In "normal" stock market investing, the range of outcomes is unlimited in terms of gains and losses. For those who would rather reduce the volatility and eliminate stock market risk, there are a number of types of structured products that create a predetermined set of outcomes. For our purposes here, we will focus on the structured outcomes in a fixed index-linked annuity (FIA). These are similar to a buffered security (aka "RILA") in that gains are linked to gains in major stock market price indexes. The difference is because there is no risk of stock market loss, the potential gains are generally less than a RILA, and there are no internal yearly fees while some RILAs may have an internal fee.
When using an FIA, one chooses an index to which one's money is "linked," meaning one's gains are determined by whether the price of that index increases. One's funds are not actually invested into the stock market itself. If the price index goes up, using the point to point with a "cap" method, your account is credited with 100% of the gain up to a maximum or "cap," and that new value can't be lost in subsequent years. Future gains compound on any previous gains. Conversely, if the stock market price index declines 1%, 10%, 20%, 50% or any % in a contract year, your account doesn't lose. Currently,* caps for accounts linked to the S&P 500 price index are in the 9% - 11% range depending on amount deposited, the company, the index, and terms selected. A few companies lock in the cap for the full term of the FIA while others may change them year to year. Generally, I prefer to lock in the cap so one has certainty over the full term of the account.
FIAs allow investors to safely profit from potentially rising prices of major stock market indexes while providing full protection from downside losses. These types of accounts can be complicated with all types of crediting methods or they can be elementary in the way gains are credited. Generally, I prefer to keep it simple.
FIAs have no upfront charges and don't charge a yearly fee (unless income riders are added). They do have restrictions on withdrawals during the surrender charger period with companies offering different options as to yearly withdrawals and full withdrawals in the event of death, terminal illness, and long term care (see the disclosures for details). Due to the restrictions, there are certain suitability guidelines that must be met. Not all investors are candidates for an FIA.
Please click on the short video above to learn more. Below is an easy to understand analysis of S&P 500 price returns since 1928. Please read to understand the power of today's structured outcome FIAs.
*As of 08.21.2024
Since an FIA credits gains when the price of the chosen stock market index increases in value during the contract year, it makes sense to wonder how often the most used index, the S&P 500*^, goes up during 1 year periods. Since 1928, the price index has increased in 64 of 96 years (about 66%). Returns of 11% or better have occurred in 47 of those years (49%) and 7.06% or better in 9 of those years. So, in 58% of the years, the index has increased 7.06% or better.**
Using rolling 7 year periods, of which there now have been 89, the index has experienced the following:
While one can't make predictions of future returns, if the next 7 years were "average," an FIA with a point to point crediting method and an 11% yearly cap, would return 11% in 3 or 4 of the years and 7% or better in 1 or 2 of the years. In 2 or 3 of the years, the price index would be negative and your funds and any gains would be safe and secure. If, in 3 of the years the price indexed gained 11% or better, and 1 of the years the gain was 7%, the compounded 7 year total return would be about 46%. Of course, there are no certainties this would occur and this is just for illustration purposes only. Your results may be better or worse and in no circumstances would you incur stock market losses.
*Source for all data: https://www.slickcharts.com/sp500/returns/details
**Data analysis as of 10.25.2023
*^The S&P 500 is a trademark of the Standard and Poor's Co. and consists of the 500 largest US based companies. One can't invest directly into the index.
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