IALC Glossary: Explaining Annuity Jargon

Every industry has its own language, and it’s no different for retirement planning. Understanding this sometimes confusing language is crucial as you begin making financial decisions that will impact your lifestyle once your working years are over. As you begin looking into annuities, make sure you take some time to understand the most commonly used terms. By doing so, you can ensure that your retirement will be the “golden years” you’ve been dreaming of.

Here are some of the most important retirement words, defined:

Annuity – A contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are often bought for future retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live. Your money grows tax-deferred as long as you leave it in the annuity.

Annuitant(s) – The person taking out an annuity.

Compounding Interest – Interest paid both on the original amount of money and on the interest it has already earned.

Simple Interest – Interest paid only on the original amount of money and not on the interest it has already earned.

Defined Benefit Plans – A type of pension plan in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns. The plan provides lifetime income through a group or individual annuity contract.

Fixed Annuity – An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.

Fixed Indexed Annuity (FIA)– An fixed annuity on which credited interest is based upon the performance of an index, such as the S&P 500. The principal is protected from losses in the equity market, while gains add to the annuity’s returns. Interest is not based on pre-declared rate of interest, typical of traditional fixed annuities.

Guaranteed Lifetime Withdrawal Benefit (GLWB)/Income Rider – An optional benefit that can be attached to an annuity contract that, will provide a lifetime income stream that can be turned on in the future. Some income riders grow at a contractually guaranteed rate that will compound during the deferral years for future lifetime income.

Guarantee Period – An option to ensure that a minimum number of year’s payments are made by the annuity, even if you die. The maximum guarantee period is 10 years. If you die during the guarantee period, the annuity will continue to make income payments until the end of the selected guarantee period or you could select that the remaining payments are paid as a lump sum (this option is not permitted where the guarantee period is 10 years).

Immediate Annuity – An annuity purchased with a single premium on which income payments begin within one year of the contract date. With fixed immediate annuities, the payment is based on a specified interest rate. With variable immediate annuities, payments are based on the value of the underlying investments. Payments are made for the life of the annuitant(s), for a specified period, or both (e.g., 10 years certain and life).

Longevity Risk – The risk of outliving one’s assets.

Lump-Sum Distribution – The distribution at retirement of a participant’s entire account balance within one calendar year due to retirement, death or disability.

Lump-Sum Option – A withdrawal option in which the annuity is surrendered and all assets are withdrawn in a single payment.

Principal – An amount of money that is loaned, borrowed or invested, apart from any additional money such as interest.

Purchase Price – The amount that is used to buy the annuity. If the whole of your pot has been paid to the annuity provider and they are paying a pension commencement lump sum (PCLS) to you, the purchase price does not include the PCLS.

Refinancing – Revising a payment schedule, usually to reduce monthly payments. A common way to do this is to reduce the interest rate on a mortgage.

Surrender Charge – A type of sales charge you must pay if you sell or withdraw money from a variable annuity during the “surrender period”—a set period of time that typically lasts six to eight years after you purchase the annuity.

Tax Deferred – An investment which accumulates earnings that are not subject to taxes until the investor takes possession of the earnings, often at a point at which the investor is in a lower tax bracket than before, such as retirement.

Variable Annuity – An insurance company contract into which the buyer makes a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments beginning immediately or at some future date. Purchase payments are directed to a range of investment options, which may be mutual funds, or directly into the separate account of the insurance company that manages the portfolios. The value of the account during accumulation, and the income payments after annuitization vary, depending on the performance of the investment options chosen.

Vesting – Reaching the point, through length of service, at which an employee acquires the right to receive employer-contributed benefits such as pensions.


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The Changing Face of Retirement

Retirement in America is changing.

What was once all but guaranteed by pensions and retirement plans, a comfortable and secure retirement is now increasingly the responsibility of the individual. Retirement today takes all shapes and sizes – from the couple enjoying adventures and grandchildren to the widow struggling to make ends meet.

This week, the Indexed Annuity Leadership Council unveiled a new initiative that examines the widely varying retirement experience across America. The project, the Changing Face of Retirement, weaves together recently released survey data, regional and personal experiences and expertly comprised photos to paint a realistic view of modern-day retirement. One common denominator we found across the regions and through the survey data: regardless of where you live and who you are, your golden years will depend on your willingness to taking financial planning into your own hands.

IALC conducted in-depth polling to better understand American attitudes toward retirement. Families across the country were interviewed to learn more about their personal experience, providing an intimate perspective on how the retirement experience changes from region to region and across the economic scale.

The Changing Face of Retirement discovered several key findings:

  • Only 41 percent of those ages 54 and under plan to retire before 67;
  • Sixty three percent of those 55 years and older said they plan to work past 67 for financial reasons;
  • Fifty four percent of participants have never spoken with a financial adviser and an even larger amount of those between 18 and 34, 65 percent, have not gotten such advice;
    • Further, 66 percent of those with incomes under $55,000 per year and 77 percent of the unemployed have never spoken with an adviser. The people who presumably would need advice the most;
  • Confidence in traditional retirement support is weakening. Only 26 percent of people between 18 and 34 plan to rely on Social Security compared to 48 percent of those 55 and older

Conversations with families and individuals in Sun City, Arizona; Brooklyn, New York; Minneapolis, Minnesota and Naples, Florida provided the Changing Face of Retirement with a personal, even gritty reality that stands in stark contrast to the overly romanticized view of retirement shared by so many. The diversity of their experiences makes it clear that a comfortable retirement is not something that is stumbled upon, but achieved.

What does this mean for you? At the end of the day, retirement is the result of your willingness to plan ahead, work hard and spend time thinking about what exactly you want your golden years to entail. It’s crucial to think about what you want your retirement portfolio to look like – by building one that is diverse and emphasizes guaranteed lifetime income, retirement is not something to be feared, but to be appreciated. A Fixed Indexed Annuity (FIA) is a great example of a secure vehicle to consider in a savings portfolio, so that a meaningful and long-lasting retirement is something attainable.

To learn more, visit FIAinsights.org and check with your financial professional to determine if a fixed indexed annuity is right for you.

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Answering Retirement’s Most FAQs

In order to ensure a relaxing and secure retirement, planning ahead is key. It’s something we all know, but let’s face it — figuring out where to start can be daunting. That’s why the Indexed Annuity Leadership Council (IALC) compiled and answered some of the most frequently asked questions when it comes to planning for retirement.

How much do I need to save for retirement?

As life expectancies continue to rise, more money is needed for retirement to cover everyday costs. A general rule of thumb is you should aim to save 10 to 15 percent of your annual salary. However, how much you should save for retirement depends on your personal goals and how you envision spending your golden years—whether it’s travel, time with family or taking up new hobbies. Make sure you know how much you will need by using one of our retirement calculators.

What age do I need to start saving for retirement?

Don’t wait! It is crucial to start saving for retirement as early as you can – the earlier you start saving, the more likely you are to meet your retirement goals. It will be nearly impossible to catch up if you wait too long, so save early and save often.

Even if you can only contribute 1 percent of your annual salary, anything is better than nothing and it can add up quickly! Additionally, if your employer does offer a retirement savings plan, take advantage by contributing as much as possible.

Check out our Saving For Retirement tool to see how much you should be saving, taking into account your age and your retirement goal.

What type of retirement vehicles are best?

Financial experts agree that your portfolio should be balanced and include a variety of products. It is important to diversify your savings if you want to reduce risk and improve return. Contributing to your company’s 401(k) is a great way to start a retirement portfolio, but relying too much on one vehicle is a common mistake when preparing to retire. And, as the economic recession of 2008 illustrated, supplementing your 401(k) is important to ensuring your retirement security. One product that can help augment a 401(k) is a Fixed Indexed Annuity (FIA), which protects your principal and can provide a steady income stream for life.

Making sure your savings strategy matches the stage in your life is also critical. For instance, putting your money into high-risk vehicles might make more sense when you’re a young professional, but the closer you get to retirement age, it is a good idea to shift to a lower-risk portfolio. Talking with a financial planner can be a great resource when identifying what financial tools make the most sense for your portfolio at any age.

How much do retirees spend on average per year?

Although it can vary based on the individual situation, the standard guideline for ensuring a sustainable rate of spending is that you should aim to only withdraw about 4 percent of your retirement savings per year.

Products like Fixed Indexed Annuities can serve as a solution to budgeting issues, as they allow you to turn on lifetime income. This can help not only with budgeting monthly expenses, but it can also guarantee that you won’t outlive that income.

How much do medical expenses cost on average in retirement?

According to a recent estimate by Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an estimated $220,000 to cover medical expenses throughout retirement. That’s why it is so important to make savvy financial decisions and start planning for retirement early so you’re prepared for not only any medical expenses, but are also able to enjoy retirement.

How do I create a retirement plan?

Sit down and determine your fixed and variable expenses and use a simple budget worksheet like this one from personal finance expert, Ellie Kay. Using interactive calculators can also help correctly assess how much your dream retirement may cost. In addition, working with a financial planner to project how expenses might rise in the future is another way to help ensure that you are budgeting properly.

You can also check out our Retirement Income & 401(k) Calculator to see how saving even a small percentage each month can accumulate.

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Three Ways to Minimize the Tax Burden on Retirement Income

Tax day is coming up in just a few weeks and while tax filing will never be fun, some planning now can make a big impact down the road when it comes to dealing with taxes during retirement.
As with many financial considerations, planning ahead is key. By beginning to think about retirement years ahead of time and organizing a financial strategy that allows for guaranteed income and security, retirement can be one of the most rewarding periods of your life.

1. Once you retire, financial flexibility becomes more important than ever. Flexibility allows you the freedom to enjoy new hobbies, travel or spend time with family and friends. What’s more, it allows for you to control your income throughout the year and stay in lower tax brackets, minimizing your annual taxes. One important way to improve your flexibility is to eliminate major expenses before you retire. For example, paying off your mortgage—one of most households’ largest expenses— can allow you to use your retirement income for a variety of other purposes or simply continue to save.

2. Develop a withdrawal plan that lets you stay in lower tax brackets. Many retirement-focused vehicles are tax-deferred, meaning that you are only taxed on them once you withdraw funds. By planning in advance and developing and sticking to a budget, you can make sure you don’t exceed certain tax brackets and are able to limit income tax.

Current Tax vs. Tax Deferred Comparison

3. A Fixed Indexed Annuity, or FIA, can play an important role in your retirement planning process as it provides a low-risk vehicle that can provide guaranteed lifetime income. What’s more, FIAs can help you minimize your tax burden. This tax deferral is important because it allows even faster growth of the annuity. In addition, FIAs don’t have government-mandated contribution limits. That means you are allowed to save as much as you would like. Finally, once you begin to withdraw (or annuitize) the funds, only the interest will be taxed – leaving your principal tax-free when you need guaranteed income the most.

Taxes are a key consideration in any financial planning. In order to enjoy a secure and comfortable retirement, take the necessary steps now to minimize your tax burden and develop a diversified portfolio of products which will provide the most financial security. For more information on how to reduce taxes in retirement, check out this interactive calculator that will allow you to prepare for multiple scenarios.

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Top 3 Common Retirement Mistakes

On the surface, transitioning to retirement means spending your days on the golf course or on the beach instead of in the office. But failing to prepare for retirement means more complications than leisure.

According to the 2014 Retirement Confidence Survey conducted by the Employee Benefits Institute, more than half of American workers may never achieve their retirement goals, as they haven’t calculated how much money they’ll need in retirement.

When it comes to planning for your “golden years,” there’s a lot at stake – will you have enough to last you your entire life? Will you be able to survive a health care crisis? Flipping the switch from saving to spending is unnerving and complex, but it can be made simpler by avoiding common missteps.

Here are the Top 3 Retirement Mistakes:

  1. Not saving early enough. The number of Americans who have student loan debt has risen to more than 40 million, and the average student loan debt in the United States is now around $29,000, according to CNN. These factors make it easy to push off saving for retirement until your late twenties or mid-thirties. In fact, the median Millennial has saved exactly $0 for retirement. Nonetheless, it is crucial to start saving for retirement as early as you can – the earlier you start saving, the more likely you are to meet your retirement goals. Unfortunately, when it comes to saving for retirement, it is difficult to make up lost time, and it will be nearly impossible to catch up if you wait too long. Americans are living longer than ever, making it more important than ever that you start saving early to ensure you don’t outlive your money. Even if you can only contribute 1 percent of your annual salary, anything is better than nothing and it can add up quickly!
  1. Lack of diversity in your retirement portfolio. It is important to diversify your savings if you want to reduce risk and improve return. Investing in your company’s 401(k) is a great way to start a retirement portfolio, but putting all of your eggs in one basket is a common mistake when preparing to retire. It’s also important to assess your investment strategy at different stages in your life. For example, a younger professional may have the luxury of putting their money into high-risk investments, whereas the closer you get to retirement, it may be best to have a low-risk portfolio. A fixed indexed annuity is one example of a conservative retirement product that offers opportunities for growing your retirement savings with protection from market volatility, and can provide you with a guaranteed lifetime income stream.
  1. Failing to budget properly. Once you have enough money saved up, it’s important to figure out how you want to spend that money. It is essential to realize that the money you have now will no longer be replaced by that regular monthly paycheck, so budgeting is crucial. Remember to take into account that your expenses may increase in retirement. In fact, a recent survey showed that not only does retirement cost more than anticipated, but for 65 percent of retirees surveyed, expenses increased. Expenses that your job may have covered such as healthcare and travel expenses will no longer be covered, and you may have to spend more money on long-term care for yourself or your parents. On top of these necessary investments, retirees often like to cross things off their bucket lists and engage in leisurely activities such as traveling – all of which cost money. Fixed indexed annuities can serve as a solution to budgeting issues, as the product allows you to turn on lifetime income – not only will this help with budgeting monthly expenses, but it can also guarantee that you won’t outlive that income. Using interactive calculators to correctly assess how much your dream retirement may cost and working with a financial planner to project how expenses might rise in the future are other ways to help ensure that you are budgeting properly.
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The 20th Anniversary of Fixed Index Annuities

This week Fixed Index Annuities (FIAs) reached a milestone – their 20th anniversary! On February 15th, 1995, Fixed Index Annuities were first introduced to consumers as a key product for helping plan a secure, dependable source of income for retirement.

FIAs were first created as a reaction to the economic volatility that darkened the bond and stock markets in 1994.[i] Despite the economic growth that characterized the 1990s, traditional financial options suddenly looked less dependable and an opening was available for a product that could be depended upon in times of economic turbulence to retain its principal and always provide a certain degree of growth – no matter the market conditions.

Photo: Classic by Stephanie Sicore – http://bit.ly/1vJZIem. License: http://bit.ly/1ryPA8o

Photo: Classic by Stephanie Sicore – http://bit.ly/1vJZIem. License: http://bit.ly/1ryPA8o

Consumers flocked to the new instrument and over the next 20 years FIAs proved to be a key part of a strong, trustworthy portfolio designed to provide confidence in later years. The proof is in the pudding – sales growth of FIAs over the last 20 years has been considerable. As Jack Marrion, president of Advantage Compendium, a financial research and consulting firm, found, “since 1995, roughly $400 billion in fixed index annuities have been purchased by millions of consumers.” [ii]

Today, the marketplace bears striking similarities to the conditions that first fostered FIAs. In the aftermath of the Great Recession, growth is once again on an upswing, but mindful of the recent economic decline and shocks, there’s still an appetite among consumers for dependable, safe ways to plan for a fulfilling retirement.

So, what does the future for FIA’s look like?

  1. The customer is changing. Traditionally, FIAs were purchased by those beginning to seriously consider their prospects for retirement. In a phrase – Baby Boomers. But, with the effects of the Great Recession still lingering, FIAs are now increasingly appealing to younger generations, even millennials, who understand the need for financial security and are worried about the future. As a Wells Fargo survey found, that more than a third of Millennials expect to receive 0% of their retirement income from Social Security, and another 21% say they have no idea what to expect. As young people advance in their careers, the purchase point for FIAs looks likely to shift to younger demographics than has conventionally been the case.
  2. FIAs will look different. Fixed Index Annuities have evolved over the years and the evolution is bound to continue. On an ongoing basis companies and agents are finding innovative ways to determine new indexes and annuities that offer consumers greater choice and flexibility. Such forward-thinking is a key reason FIAs have been so successful for both contract owners and their beneficiaries. That innovation is bound to continue.
  3. FIAs will become better known among everyday consumers. Traditional retirement options such as pensions are dwindling. It used to be that you could hold a single job for 25 years and be able to retire comfortably at an early age and on a healthy pension. As Towers Watson, a business consultancy, found, in the last 15 years, the portion of the U.S.’s largest companies offering defined-benefit pensions to new workers has fallen from 60 percent to 24 percent. Further, with individuals switching jobs on a more frequent basis and employers looking for new retirement options to offer employees, FIAs will increasingly become a go-to product for those looking to finance a rewarding, balanced retirement.

It’s been a strong, exciting 20 years for FIAs and the future is bright. Customers who may have never heard of a Fixed Index Annuity in the past will progressively consider them at younger ages and companies will continue to develop new products that reach wider audiences and satisfy the widespread desire for a secure and comfortable retirement. When it comes to considering an FIA, Benjamin Franklin put it best, “Never leave that till tomorrow which you can do today!”

[i] Fixed Indexed Annuities Celebrate 20 Years
[ii] Fixed Indexed Annuities Celebrate 20 Years

Photo: Classic by Stephanie Sicore – http://bit.ly/1vJZIem. License: http://bit.ly/1ryPA8o

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5 Best Reads on Retirement

2014 was a big year in retirement news and research, from women’s retirement savings still lagging behind men’s to LGBT Baby Boomers and soon-to-be-retirees continuing to experience unique hurdles in preparing for retirement.

The Washington Post explored some of the reasons why women are still saving and contributing less to retirement accounts than men, the Associated Press detailed the hurdles LGBT Baby Boomers face when planning for retirement, and the Washington Post gave an in-depth look at a startling study that showed nearly a third of Americans approaching retirement have zero dollars saved for retirement.

Despite the gloomy findings, one bright spot in 2014 was a report showing that millennials, young people whose formative years were tempered by the Great Recession, are starting to save earlier than Baby Boomers.

As each of these groups—Baby Boomers, millennials, women and soon-to-be-retirees—look at retirement planning, fixed indexed annuities (FIAs) have become an increasingly popular tool in ensuring their retirement plan is balanced.

In case you missed them, here are the top 5 stories and retirement news from 2014.

1) Almost 20 Percent of People Near Retirement Age Have Not Saved for It
Washington Post
By Jonnelle Marte

“One in five people who are near retirement age have zero money saved.

Overall, 31 percent of people said they have zero money saved for retirement and do not have a pension. That included 19 percent of people between the ages of 55 and 64, or those closest to retirement age.

What’s going on here? A lot of people said they rarely thought about retirement, at least not until it was too late. About 41 percent of people ages 18 to 29 said they never thought about retirement planning, a number that understandably declined to 20 percent for people above the age of 60.”

Read full story at the Washington Post.

2) Women Are Still Way Behind Men When it Comes to Retirement Savings
Washington Post
By Jonnelle Marte

“Women are just as likely to put away some money for retirement as men — but they are still way behind their male counterparts in total retirement savings, a new study shows.

Men had an average of $139,467 in their individual retirement accounts as of 2012, compared with the average of $81,700 that women had stashed in their IRAs, according to a report released Wednesday by the Employee Benefit Research Institute, a Washington-based research institute that focuses on health, savings and retirement issues.”

Read full story at Washington Post.

3) Fixed Indexed Annuities to Hold ‘Bright Spot’ in 2015

“Fixed indexed annuities will continue to be a ‘bright spot’ for the annuity market in 2015 and the industry can expect a ‘continued shift’ of annuity purchases in the new year toward principal-protected and income-producing products, as baby boomers confront their retirement realities.”

Read full story at ThinkAdvisor.

4) Millennials Save for Retirement Earlier Than Baby Boomers, Survey Finds
By Alicia Adamczyk

“All of those reports encouraging Millennials to start saving for retirement as soon as possible may be paying off, literally. According to the 15th Annual Transamerica Retirement Survey, performed by the nonprofit Transamerica Center for Retirement Studies, Millennials are an ‘emerging generation of retirement super savers,’ with 74% starting to save for retirement at an ‘unprecedented’ median age of 22, or 5 years sooner than Gen Xers and a staggering 13 years sooner than Baby Boomers.”

Read full story at Forbes.

5) LGBT Baby Boomers Face Tough Retirement Hurdles
Associated Press
By Ken Sweet

“For many, decades of workplace discrimination impaired their earning power. The AIDS crisis caused lasting financial and psychological damage, particularly for gay men. And legal pitfalls within Social Security, the cornerstone in any senior’s financial planning, have left gay boomers ill-equipped for retirement.”

Read full story at ABC News.

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Prepared for Retirement? Higher Education Professionals Are

According to a new Teachers Insurance & Annuity Association survey, higher education faculty is better prepared for retirement than the general population – setting a great example.

On top of saving in their employer-sponsored retirement plan, 42 percent of higher education employees have saved in an IRA compared to 34 percent of the general workforce. While 36 percent of college faculty and staff say they have seen a financial advisor, only 22 percent of the general population report that they have done so.

Confidence is key: Giving thought to retirement preparations contributes greatly to your financial confidence.  Eighty-three percent of tenured and tenure-track faculty felt ‘very or somewhat’ confident they will have enough money to live comfortably throughout their retirement years, compared to just 55 percent of workers overall.

Employees in all industries can adopt a “plan now, plan for the future” approach by consulting a financial professional or insurance agent to determine the best route to achieve a safe and secure retirement.

One option to consider when speaking with your financial professional is a Fixed Index Annuity (FIA), a financial product that protects your principal and allows the potential for growth linked to an index, such as the S&P 500.

Visit FIAinsights.org for more information and check with your financial professional to determine if a fixed indexed annuity is right for you.

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Trends for Fixed Annuities in 2015

Once simply viewed as a safe way to guarantee a lifetime stream of income, fixed annuities have emerged as a balanced instrument that offers the potential for wealth accumulation. This potential has made fixed annuities a top choice for many soon-to-be retirees, and there is no sign of this changing in 2015.

Insurance News Net released the following list of trends for fixed annuities in 2015:

  1. The end of quantitative easing (QE) will create uneasy investors. QE is the process through which the Federal Reserve bought treasury bonds to spur private spending and growth during and after the economic downturn. It is unclear how the stock market will perform with the Federal Reserve having ended quantitative easing.
    • “What many don’t realize about delaying their fixed annuity purchase is that they may be hurting their overall accumulation potential. A fixed annuity’s compounded growth and tax-deferral status can grow savings faster than one may think. A year of tax deferral growth can have a great impact in your accumulation.”
  1. Purchasers are getting younger.According to a recent LIMRA (Life Insurance and Market Research Association) study, half of all annuity purchasers are under age 60.This trend shows increasing awareness and concern around retirement preparedness among people of all ages. An exciting development!!
    • “Fixed annuities are a practical option for financially conservative clients — particularly those who want to see a return on their investment. Many who are preparing for retirement have a low risk tolerance; a fixed annuity can work well for those who don’t want to gamble with money they’ve worked so hard to accumulate for retirement.”
  1. Watch for new products. Insurance companies are always examining the needs of their customers and reviewing their product portfolio to ensure customers get the best retirement saving options, tailored to their specific needs.
    • “Many carriers are hoping to create annuities that help expand options for consumers while providing the same rate of return.”
  1. The benefits of wealth transfer.A fixed annuity can be used to transfer money from a purchaser’s estate directly to select beneficiaries, offering additional flexibility and freedom.
    • “Death benefits payable to their heirs, especially in large sums, could actually be a burden. The taxes associated with the proceeds could place beneficiaries in a different tax bracket and/or eat up a significant portion of an inheritance. Fixed annuity payments can help spread out that impact.”

The overriding trend is that when preparing for retirement in America, risk tolerance is extremely low. As you think about balancing your financial retirement portfolio in 2015, one option to ease your risk is a fixed indexed annuity (FIA). FIAs protect you from market volatility, while also allowing the potential for additional interest based on an external index. With a FIA, your principal is protected, and the value can increase based off of index growth, but will never decline.

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