Fixed Indexed Annuities (FIA): How They Work, Benefits, Risks & Retirement Income
Spend More with Less Risk
Everyone has bills. A Fixed Indexed Annuity can turn a portion of your savings into lifestyle money that's guaranteed for life— so you know the essentials are covered without worry. Yield is for what you can risk. We protect what you can't.
Why a Fixed Indexed Annuity (FIA)?
- Downside protection: Your contract's values are not reduced solely because the market index used to calculate interest has a negative return.
- Index-linked growth potential: Crediting strategies may earn interest based partly on the performance of an external index, subject to carrier-declared caps, spreads, participation rates and other contract terms. You are not directly invested in the index.
- Lifetime income options: An available income rider or annuitization option can convert a portion of retirement assets into income designed to continue for life. Learn more about lifetime retirement income planning .
- Income and investment separation: Assets needed for essential expenses can be positioned differently from assets the retiree can afford to expose to market risk.
- Tax deferral: Interest inside a non-qualified annuity generally grows tax-deferred until distributed. Tax treatment depends on the owner's circumstances.
Creating Lifetime Income While Keeping Most of the Portfolio Invested
Consider a 65-year-old retiree with approximately $1 million in retirement assets, along with future Social Security income.
The investment portfolio could potentially be used to generate approximately $40,000 per year at a 4% annual withdrawal rate. Those withdrawals, however, would remain dependent on portfolio value and market performance.
The planning objective was different: determine whether a smaller portion of the assets could establish a dependable lifetime income floor while allowing the majority of the portfolio to remain invested for potential growth, liquidity and legacy needs.
Using a Portion of the Portfolio to Establish Lifetime Income
In this planning example, $250,000 — approximately 25% of the original $1 million portfolio — was illustrated in a Delaware Life TruePath Income™ Fixed Index Annuity.
The contract was illustrated at age 65 with lifetime withdrawals beginning at age 73. Under the illustrated assumptions, the Guaranteed Lifetime Withdrawal Benefit (GLWB) provides an annual withdrawal amount of approximately $38,520 beginning at age 73.
The illustrated GLWB has an annual rider fee of 1.20% of the Withdrawal Benefit Base. The income amount shown assumes the contract is maintained according to its terms. Withdrawals before the illustrated income start date, or withdrawals exceeding the permitted annual withdrawal amount, can reduce future benefits.
The planning distinction: the objective was not to eliminate investment risk from the entire portfolio. It was to identify which portion of the assets needed a lifetime income guarantee and which assets the retiree could afford to leave exposed to market risk.
Approximately $750,000 — 75% of the original portfolio — could therefore remain invested. Because the retiree was not depending on all of those assets to meet essential income needs, the remaining portfolio could continue to pursue longer-term growth while retaining liquidity and legacy flexibility.
Additional Portfolio Withdrawals Remain Available If Needed
The remaining invested assets could also be used to supplement income. For example, a 3%–4% annual withdrawal from a $750,000 portfolio would equal approximately $22,500–$30,000 per year.
Illustrated FIA lifetime withdrawal: approximately $38,520 per year
3% withdrawal from the remaining $750,000: approximately $22,500 per year
4% withdrawal from the remaining $750,000: approximately $30,000 per year
Potential combined annual cash flow from retirement assets: approximately $61,020–$68,520 before Social Security
The $22,500–$30,000 portfolio withdrawals are not guaranteed. Investment values and the sustainability of withdrawals can be affected by market performance, sequence of returns, taxes, fees and the length of the retirement period.
The result is a retirement-income structure in which one portion of the portfolio is used to establish a lifetime income floor while the remaining assets retain the potential for growth and additional future income.
An Additional Chronic-Illness Income Feature
The Delaware Life TruePath Income™ GLWB illustrated here also includes a Chronic Illness Income Multiplier.
If the contract's eligibility requirements are satisfied, including the applicable Activities of Daily Living requirements, the Annual Withdrawal Amount may be increased by applying a 200% multiplier for up to five years.
In this illustration, that could increase the approximately $38,520 annual withdrawal amount to approximately $77,040 per year during a qualifying period, subject to all contract terms, eligibility requirements and limitations.
This feature is part of the annuity contract and should not be interpreted as a representation that the annuity replaces comprehensive long-term-care insurance. You can also review annuity strategies with long-term-care-related benefits .
Annuity guarantees, including guarantees associated with lifetime withdrawal benefits, are subject to the claims-paying ability of the issuing insurance company. Fixed index annuities are insurance products and are not direct investments in a securities index.
Values or withdrawals associated with assets remaining invested in the market are not guaranteed and may increase or decrease. A 3% or 4% withdrawal illustration is mathematical only and does not represent a guaranteed rate of return, recommended withdrawal rate or assurance that a portfolio will last for any particular period.
Product availability, features and terms may vary by state. Refer to the current Delaware Life contract, disclosure statement and approved product materials for complete details.
Prioritize Needs Before Taking Risk
Retirement assets do not all have to perform the same job. Before deciding where risk belongs, identify what each portion of the portfolio needs to accomplish.
- Income for life: Help cover essential and lifestyle expenses without depending entirely on market cycles.
- Yield and growth: Assets not required for immediate income may remain positioned for appropriate growth opportunities based on risk tolerance and objectives.
- Tax efficiency: Coordinate the timing and taxation of retirement distributions with the client's broader tax plan.
- Longevity protection: Establish sources of income intended to continue even if retirement lasts longer than expected.
- Care flexibility: Certain annuity designs may provide enhanced income following a qualifying chronic-illness event, subject to contract terms and eligibility requirements.
- Legacy: Preserve assets not required for current income when doing so is consistent with the client's objectives.
How a Fixed Indexed Annuity Works
- Premium: The contract is funded with a lump sum or, where permitted, additional premiums.
- Interest crediting: Interest may be credited using a fixed account or formulas linked to the performance of one or more external indices.
- Down-market protection: A negative index return does not by itself create a negative index credit. Contract charges and withdrawals can still reduce account value.
- Lifetime income: An optional GLWB or annuitization provision may provide payments designed to continue for life, subject to contract terms.
- Access: Contracts generally provide specified withdrawal provisions. Withdrawals beyond permitted amounts may be subject to surrender charges, market value adjustments or reductions in future benefits.
FIA Design Features That Matter
- Crediting strategies: Options may include annual point-to-point strategies, performance triggers, participation-rate strategies, volatility-controlled indices and fixed accounts.
- Caps, spreads and participation rates: These determine how index performance may translate into credited interest and may change according to contract terms.
- Income riders: Compare roll-up provisions, payout percentages, rider charges, waiting periods, single versus joint income and enhanced income features.
- Surrender schedule: Review surrender charges, free-withdrawal provisions, market value adjustments and applicable waivers.
- Beneficiary provisions: Understand how remaining contract value may pass to beneficiaries under the specific contract.
FIA vs. Other Retirement Income and Safe-Money Options
- Fixed Indexed Annuity: Insurance-contract guarantees combined with index-linked interest-crediting potential and optional lifetime-income features.
- MYGA — Multi-Year Guaranteed Annuity: Provides a declared fixed interest rate for a specified period, subject to the insurer's contract terms.
- Variable Annuity: Provides market-based investment options and therefore can involve investment losses as well as additional contract and rider expenses.
For an overview of the broader choices, see TUSK's annuity strategies and retirement-income options .
Why FIAs Can Help Separate Income Risk From Investment Risk
- Lifetime-income planning: Establishing dependable income for essential expenses may reduce the amount of the portfolio that must be managed primarily for current distributions.
- Sequence-of-returns planning: A separate lifetime-income source may reduce the need to sell market investments solely to fund expenses during a market decline.
- Portfolio flexibility: Assets that are not required to produce essential income can be invested according to the client's risk tolerance, time horizon and longer-term objectives.
Let's Inventory Your Retirement Risks
We look at current and future income needs, market exposure, liquidity, taxes, care risks and legacy objectives. Then we determine how much needs to be dependable and how much can appropriately remain exposed to investment risk.
If an FIA is appropriate, TUSK can compare available designs and illustrate how different allocations may affect lifetime income, liquidity and the assets that remain available for other objectives.
Disclosures: Fixed indexed annuities are insurance contracts. Index-linked interest is subject to the crediting methodology and contract terms, which may include caps, spreads, participation rates or other adjustments established by the insurer. Contract owners do not directly invest in an index.
Withdrawals may be subject to surrender charges and, where applicable, market value adjustments. Withdrawals may also reduce account value, death benefits and future lifetime-income benefits. Optional income riders may involve additional charges, waiting periods and other requirements.
Guarantees are subject to the claims-paying ability of the issuing insurance company. Product availability, features and terms vary by carrier and state.
Tax deferral and the taxation of distributions depend on individual circumstances. TUSK does not provide tax or legal advice. Consult qualified tax and legal professionals regarding your circumstances.
TUSK is an independent insurance agency and is not captive to a single insurance company.
About This Retirement Income Content
Daryl Kutner works with individuals, families and businesses on retirement-income, insurance and financial risk-management strategies. TUSK's process begins by reviewing existing income, assets, liquidity, market exposure and insurance before evaluating whether an annuity or another strategy belongs in the plan.