If you’re a government employee, you may have attended private retirement seminars  or webinars where you were told you should have an annuity.  But, is that really true?
In this video, we explore reasons you might or might not want an annuity.
The video is based on the article below.

 

 

Should Federal Employees Own Fixed Indexed Annuities?  Some Pros and Cons

by Brian Swerdlow

Federal employees planning their retirements often rely heavily on their government benefits, including the Thrift Savings Plan (TSP), Social Security, and a FERS pension. While these are substantial benefits, diversifying outside of this package can add a layer of security and flexibility. One option for “insuring” your federal retirement plan is a Fixed Indexed Annuity, or FIA.   But can a FIA truly help you protect your federal benefits?

Let’s explore what a Fixed Indexed Annuity is, its pros and cons, and why it could be a smart addition to your retirement strategy.

What is a Fixed Indexed Annuity?

A Fixed Indexed Annuity (FIA) is an insurance product offering a unique combination of features often not found in other types of safe money products. At its core, FIAs were created to provide principal protection while also offering the opportunity for at least some market-linked growth. Unlike a traditional fixed annuity that offers a guaranteed interest rate, the growth potential in an FIA is linked to the performance of a specific stock market index, such as the S&P 500 or any of a number of other market indices.

However, when you purchase a FIA, your money is not directly invested in the stock market. Instead, the insurance company uses a benchmark index to determine how much interest to credit to your account. If the market does well, you could see higher returns compared to a traditional fixed annuity. But if the market drops, your principal is contractually protected, meaning you won’t lose any of your initial investment.  For some federal employees, FIAs are more secure choices than other types of annuities since these assets are not exposed to the market’s fluctuations.

With a traditional fixed annuity, your rate of return is guaranteed just as it is with a FIA.  However, since a fixed annuity has no link to the stock market, it provides stability, but often lower returns.  A FIA gives you the same stability, but with the added potential for a greater return on your investment.

There are also “variable” annuities that participate directly in market investments and are thus regulated as securities.  Variable annuities could possibly get you more gains, but are obviously riskier than FIAs, since you could theoretically lose your principal in a market crash.

What are some of the PROS of a fixed-indexed annuity?

When you have a FIA in your portfolio, it acts as a type of insurance for the rest of your investments.  This is because of a FIAs contractual guarantees.  Your original FIA investment stays safe from market risk, which is critical the closer you get to retirement time.

As mentioned before, with a FIA you have a chance to participate in market upside but are shielded when there is an economic downturn.   Because of this feature, FIAs can be idea for some retirees to help offset losses in other sectors of their retirement portfolio or to help create supplement income needed to maintain their lifestyles.

FIAs, like some other financial products, are also tax-advantages.  Any money earned in your annuity grows more efficiently, tax-deferred, until withdrawals begin.

 Cons of fixed annuities

As do other financial tools, fixed-indexed annuities can have a few potential pitfalls. One of these possible cons is the “surrender period.”  Typically, fixed-indexed annuities have a specific time during which you must leave your money invested or face steep early withdrawal penalties.  This surrender period can be anywhere from five to ten years or longer.  So, not only is it crucial that you thoroughly understand all the provisions of your chosen annuity, but you must also have a long-term mindset so you’ll be more comfortable leaving those funds untouched for a while.

Fixed annuity gains usually come with caps on the market-linked growth they provide.  This means that even if the stock market is performing exceptionally well, your gains are limited by the annuity company.  It should be emphasized again that the main reason you buy an annuity is not its potential for gains but rather its guaranteed protections against loss.

Finally, it should be noted that a fixed-indexed annuity may be somewhat more complicated than other types of annuities or safe money vehicles.  A fixed-annuity has many nuances, including the manner in which interest is credited, and various customization options that may make it more difficult for the average retiree to understand.

Is a FIA right for a federal employee?

Federal employees enjoy a robust benefits package, including pensions, health benefits, and the TSP.  However, relying solely on these benefits may leave you more vulnerable than you think to economic fluctuations and situations such as government shut-downs,    Diversifying your retirement savings with a FIA gives you an additional measure of control, flexibility, and protection when it comes to your retirement benefits.

For if you anticipate that their pension and Social Security benefits may not be enough and worry that you could run out of money in retirement, a FIA gives you an additional steady stream of guaranteed lifetime income.

Your TSP allows you to participate in market upswings, but it’s still subject to volatility. A FIA’s market exposure adds a protective layer that lets you benefit from market gains without exposing your money to market risk.

Owning an asset that is outside of your federal benefits package can allow you more control and flexibility. You’re not limited by the restrictions or the financial health of government-sponsored retirement systems like TSP or the G Fund. In a world where economic and political uncertainties are rising, having an asset that’s independent of the federal government can provide additional peace of mind.

Conclusion

For federal employees, a fixed-indexed annuity can be a smart way to supplement retirement income, ensure greater portfolio diversity, and safeguard against longevity risk. With principal protection, market-linked growth, and tax-deferred benefits, a FIA offers a balanced approach between security and potential returns.  However, it’s crucial to weigh any potential downsides, such as surrender charges and capped gains, before making a decision.

Diversifying your retirement strategy by owning assets outside of your federal benefits package, including annuities, gives you added flexibility and ensures you’re prepared for whatever the future holds.

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