility. While younger investors can benefit from dollar-cost averaging and eventual market recoveries, retirees face different risks when withdrawing funds during downturns:

1. Withdrawal Rate Risk: Regular withdrawals during a falling market exacerbate portfolio losses, increasing the chance of depleting your retirement funds prematurely.
2. Order of Returns Risk: Poor market performance early in retirement can significantly affect long-term results, compounding losses as withdrawals continue.
3. Longevity Risk: The longer you live, the greater the risk of running out of money—and the cumulative effects of inflation, market downturns, and withdrawal rate risks intensify over time.

Fixed index annuities mitigate these concerns by offering consistent, guaranteed income while protecting your principal and credited interest.

Transferring Longevity Risk

Insurance companies are uniquely positioned to manage longevity risk due to their combined role in offering both life insurance and annuities. This balance allows insurers to hedge against the financial impact of both shorter and longer lifespans. By leveraging FIAs, retirees can transfer the risk of outliving their assets to an insurance provider, ensuring dependable income for life.

Avoiding Penalties with Annuity Liquidity Features

One of the standout benefits of FIAs is their liquidity. Unlike market-based investments, which may force you to take substantial losses during downturns, annuities provide penalty-free access to funds under certain conditions:

• Many FIAs allow you to withdraw up to 10% of your annuity’s total value without incurring fees after the first year.
• For example, if Mary has a $500,000 annuity, she can access up to $50,000 penalty-free. Even if additional funds are withdrawn and subject to a surrender charge, the cost is often significantly lower than selling investments during a market decline.

Beyond standard liquidity provisions, FIAs also ensure that withdrawals are not subject to the “market loss” penalty, meaning you avoid the financial strain of taking distributions during down markets.

The Surrender Charge Schedule

While FIAs include surrender charges for early withdrawals beyond the penalty-free amount, these fees are often smaller compared to the impact of withdrawing from other investments during a downturn. A typical surrender charge schedule might look like this:

• Year 1: 8%
• Year 2: 7%
• Year 3: 6%
• … declining by 1% annually until the end of the surrender period.

For instance, if Mary needs an additional $5,000 beyond her free withdrawal amount during the second year of her contract, she would incur a 7% charge on the excess, resulting in a $350 fee—significantly less than the potential losses from liquidating market investments under poor conditions.

The Importance of a Minimum Guaranteed Interest Rate

Even if the market index linked to your annuity performs poorly, FIAs are supported by a minimum guaranteed interest rate. This ensures that your annuity continues to grow, albeit modestly, even in adverse market conditions. Combined with the annual reset feature, this allows your retirement savings to remain resilient.

Why Fixed Index Annuities Are Essential for Retirees

For retirees and individuals with significant IRA or 401(k) accounts, fixed index annuities offer a critical combination of stability, growth potential, and income security. Key benefits include:

• Protection from market losses.
• Guaranteed income for life.
• Access to funds without penalties, even during volatile markets.
• A hedge against inflation and longevity risks.

When planning for financial security, especially retirement, the information around tools like fixed index annuities can often seem overwhelming. To make it simpler, here’s a guide to help you understand key features like participation rates, cap rates, spreads, and their benefits.

What Is an Index Annuity?

A fixed index annuity (FIA) is a financial product designed to provide potential growth and protect your investment from market downturns. It credits interest based on the performance of a stock market index (like the S&P 500), without actually investing directly in the stock market. One of the main benefits is that your annuity does not lose value when the market performs poorly.

Now, let's break down these features so you can determine how well a fixed index annuity might work for your retirement goals.

What Is a Participation Rate?

The participation rate determines how much of the stock market index’s gain will be credited to your FIA. For example:

• If your annuity has a 100% participation rate, and the stock market index grows by 6%, you’ll be credited the full 6% growth.
• If your annuity has a 50% participation rate, and the market grows by 6%, you’ll only be credited with 3% growth.

Why Does Participation Rate Matter?

A higher participation rate usually results in more earned interest. A good annuity often guarantees a 100% participation rate for the term of the contract, ensuring you’re fully benefiting from the market’s performance up to the cap rate.

What Is a Cap Rate?

A cap rate limits the maximum amount of interest your annuity can earn, regardless of how much the stock market grows. For instance:

• If your annuity has a 6% cap rate, and the market grows by 20%, you'll still only earn 6%.

While the cap may seem limiting, it’s important to remember that index annuities are designed to protect your principal. When the market declines, your annuity value does not drop.

Benefits of Cap Rates

While you may miss out on some of the upside, cap rates ensure safety. Even if the market performs poorly in the following year, your previous gains remain intact, and your value will not decrease due to market fluctuations.

What Are Spreads in Index Annuities?

Spreads work a bit differently. Instead of having a cap, spreads deduct a percentage from the total stock market gains. For instance:

• If the spread is 2% and the market grows by 20%, you earn 18% (20% minus 2%).

Spreads can allow you to capture more upside, especially in markets where the index grows significantly.

When Are Spreads Beneficial?

Spreads tend to perform well in upward-moving markets where growth exceeds the typical cap rate of an indexed annuity. They’re another way of structuring the annuity to maximize earning potential.

Can Terms Like Participation Rates or Caps Change?

Yes, insurers can adjust participation rates, spreads, and caps after a set period (e.g., annually or at the end of the initial contract period). However, they are locked in during the guaranteed period specified in your contract.

Guaranteed Features to Look For:

• 100% Participation Rate throughout the annuity's term.
• Fixed cap or spread rates for a certain period (e.g., 5 or 10 years).

Some companies have a history of maintaining favorable terms, like never decreasing cap rates, which is worth discussing with your insurance provider or advisor.

Other Features of a Good Fixed Index Annuity

Free Access for Life Events

Many annuities allow exceptions for penalty-free withdrawals under specific circumstances, such as:

• Nursing Home Care: If admitted to a facility for a specified period, some annuities allow access to the funds.
• Terminal Illness: A terminal diagnosis expected to result in death within a year may allow penalty-free withdrawals.
• Required Minimum Distributions (RMDs) for retirees over age 73.
• Death benefits ensuring at least the full principal is passed to beneficiaries.

Increasing Income Payments

To keep up with inflation, some annuities offer lifetime income payouts that increase over time. These adjustments may be tied to a benchmark index like the Consumer Price Index (CPI) or predetermined annual rates.

Minimal to No Fees

Some annuities don’t charge fees while still providing the option for growth, downside protection, death benefits, and access to funds. When fees are present, they should add clear value, such as offering increasing income or doubling care facility income benefits.

Why Choose a Fixed Index Annuity?

Fixed index annuities are often chosen for these reasons:

• Retirement Savings: Help accumulate retirement funds securely.
• Legacy Planning: Provision for loved ones, business partners, or charities.
• Expense Safety Net: Cover unplanned expenses or essential needs.

Unlike other investments, FIAs can guarantee predictable growth without exposing your principal to market risks.

The Confidence of Annuity Owners

Surveyed individuals overwhelmingly express satisfaction with their annuities. A 2013 Gallup study found that 9 out of 10 annuity owners believe annuities effectively support their financial goals.

Understanding participation rates, cap rates, and spreads makes it easier for you to assess a fixed index annuity for long-term financial planning. FIAs balance growth potential with downside protection, offering peace of mind in uncertain markets.

Final Thoughts

The shifting economic landscape presents challenges, especially for retirees who depend on their savings. Fixed index annuities with annual reset capabilities address these challenges head-on, providing peace of mind through market volatility, inflation protection, and dependable income. By partnering with an insurance provider to manage longevity risk, you ensure a safer, more stable retirement.

If you’re looking to protect your hard-earned savings and secure your financial future, speak with a financial advisor about how an FIA can fit into your retirement strategy.

Before making decisions, consult with a financial advisor or professional specializing in annuities to tailor your selection to your unique goals and retirement needs.

Chapter 9

INDEX ANNUITIES, QUESTIONS AND ANSWERS

A Simplified Guide to Fixed Index Annuities for Retirees

Fixed index annuities (FIAs) can provide stable income, protect your savings, and offer growth potential based on market performance. If you're considering FIAs as part of your retirement strategy, here’s a breakdown to help you understand the basics.

How Much Can You Earn with Fixed Index Annuities?

FIAs offer returns based on stock market performance but with no risk of losing your principal. Here’s what studies suggest about potential earnings:

• Typical Returns: Researchers found annualized returns between 3.89% and 9.19% on real FIA data from 1997 to 2010. During the same period, the S&P 500 had returns ranging from -3.08% to 13.37%.
• What to Expect: Financial experts often estimate long-term returns for index annuities to fall between 3% and 6% annually.

Key Takeaway: While returns can match or exceed some market-based investments during positive years, FIAs are more focused on safety and protection from market losses. This makes them ideal for those prioritizing a steady income rather than high-risk rewards.

C You Earn More Than 20% in a Year?

It’s possible. If the market (like the S&P 500) performs exceptionally well—say 23% growth in a year—you might earn over 20% after fees like the “spread rate” (usually 2%-3% is subtracted for administrative costs). However, these high returns are rare and shouldn’t be relied upon for consistent income.

Who Should Consider FIAs?

FIAs might be a good option if you:

• Want Reliable Income: Many FIAs offer guaranteed income payments for life.
• Value Principal Protection: You won’t lose your initial investment, even if the market drops.
• Plan for the Long Term: FIAs typically have surrender charge periods ranging from 5 to 15 years, making them more suitable for committed, long-term strategies.
• Seek Stability: If you want part of your retirement fund to grow steadily without taking on significant market risks, FIAs can complement other investments.

FIAs are not designed to replace your entire retirement plan. Instead, they work best alongside IRAs, 401(k)s, or similar products.

Do Annuities Have High Fees?

Fee structures for annuities vary, but here’s the general breakdown:

• Contract Fees: Most FIAs have nominal annual fees.
• Riders: Some optional benefits, like lifetime income riders, come at an extra cost. However, many FIAs don’t require additional charges for basic functionality.

Compared to actively managed investment portfolios, FIAs often have lower fees, and there’s typically no upfront planning cost or minimum asset requirement to open a contract.

Are There Any Alternatives to Annuities?

While FIAs offer unique benefits like guaranteed income and principal safety, other investment options may also suit your goals. Consider these alternatives:

• U.S. Treasury Bills: Low-risk government-backed securities.
• Certificates of Deposit (CDs): Guaranteed returns over a fixed period through banks.
• Municipal Bonds: Tax-efficient bonds issued by local governments.
• Stable Value Funds: Low-risk funds often offered in employer-sponsored retirement plans.

Unlike FIAs, these products may lack features like income guarantees or downside market protection. Be sure to consult a financial professional to determine the best option for your needs.

What Makes FIAs Secure?

Annuities are insurance products, backed by the reserves and financial stability of insurance companies. Here’s how these companies protect your investments:

• Policy Reserves: Insurers are required by state law to maintain reserves equal to their obligations to you.
• Regulation: Insurance departments regulate company solvency. If a company struggles financially, states can step in to ensure payouts through rehabilitation processes.
• Safety Ratings: Reputable agencies like A.M. Best, Moody’s, and Standard & Poor’s rate insurers to indicate financial health and reliability. Choose your annuity provider based on strong ratings for peace of mind.

Bonus Tip: Unlike bank products backed by FDIC, annuity guarantees rely on the insurance company itself. Allocate your investments accordingly to balance risk.

What If You Change Your Mind?

Most states mandate a “free-look period” for annuities, typically lasting 10 to 30 days. During this time, you can cancel your contract without penalties and receive a full refund. This feature adds flexibility, allowing you to reevaluate your decision after purchase.

No other financial product offers this kind of post-purchase reconsideration, making it a unique advantage of annuities.

Key Points to Consider

1. Use FIAs for long-term savings and guaranteed income, not short-term gains.
2. Keep an eye on surrender charge periods to avoid unexpected fees.
3. Maximize security by choosing insurers with top ratings from A.M. Best, Moody’s, or Standard & Poor’s.
4. Diversify your financial portfolio to balance growth, income, and security.

For more detailed resources, visit reliable sources such as:

• www.fixedannuityfacts.com
• www.standardandpoors.com

Investing in an FIA means prioritizing financial security in retirement. When combined with other strategies, it can help ensure a steady income while protecting hard-earned savings.

Looking for guidance? Consult a professional to see how FIAs fit into your retirement plan.

Disclosures

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and FORTE ADVISORS are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.

Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.
Any comments regarding safe and secure products, 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 Brookstone.

Examples are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
FORTE ADVISORS is not affiliated with or endorsed by the Social Security Administration or any other government agency.

Registered Investment Advisors and Investment Advisor Representatives act as fiduciaries for all of our investment management clients. We have an obligation to act in the best interests of our clients and to make full disclosure of any conflicts of interests, if any exist. Please refer to our firm brochure, the ADV 2A item 4, for additional information.

The world is not what it used to be, and so we are required to give the following additional 
disclosures about the material presented in this website and/or webpage, herein referred to this "book".

This book is designed to provide accurate and reliable information with regard to the
subject matter. It is provided with the understanding that it is not providing legal,
accounting or other professional advice.

The information in this book is for general use, and while we believe the information
is reliable and accurate, it is important to remember individual circumstance can and
will be different. Therefore, the information should only be relied upon when
coordinated with tax, legal and/or financial advice. You need to consider your own
personal situation including health, personal finances, and retirement goals before
acting on any information presented in this book.

The information being discussed throughout this book is general in nature and is
intended for educational purposes only. No specific products, services or companies
are being solicited or offered. Please understand the rules and regulations governing
insurance, tax, and financial issues are complex and are subject to state and federal
variations and they have different interpretations. Therefore, should investment, tax
or financial advice be required, it is recommended that you do seek the advice of a
licensed professional in your area. No specific financial, investment, legal, tax or
insurance advice is ever intended. The information provided is not intended as tax
or legal advice and may not be relied on for the purposes of avoiding and Federal or
State tax penalties. FORTE ADVISORS, it's employees or representatives are not
authorized to give tax or legal advice. Individuals are advised to seek the advice of
their own tax and legal counsel. Furthermore, we are not associated with or endorsed
by any government agency including the Social Security Administration.

Financial products do vary therefore look only to the specific details of the covered
structure or product for benefits and features. For example, an annuity may have
unique features not covered in this guide. Any discussions regarding guarantees,
interest rates and rates of returns are purely hypothetical and not intended to
represent assurances or guarantees.

You should also know that annuities are not the best products for every person and
that no one annuity should make up an individual's entire financial plan.

Footnotes

See George Korniotis and Alok Kumar, "Do older investors Make Better Investment Decisions? The
Review of Economics and statistics, February 2011, Harvard college and Mit.
Top 10 Financial Challenges To Funding Retirement, Leading Economist Dr. David F. Babbel
Reveaks His Strategies

Allocation During Retirement: Adding Annuities to the Mix by William Reichenstein I Making
Retirement Income Last a Lifetime by John Ameriks, Ph.D., Robert Veres and Mark J. Warshawsky,
Ph.D. I http://www.marketwatch.com/story/how-to-avoid-sequence-of-return-risk-2013-09-28

Source: NAFA National Association for Fixed Annuities

According to the Financial Industry Regulatory Association (FINRA), the index-linked
interest rate computed on an FIA depends on the particular combination of indexing
features that the annuity uses. These include:
• Participation rates, which determine how much of the gain in the index will be
credited to the annuity;
• The spread/margin/asset fee that some FIAs use in addition to or instead of a
participation rate. This percentage will be subtracted from any gain in the index
li ned to the annuity;
• Interest rate caps put on an individual's return. The cap rate is typically stated
as a percentage.

According to the National Association for Fixed Annuities (NAFA), individuals are
buying into fixed indexed annuities for a number of reasons, including saving money
for retirement, saving money for business partners, loved ones or charities at death,
and saving for planned and unplanned expenses.
As with all types of annuities, guarantees are backed by the financial strength and
claims paying ability of the insurance company.
Those who have annuities generally think they're a good deal. According to the 2013
Survey of Owners of Individual Annuity Contracts , conducted by The Gallup
Organization and Mathew Greenwald and Associates for the Committee of Annuity
Insurers, 9 out of 10 annuity owners believe that annuities are an effective way to save
for retirement.

FIA facts: 10 fixed index annuities truths http://www.lifehealthpro.com/2015/10/21/fiafacts-
10-fixed-index-annuities-truths?t-fixedindexed&
page-2&slreturn-1478731345

Real-World Index Annuity Returns by Geoffrey VanderPal, D.B.A, CFP®, CLU, CFS, RFC®; Jack
Marrion; and David F. Babbel, Ph.D. https://www.onefpa.or /iournal/Pages/Real-
World%20lndex%2OAnnuity%2OReturns.aspx

Additional Resources online

www.fixedannuitvfacts.com
www.indexedannuitiesinsights.com
National Association for Fixed Annuities, Securing the Future!
"The Financial Journalist's Guide to Index Annuities"

About the Author 

Seasoned financial advisors with years of experience specializing in retirement planning and income strategies. Forte Advisors are dedicated to helping individuals understand complex financial products and make informed decisions to secure their financial futures. Their extensive knowledge and approachable guidance have empowered countless people to achieve their retirement goals with confidence and ease.