Stop Gambling With Your Clients' Retirement

The Covid-19 pandemic has thrown the stock market into turmoil. For many people, that means their retirement accounts are in turmoil as well. And the truth is, no one knows what the stock market is going to do in the years to come.

Some economists are speculating that the market will get much worse before it gets better. Others are projecting a rapid stabilization and a speedy recovery. Who should we believe? The truth is, we just don’t know.

For those whose retirement funds are in 401(k) plans or other market-based funds, this means uncertainty about how to best protect their retirement nest egg. There are three common options investors consider:

1. Withdraw your money now so you won’t lose more if the economy is still ailing. For those who don’t have decades to wait for an economic recovery to occur, this option may make sense. But it may also be risky. What if the market does grow, and you miss out on the recovery? And if you are under the age of 59 1/2, there may be penalties and taxes.

2. Leave your money in the market and hope for the best. This way, if the market does grow, you can regain some of what you’ve lost in the pandemic so far. But this obviously also comes with big risks. What if the market drops again? Yes, if you are putting money in your 401(k) plan every two weeks, you are buying low when the market crashes. What if it drops so far that you lose most of your retirement savings?

3. Move your money into a fixed indexed annuity (FIA). This is a vehicle that offers you some potential for growth if the market recovers, but which carries no risk of loss if the market continues to drop further.

What Is A Fixed Indexed Annuity?

Fixed indexed annuities have become an appealing option for many people who are afraid to invest in such a volatile world.

In short, the three types of annuities are:

• Fixed annuities. These annuities gain interest on your money at a fixed rate that never changes. They are the most reliable type of annuity, completely immune from market downturns. On the other hand, they can also earn less than other types of annuities if the market grows.

• Variable annuities. Variable annuities are tied to the performance of the stock market. This means they can make as much as the market makes when the economy is booming, but they can also lose as much as the market loses when it turns down. Also, this annuity usually has rider, subaccount, mortality and expense fees. This is the riskiest type of annuity, and the most expensive.

• Fixed indexed annuities. An FIA combines the best of both worlds. It is fixed to a floor — a worst allowable rate of change. For most FIAs, this is 0%. In other words, the worst thing that can happen to the dollar amount in your FIA during an economic crash is it doesn’t change. But an FIA is also indexed: It grows at a rate that is related to the stock market, potentially allowing this type of annuity to outearn a regular fixed annuity. You do not get all the upside, but you get none of the downside due to market volatility.

What if you walked into a casino, and a blackjack dealer said to you, “Here’s what we’re going to do. If you lose a hand, I’m going to reshuffle the deck, and we’ll pretend it never happened. But if you win a hand, I’ll split the winnings with you 50/50.” How long would you sit at that table?

In essence, this is an FIA. When the market “wins,” you get a percentage of the gains. But when the market “loses,” you lose nothing. Many investors do not get 100% of the market gains on the upside due to them being in a diversified portfolio, so the FIA may be an option.

For this reason, FIAs are an attractive prospect for many Americans. They are less risky than the stock market but generally offer a greater upside than bank products.

Know The Costs

Like all financial products, no investment is perfect. Fixed indexed annuities can potentially come with some hidden costs you should be aware of. A few items you will want to scan your contract for include:

• Surrender charges. Just like 401(k) plans and other types of retirement accounts, some FIAs have penalties for withdrawing your money earlier than scheduled, typically more than 10% per year.

• Commissions. Commissions are paid directly by the insurance company, but that money does not come out of the client’s assets. And although most FIAs do not have a fee, some people do have to pay an annual fee of their assets or a sales charge that is taken off their retirement assets.

• Rider fees. Some annuities may allow you to add riders, which give you special abilities or perks with your annuity, such as lifetime income. However, there may be costs for these riders. Keep an eye on these fees to ensure they don’t outweigh the benefits.

• Caps. Just as FIAs may have different floors, they may have different caps on the maximum amount you can earn. Find an annuity that has no caps.

If this all seems intimidating, consulting with an independent agent or advisor can help. These advisors who do not work directly for financial companies can give you an honest assessment of what’s in your best interest.

Stay well. Stay safe. I wish you all the best during this time of uncertainty.

This article originally appeared on Forbes.


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