Should You Stay Away From Fixed Index Annuities?

Here’s What We Tell Our Clients About Fixed Index Annuities

When clients come to us asking whether they should avoid fixed index annuities (FIAs) because they’re too complicated or full of fees, we don’t sugarcoat it. We lay out both the pros and cons so you can make the best decision based on your goals. Let’s walk through what we’ve shared with many others in your shoes.

First, How Do Fixed Index Annuities Work?

Think of an FIA as a savings account inside an insurance wrapper:

• Your principal is protected—you can’t lose money due to market downturns.
• Instead of earning a flat interest rate, your account receives interest credits based on a market index, like the S&P 500.
• However, your money is not invested directly in the market. The insurance company uses part of your deposit to buy options that determine your credit.

It’s a tool designed for growth without market loss, which is why many people nearing retirement explore it.

Now, Let’s Be Honest—Here Are the Real Drawbacks We Explain First

We always tell our clients to look at five key limitations before considering an FIA:

1. Your Growth Is Capped
   Insurance companies use caps, participation rates, and spreads to limit how much of the market’s upside you’ll get.Example: If the S&P goes up 10% but your participation rate is 50%, you only get 5%.What we do: We help you find the carriers with the highest caps and participation and lowest spreads or fees, so you get more out of the upside.
2. Fees and Spreads Can Eat Into Earnings
   Some contracts have no fees, but offer lower earning potential. Others offer better growth potential but charge fees or spreads (we’ve seen some as high as 5%).What we do: We compare dozens of carriers and only recommend those with transparent, reasonable fee structures—often just 0–1%. And we prefer spreads (taken from gains) over flat fees (which reduce your value regardless of performance).
3. You Miss Out on Big Market Gains
   Since FIAs are not actual investments, you won’t get the complete market return, but you also don’t get the market risk.How we guide this: We help you allocate the right portion of your portfolio to FIAs. An FIA isn’t your growth engine. It’s your safe money, like the “spoon” in your financial utensil drawer—perfect for protection, not for cutting through market volatility.
4. The Time Value of Money Can Be Tricky
   Suppose you’re buying an FIA with a lifetime income rider (aka a “hybrid pension”). In that case, putting money in earlier indeed means it sits for years before producing income. Some advisors may say, “Wait until you’re ready to retire.” But that advice could cost you.What we’ve found: Starting earlier gives the insurance company more time to guarantee a much higher future income. You’d need to earn 7–9% annually in the market without losses to match the payout of starting early with a quality hybrid pension annuity.
5. Misleading Sales Practices Are a Problem
   Unfortunately, many agents and advisors push annuities without a deep understanding of the products, or they work under high-commission models or even multi-level marketing structures (MLMs).What makes us different: We specialize in retirement income and protection-based products only. We don’t sell car insurance, stocks, or mutual funds. This focused approach helps us navigate more than 50 annuity plans across top-rated carriers and find the one that’s right for you.

So, Why Would Anyone Choose an FIA?

Great question—and here’s what we tell clients:

• Principal protection: Especially in volatile markets.
• Tax-deferred growth: Like IRAs or 401(k)s.
• Optional guaranteed lifetime income: Through riders that can create your pension.
• One-time commission structure: No ongoing advisor fees like the 1–1.5% you’d pay in traditional AUM models.

The Bottom Line

Fixed Index Annuities are not for everyone, but when used for the right purpose, they can be a powerful tool in your retirement plan.

• Use them for safety and income, not high returns.
• Make sure to compare multiple carriers—not just the one your advisor prefers.
• Partner with someone who’s a true specialist, not a generalist dabbling in everything.

Suppose you’re thinking about whether a fixed index annuity could fit your retirement plan. In that case, we’d be happy to review it with you, run illustrations, and show you historical rate integrity data so you can make a confident choice.