With Fixed Indexed Annuities, Zero Is Your Hero
Fixed indexed annuities are retirement tools that can offer potential growth as well as principal protection by limiting market risk. Here's how they work.

Throughout my years as a financial professional, I've realized that all of my clients, regardless of the amount of wealth they have earned during their working years, share the same worries about retirement. They're concerned about safeguarding and preserving their investment principal so that they can have a worry-free retirement.
People spend 30 to 40 years investing and saving for their retirement, through good and bad market cycles. As retirees shift their accounts from the accumulation phase of obtaining and saving funds to the distribution phase of allocating and spending funds, their investment strategy needs to adjust accordingly. They can no longer tolerate significant losses in principal, as they may not have enough time to recover from a bad year. This begs the question: Which retirement tools are available that can offer potential growth while limiting market risk?
How is zero your hero?
When I meet with clients to discuss their retirement plans, many express concerns about exposing their entire savings to market risks. This is a reasonable and prudent approach considering the current economic climate and the impact of the coronavirus pandemic, as well as the bear market of recent years. People still recall the market crash of 2008, when the S&P 500 lost 37%. More recently, during COVID-19, the market dramatically dropped over a very short period of time. If you retired around that time, the hit to your life savings would have been a cause for concern and sleepless nights.

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A fixed indexed annuity (FIA) is a type of insurance contract that helps you earn index credits based on the performance of a selected stock market index, such as the S&P 500. The principal amount remains protected even if the index experiences negative returns. Suppose you had invested in the S&P 500 index at a participation rate of 50%. In layman’s terms, this means you would get half off the S&P 500 growth over a one-year span. Each year, on the policy anniversary, you would lock in interest credits for one year. If the S&P 500 index is up by 26%, you receive a credit of 13%. Similarly, if the S&P 500 index rises by 8%, you receive a credit of 4%.
However, if the S&P 500 index falls by 20%, you will not receive any interest credit. In this scenario, we always tell our clients, "Zero is your hero." It's a reminder that the year you receive 0% interest is the best year to own this type of account, as you don’t have to play catch-up from previous years’ losses.
Expand your options with income riders
FIAs offer a safe way to grow and accumulate funds, which are attractive features all by themselves, but these types of annuities can also include income riders that can provide a single or joint lifetime income. For someone on the verge of retirement who needs additional income beyond their pensions and Social Security, income riders can be used to increase a key percentage — income stability. It is our preference to have our clients have as high of a stable income percentage as possible. Some carriers even offer long-term care (LTC) coverage, making it a smart option for those who don't want a stand-alone LTC policy but still want to be prepared for the future.
Here's the flip side to all this good news: FIAs have limitations just like any other investment or insurance product. The accounts usually allow you to take out up to 10% of the account value without penalty, so it's important to diversify into other accounts that offer more liquidity. It's always a good idea to have some funds available in a checking or savings account to access quickly for an emergency or an unforeseen larger expense. Annuities have been an important part of retirement portfolios for a long time, and the industry's evolution has made them even more flexible and attractive in recent years.
The bottom line
When considering an annuity, it's crucial to work with an independent agent who can research your specific profile and objectives to find the insurance company that offers the best overall benefits to you. Even after you've found the annuity product that's right for you, a best practice is to know how your FIA works with the other tools in your financial plan.
Ultimately, the best way to protect and preserve your principal in retirement is to create a diversified investment portfolio. Investing in a variety of other asset classes, such as equities, fixed income and alternatives will help reduce your risk and ensure that you have a steady stream of income in retirement.
Here are some additional tips when making important financial decisions in retirement:
- Understand the amount of risk you are taking with your investments. Will you be able to stick to your investment plan when markets are difficult?
- Make sure to keep your beneficiaries updated.
- Monitor and adjust your accounts on a regular basis.
- Talk about future health care needs to determine if you are going to self-insure for LTC or if you might want to consider additional coverage.
- If you need help making decisions and turn to a financial adviser, ask them how they are compensated. Also, make sure to ask if they are able to just help with insurance, investments or a combination of both worlds.
By following some of these suggestions, you will be on the right path to best protect everything you’ve saved over the years, create additional income if needed and enjoy your retirement years.
Related Content
- Fixed Index Annuities as Retirement Tools: Pros and Cons
- How to Find Fixed Indexed Annuities That Work for You
- Fixed Indexed Annuities Can Be a Potent Diversifying Tool
- Why So Many Experts Consider Annuities a Win for Retirees
- Why Annuities Sometimes Sound Too Good to Be True
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As the third generation of Steinhandler Wealth Advisors, Zachary Steinhandler learned from a young age to treat his clients like family. Zak always takes a personalized approach to his clients' portfolios because, as a son, a father and a husband, he's learned that the secret to serving people and their best interests is to truly listen to them. Now, as an Investment Advisor Representative and President of SWA, he takes an active interest in his clients' lives and their families, learning what they love, what they fear and what keeps them awake at night so he can offer comprehensive solutions to help them reach their lifelong goals.
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