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April 7, 2025 - If recent stock market gyrations are causing you understandable anxiety, you're probably wishing there were some easy way to avoid losing money when the market turns negative but still benefit from stock market appreciation when the arrow is pointing upward.
The good news is that a strategy is readily available that allows you to do this very thing. A strategy growing so much in popularity that two major banking and financial institutions, BlackRock and Barclays, recently published whitepapers advocating for its use as an alternative to investing in bond funds.
What's Better Than a Bond Fund?
No, not two bond funds. But rather an Accumulation-Only Fixed Indexed Annuity (FIA).
Short of not investing in the market at all, FIAs offer a viable compromise that allows you to still dance with market bulls when they're running while taming the market bears to the point where they can't bite you.
Broadly speaking, an FIA is a tax-deferred life insurance company offering that allows investors to purchase an annuity with some unique, and quite attractive, characteristics.
Unlike traditional investing in stock and bond funds where your fortunes rise and fall in lock step with the markets, an FIA operates a little differently. While your investment is still tied to a market index (there are typically a variety of choices available with the S&P 500 being a popular one), the fate of your balance is subject to two limitations on a (usually) point-to-point annual basis:
Your upside is limited to either a cap or a participation rate; and,
Your downside is limited to zero. You can never lose money!
Further, while many traditional annuities are purchased for their future income features, these particular FIAs we're discussing are ACCUMULATION ONLY options which allow for an apples-to-apples comparison with traditional portfolios.
" . . . an FIA acts as a risk mitigation asset while enabling
participation in positive market performance."
BlackRock
And best of all there are NO FEES associated with these accounts. If you invest $100,000, the full $100,000 is invested.
While each life company FIA will have slightly different features, here's a brief overview of how these two particular strategies work. Keep in mind that with both offerings, the value of your account NEVER decreases. It can only go up subject to these limitations:
FIA with Cap: Your account balance increases according to the index it's tied to; however, it will never exceed the specified cap.
Example: A Cap Rate of 10% means you can earn up to (but never more than) 10% over the point-to-point term (typically one year).
FIA with Par Rate: Your account balance increases according to the index it's tied to; however, it will never exceed the specified participation, or par, rate.
Example: A Par Rate of 60% means your account gets credited with 60% of whatever the index achieves during the point-to-point term of (usually) one year.
And it's worth stressing again, these accounts NEVER lose money. Your worst-case scenario is that you earn no money.
Each year then you will have an opportunity to review the renewal options available and those terms will be in place for the next twelve months through the duration of your contract.
"FIAs offer flexible exposures to a diverse range of investments . . . "
Barclays
Any Downside?
Two important questions you'll want to ask before you consider investing in a Fixed Indexed Annuity:
How Safe Is My Money? - Because your guarantees are subject to the claims paying ability of the life insurance company offering the product, it's important to choose a company with a solid track record and one that is highly rated by independent rating agencies such as AM Best.
When Can I Access My Funds? - Similar to limitations on other long-term investments found in retirement accounts where penalties can be assessed on premature distributions, most FIAs will carry a sliding scale Surrender Schedule preventing you from withdrawing all of your funds before the end of the surrender period. This surrender penalty for premature distribution varies by product but will decline over the term of (usually) six to twelve years.
HOWEVER, penalty-free distributions (usually up to 10%) annually after the first year or sooner are permissible making them an ideal fit for long-term investors facing Required Minimum Distribution (RMD) stipulations.
Can You Demonstrate How This Might Work Using Real Numbers?
I thought you'd never ask! In anticipation of this question, I created and uploaded a video to our YouTube Channel which makes a solid case for shifting some of your safe money assets out of bonds and into one or more FIAs. I hope you take the time to watch it.
Click Image Below for Demonstration on
FIA/Bond Fund Comparison:
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