20/20 Vision

20/20 Vision

Fixed Indexed Annuity

What does it mean to index?

• When your money is indexed in an annuity with a life insurance company, the insurance company guarantees your balance will never go down.
• It means your money is not in the stock market so if you get a return on your money it’s because an index like the S&P moved upwards.
• Both the upward and downward movement is capped. On the down side the lowest it can go is zero and on the upside each contract is different, but caps typically range in high single digits.

Just before the big downward movement in the stock market I chatted with two different people about their retirement money. The first person I spoke with was Ralph. He had a handsome sum of money to invest and wanted my opinion.

After explaining the difference between investing and savings, and how an indexed annuity works, Ralph reasoned that he would keep his money in the stock market until a downturn and then pull it out. Ralph wanted to invest his money.

The other person I chatted with was Gertie who had most of her money in a 401(k) account fully invested in stocks. She wanted a little more security and a reasonable rate of return. She couldn’t afford to lose any of her principle.

When do you want your money, I asked. Oh, I won’t need it for some time, perhaps seven or eight years. Gertie chose to save her money and protect it.

Gertie rolled her money into an indexed annuity just before the big crash hit. One year after the rollover, Gertie visited my office for her annual review.

Her first question as she sat down was “How much did you make me last year?”

I smiled at her, grabbed a scrap piece of paper and wrote a big 0. Looked into her eyes, smiled and asked, “How’s that make you feel?” “Great, and thank you.”

We spent the remaining time talking about her trips visiting the grandchildren, her health, and other things important to her.

What we didn’t discuss is the thirty percent drop she would have incurred had she not protected her money.

20/20 hindsight is awesome when you get it right. I wonder how Ralph did with his timing?  It’s never too late to protect your money.