BlackRock: A Case for Fixed Indexed Annuities in Accumulation

It’s not everyday we get a beautiful piece from a non-insurance company discussing the case for a fixed index annuity inside a portfolio. Well today is the day. This is a must read for annuity writers, so give yourself a minute. 

A few bullet points on their Executive Summary:

  • An FIA allocation reduces extreme bad outcomes in balanced portfolios.
  • FIAs improve median and worst outcomes for conservative and cash-heavy portfolios (assuming liquidity needs have been met).
  • Incorporating an FIA with an underlying volatility controlled index can help provide more certainty around future portfolio values.

In the study, Blackrock looks at a hypothetical 58-year-old investor who is planning to retire at 65. It considers two alternatives from a 40% equities/60% fixed income portfolio.

1) A Fixed index annuity funded from both the equity and fixed income side (30% FIA, 25% equities, 45% fixed income)

2) A Fixed index annuity funded from fixed income only (30% FIA, 40% equities, 30% fixed income)

Using their assumptions and Monte Carlo simulations they were able to analyze the data and come up with some interesting points.

Notable takeaways:

1) An allocation to an FIA leads to increased median accumulation value when it is funded out of the fixed income sleeve (page 7) & also reduces extreme bad portfolio outcomes when funded from fixed income. (page 10)

2) Inclusion of an FIA reduces extreme bad outcomes in balanced portfolios irrespective of funding source, thus acting as a natural risk mitigation asset. (page 10) 

3) If the investor’s primary focus is to significantly reduce extremely bad outcomes, it is reasonable to allocate to the FIA in a prorated fashion from stocks and bonds. However, by doing so the investor gives up some upside. (page 10)

4) For conservative and cash-heavy portfolios, after accounting for liquidity needs, an FIA improves worst and median case total portfolio outcomes. (page 12)

A few snippets from Blackrocks’ Conclusion:

  • “Accumulation FIAs can play an important role in helping clients achieve their goal of retiring with confidence”
  • “…given the challenging forward-looking return expectations for equities, and low bond yields, it is important to consider complementary product options that can preserve the desired characteristics of retirement portfolios. FIAs may be a good candidate to help investors with protected growth leading up to retirement.”

Overall, I think this paper is extremely timely as retirees are grasping for ideas on how to preserve, yet still accumulate in a challenging market environment. Take this information and run with it, what an awesome time to be in this industry!

Contact Us

We’re looking forward to working with you!

Confidentiality Notice

The information in this message, and any files transmitted with it, is confidential, may be legally privileged, and intended only for the use of the individual(s) named above. Be aware that the use of any confidential or personal information may be restricted by state and federal privacy laws. If you are not the intended recipient, please do not further disseminate this message. If this message was received in error, please notify the sender and delete the message.

Seek Independent Advice

Any information expressed above is intended to be general and non-specific information only; it is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Mach96, LLC, its affiliated companies, and its representatives do not provide tax, legal, or investment advice. Please consult an independent professional regarding each individual’s specific situation.

The information and opinions included in this article have been provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Mach96, LLC. It is being provided for information purposes only and is not a solicitation for the purchase of any product, nor should it be construed as advice designed to meet the particular needs of your clients. For Financial Professional use only. Not for public distribution.

A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.

Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.