In the realm of retirement planning, annuities have often been met with skepticism, with some financial experts cautioning against their potential drawbacks. However, a new wave of financial products is challenging this stigma and reshaping the narrative around annuities. Registered indexed linked annuities (RILAs) and fee-free fixed indexed annuities (FIAs) are emerging as innovative solutions that address concerns about fees and align more closely with savers’ goals. In this article, we explore the unique features of these annuity products and how they are revolutionizing retirement strategies.
Among experts cautioning against annuities is financial guru Suze Orman. Her stance primarily stems from concerns about high fees and complex structures. Traditionally, annuities have been criticized for their lack of transparency and the potential for excessive costs eating into the returns. This skepticism has created a barrier for many investors, preventing them from considering annuities as viable retirement planning tools.
The rise of RILAs
RILAs have entered the scene as a modern alternative that aims to address the concerns associated with traditional annuities. For one thing, RILAs impose no direct fees to policyholders. The provider earns a percentage of the RILA’s investment return, similar to various mutual funds and other investment management programs.
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In addition, RILAs offer a combination of upside potential and downside protection. Returns are tied to a market index, enabling policyholders to:
- Realize gains up to a specific level
- Avoid losses beyond a certain level, if the underlying index experiences a decline
About fixed indexed annuities (FIAs)
Another recent arrival in the annuity marketplace is gaining popularity among retirement-conscious individuals. Like RILAs, FIAs charge no direct fees. They also link returns to a market index.
However, they differ in that FIAs offer a guarantee. Policyholders cannot suffer losses even if the underlying index declines. In return, their upside potential is limited to an annual cap — typically 7% to 11%, depending on the provider and annuity contract.
Investors may find it extremely attractive to track a market index performance with no chance of market losses and no fees, even though their upside capture is limited.
Advantages of RILAs and FIAs
No direct fees. RILAs and FIAs stand out for their fee-free structures, ensuring that a significant portion of the investment is dedicated to potential growth rather than being eroded by fees.
Market-linked returns. Both RILAs and FIAs offer market-linked returns, allowing policyholders to benefit from market upswings while providing protection during market downturns.
Downside protection. The innovative design of these annuities incorporates downside protection, mitigating the impact of market volatility and offering a more stable approach to retirement planning.
Transparency. The transparent fee structures of RILAs and FIAs address the concerns about hidden costs, contributing to increased transparency and fostering trust among investors.
Customization options. These annuities often provide customization options, allowing investors to tailor their policies to align with specific financial goals and risk tolerances.
Disadvantages of RILAs and FIAs
The downside to both RILAs and FIAs is that the performance is usually capped either on an annual basis or after a period of time such as six or seven years. Even though they are tracking well-known indexes, such as the S&P 500, these annuities do not credit dividends, only the price return.
They also have a surrender charge during their holding periods.
Lastly, if non-qualified money is invested, once the money is withdrawn, it is treated as income and not capital gains.
Changing the perception
The introduction of RILAs and fee-free FIAs challenges the prevailing negative perceptions surrounding annuities. By focusing on transparency, reduced fees and innovative structures, these products are shifting the conversation toward annuities as viable, cost-effective tools for retirement planning.
As more investors seek efficient and reliable strategies for securing their retirement savings, RILAs and FIAs are proving to be transformative forces, reshaping the perception of annuities and redefining their role in financial planning.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
