One of the most common conversations I have with clients who are approaching or already in retirement is about risk. At this stage in life, protecting what you’ve saved is just as important—if not more important—than chasing high returns. The question becomes: how do you lower risk in your portfolio without giving up growth potential?
In this week’s Cardinal Lesson, I explain how a fixed indexed annuity can serve as an alternative to traditional bonds. It’s a tool that can help reduce both market and interest-rate risk while still giving you the chance to see steady growth over time.
Why Consider a Fixed Indexed Annuity?
When many retirees think about lowering risk, bonds are the go-to option. But bonds come with their own risks, especially interest-rate risk. As we saw in 2022, when interest rates rise sharply, bond values can drop at the same time stocks are falling. That’s not the kind of “safety” you want in retirement.
A fixed indexed annuity offers something different:
- Protection from losses. Even if the market goes down, your contract won’t lose value—it simply earns 0% that year.
- Growth potential. Returns are tied to the performance of the S&P 500 (up to a cap). If the index rises, you share in some of that growth.
- Flexibility. You can withdraw up to 10% each year penalty-free, which can be useful if you need income during a market downturn.
A Simple Example
Let’s say you invest $200,000 into a fixed indexed annuity. If the S&P 500 rises 7% in the first year, you would be credited $14,000. If the index soars 18%, you would be capped at 9.5%. On the other hand, if the index falls 20%, your account value stays the same.
Over time, this means your portfolio has a chance to grow steadily—without the fear of watching your savings drop when markets get rough.
Where Does It Fit in a Retirement Plan?
I don’t recommend putting all of your money into an annuity. Instead, it’s about balance. For someone with a 60/40 portfolio (60% in stocks, 40% in bonds), we might move half of that fixed portion—about 20% of the overall portfolio—into a fixed indexed annuity. This way, you reduce the risks of traditional bonds while still giving your portfolio some conservative growth.
It’s important to note that fixed indexed annuities have a surrender period, usually around 10 years, and caps on returns. That’s why they should only be used as part of a comprehensive financial plan that considers your income needs, estate goals, and tax situation.
Final Thoughts
For many people in retirement, a fixed indexed annuity provides peace of mind. It’s not about trying to hit home runs in the stock market. It’s about protecting your savings, smoothing out volatility, and creating a plan that lets you enjoy retirement without constantly worrying about losses.
If you’re 65 or older and wondering whether this might be the right fit for your retirement strategy, I encourage you to watch the full video and download the show notes. As always, this is just one of many tools we use to build a retirement plan that’s tailored to you.
