Will Your Retirement Savings Last as Long as You Do? How a Fixed Indexed Annuity Can Turn Savings Into Income for Life

Retirement can last 25, 30 years, or longer. That makes one question especially important: How long will your retirement savings last, and how can you create dependable income without putting all your savings at risk from market losses?

A fixed indexed annuity (FIA) may be one option to consider. It is an insurance contract that can protect your contract value from losses tied to a market index and, with an optional lifetime income rider, may provide guaranteed income for life. But FIAs also limit some potential gains and may restrict access to your money. Understanding both sides can help you decide whether one fits your retirement income planning.

Why Retirement Savings Run Out

Living longer is good news, but a longer retirement means your savings may need to support you for many years. A fixed withdrawal plan can become fragile when markets fall early in retirement.

Sequence-of-returns risk is the danger of receiving poor investment returns early, while you are taking withdrawals. If you must sell shares during a downturn to cover expenses, you may lock in losses and have fewer assets left to benefit from a later recovery. The timing of returns matters, not just the average return over time. Charles Schwab explains sequence-of-returns risk.

The often-discussed 4% rule is a planning benchmark based on a 30-year retirement horizon and specific assumptions. It is not a promise that your money will last. A longer retirement, higher fees, taxes, or early investment losses can make a fixed withdrawal rate less suitable for your situation. Schwab’s guide to the 4% rule discusses why retirement withdrawals need to be personalized.

When you ask, “How much do I need to retire?” it helps to consider more than a savings target. Your spending, Social Security, pension income, health, time horizon, and ability to adjust withdrawals all matter.

What Is a Fixed Indexed Annuity?

A fixed indexed annuity is an insurance contract, not an investment directly in the stock market. During the accumulation phase, your contract value is protected from losses caused by a decline in the linked index, subject to the contract’s terms. If the index rises, the insurer may credit interest based on its performance, using a method that limits or adjusts the credited gain.

Common terms include:

• Cap: The maximum interest rate that can be credited under an index strategy for a period.
• Participation rate: The percentage of index gains used to calculate credited interest.
• Spread: An amount subtracted from the index gain before interest is credited.

For example, AARP describes a hypothetical $10,000 FIA with a 10% cap linked to the S&P 500. If the index falls, the example still has $10,000 at year-end. If the index rises between 0% and 10%, the account value rises by the same percentage. If the index rises more than 10%, the credited gain is limited to 10%. In 2024, when the S&P 500 rose 23.3%, this example would have gained $1,000, not $2,330. This is an illustration, not a promise of a particular annuity rate or a description of every contract. Read AARP’s explanation of popular annuities.

What a Fixed Indexed Annuity Can and Cannot Do

When weighing annuity pros and cons, look beyond the headline of “protection” and review how the specific contract works.

An FIA can:

• Protect contract value from market-index losses during the accumulation phase, subject to contract terms.
• Lock in credited gains so that later index losses do not erase those credited gains.
• Offer an optional lifetime income rider that can provide a predictable income stream for life when activated, subject to the contract and the insurer’s ability to pay.
• Allow access to some money each year. Many contracts allow up to 10% annual access without surrender charges, but check the contract’s exact rules.
• Provide tax-deferred growth. Qualified money, such as money from certain 401(k) or IRA rollovers, may also be used, but a rollover does not make already tax-deferred money more tax advantaged.

An FIA cannot:

• Pay dividends from the linked index. Since 1926, dividends have accounted for more than 30% of the S&P 500’s total return.
• Credit gains beyond the applicable cap, participation rate, or spread.
• Provide unlimited access to your money. Surrender charges commonly apply to early withdrawals during surrender periods that often range from three to 10 years.
• Provide FDIC insurance or a guarantee from a federal agency.

FIAs are often described as a potential alternative to some bonds in a portfolio, rather than a replacement for stocks. They limit gains in exchange for protection from index losses, and they do not capture index dividends.

Turning Savings Into Income for Life

An FIA does not automatically provide lifetime income just because it protects against index losses. To create a guaranteed lifetime income stream, you may be able to add an optional annuity income rider, usually when you purchase the contract. When you activate it, the rider can provide a predictable income amount for life, according to the contract’s rules. The guarantee depends on the issuing insurer’s claims-paying ability.

Another route is annuitization: using the contract value to purchase a separate income annuity. Payments are determined by factors such as the lump sum, your life expectancy, and interest rates. Annuitization generally cannot be reversed, and you typically cannot take the lump sum back.

Before choosing, compare the terms and ask how income is calculated, when payments can begin, what happens if you take withdrawals, and whether your family may receive a death benefit. The Borde & Associates lifetime retirement income page offers more information about annuities for lifetime income.

How Safe Is the Guarantee?

Annuity guarantees are obligations of the issuing insurance company. They are not FDIC insured, and they are not guarantees from a federal agency. Before you buy, check the insurer’s financial strength ratings from agencies such as A.M. Best, Moody’s, Fitch, or S&P. Consider whether you are comfortable with the company and avoid concentrating retirement money with a single low-rated carrier.

Florida residents may have a separate backstop through the Florida Life & Health Insurance Guaranty Association, subject to eligibility and applicable limits. For covered annuities, the stated maximums are generally up to $250,000 of deferred-annuity net cash surrender value or up to $300,000 for an annuity in the benefit phase, per contract owner, per insurer. These limits do not make an annuity risk-free. See FLAHIGA’s coverage information and limitations.

Is a Fixed Indexed Annuity Right for You?

An FIA may be worth discussing if you are retired or nearing retirement and want to:

• Put a floor under losses tied to an index.
• Add predictable lifetime income alongside Social Security or pension income.
• Consider an annuity after you have made the most of available employer plan contributions.
• Set aside money you do not expect to need immediately.

It may be a poor fit if you:

• May need all your money back soon.
• Want full market upside, including dividends.
• Are uncomfortable committing part of your savings for several years.

As general guidance reported by AARP, advisers often suggest keeping no more than about 30% to 50% of a portfolio in annuities, depending on emergency cash needs, essential income needs, and risk tolerance. This is not a recommendation for your situation. Social Security already provides income similar to an annuity for many households, and you should not tie up all your retirement savings in an annuity.

If you are weighing an annuity vs. a 401(k), remember that these are different tools and may serve different purposes. An FIA funded with qualified money may preserve tax deferral, but tax treatment depends on your circumstances. Consult a tax professional before making a rollover or purchase decision.

Frequently Asked Questions

Will my retirement savings last as long as I do?

No one can know for certain. A longer retirement, spending needs, market returns, and the timing of losses all affect how long your savings last. A personalized plan can help you evaluate a range of outcomes and whether guaranteed income belongs in your plan.

How does a fixed indexed annuity protect my money from market losses?

During the accumulation phase, an FIA generally protects its contract value from declines in the linked index, subject to contract terms. Your interest credit may be limited by a cap, participation rate, or spread.

Does a fixed indexed annuity pay dividends?

No. An FIA does not pay the dividends from the index it references. Credited interest is calculated according to the contract’s index strategy.

Are annuity guarantees FDIC insured?

No. Annuity guarantees are obligations of the issuing insurance company and depend on its claims-paying ability. They are not FDIC insured.

How much of my retirement savings should go into an annuity?

There is no single amount that fits everyone. AARP reports general guidance of roughly 30% to 50% of a portfolio, depending on income needs, emergency cash, and risk tolerance. Keep liquidity needs in mind and do not commit all your retirement savings.

Talk Through Your Retirement Income Options

Borde & Associates PA has proudly served Melbourne and Florida families for over a decade. We can help you review whether a fixed indexed annuity fits your retirement income plan and explain the contract features to consider. Learn more about lifetime retirement income or contact Borde & Associates to start a conversation.

We don't offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact the Florida Department of Financial Services or your insurer for information about all options.

This article provides general information about insurance products for educational purposes. It is not investment advice or a recommendation to buy an insurance product. Please consult your own tax or legal advisors. Annuity guarantees depend on the issuing company’s claims-paying ability.

This article was created by AI.

Sources

• AARP: The Most Popular Annuities, Explained
• Charles Schwab: Understanding Sequence-of-Returns Risk
• Charles Schwab: The 4% Rule
• Florida Life & Health Insurance Guaranty Association: Frequently Asked Questions
• Borde & Associates: Lifetime Retirement Income (Annuity)

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