Fixed indexed annuities and the power of annual reset
By Kevin Startt
The greatest storyteller in history was a carpenter. Jesus told stories in parables so people could understand the complex. So it is with one of the fastest growing products in this ”age of safety” or "new normal," as some analysts would call it.
I never forget why the good Lord put the first four letters of the word analyst in the word: because he who forecasts by the crystal ball tends to eat glass! So, it makes perfect sense to use a carpenter's ruler to show how the greatest benefit of fixed indexed annuities works.
Today, I will use a carpenter's ruler to demonstrate how the power of annual reset can help savers and investors who have abandoned the market in droves to capture gains and keep those gains at a time when it is critical to have some assets allocated to growth, without experiencing the ups and downs of a roller coaster.
Annual reset makes an investment in a fixed index annuity more like a merry-go-round where, just like a direct investment in the market, I can pick the ponies (or allocations). I remember my first trip to Dollywood, the amusement park in Pigeon Forge, Tennessee. After boarding the roller coaster, I found the first ascent scary enough; but after they turned the lights out on the second ascent with all the zigs and zags thrown in, I was scared to death.
Considering the Fed’s policies, fiscal cliffs and debt ceilings, how many of your clients feel like they have had the lights turned out in the last 12 years? How many are simply hoping they will get back to where they started from? A slow steady ride on a merry-go-round can have its up and downs, but those who invest in FIAs can trust that, subject to insurer solvency, the indices can go up like a carousel, but never down below where they started. They even enable investors to lock in some participation in market gains, like those of the last four years, when the market doubled.
Annual reset and the minimum guarantees of a fixed annuity also ensure that investors can reduced the risk of losing gains such as those experienced between 2001 and 2003, and between 2007 and 2009.
Let’s see how annual reset works using the old carpenter's ruler and presuming market performance based on the average annual basis for the last 200 years before inflation of 8 percent, according to Jeremy Siegel. If I was participating in a fixed indexed annuity with an annual point to point cap rate of 4 percent with 100 percent participation, I would capture 4 percent gains that I can never lose. This is the differentiator between FIAs and other products like structured CDs, notes, REITS, and of course, mutual funds or ETFS. If the market goes down I am locked in at 104,000 CSV on my original $100,000 savings. The humorist Will Rogers is often attributed with the quote: "I am not so much concerned with the return on capital as I am with the return of capital." Rogers died in a plane crash and so did not have to face 30 years of generating retirement income and worrying that it could all evaporate in a market downturn.
Rest assured that when you begin to take income, growth stays up as well because of annual reset. I can draw down income that may even be protected against inflation through a rider. And the beauty of annual reset continues working, assuring me that I can now get appreciation on an asset like an annuity that is designed to provide tax deferred income without the worry of losing money. That’s peace of mind, wouldn’t you agree?
The late Zig Ziglar said you have to teach a prospect about the pots and pans they already have before you can show them how the new ones work. There are a lot of spins on the concept of a fixed indexed annuity, but the annual reset remains the very best.