Fixed Indexed Annuities, Explained

Fixed Indexed Annuities, often called FIAs, have become one of the more popular retirement products in the United States. The appeal is straightforward. They offer growth linked to a market index, with protection for your principal from market losses.

What is a fixed indexed annuity?

A Fixed Indexed Annuity is an annuity contract where your account's growth is linked to a stock market index, usually the S&P 500. When the index does well, your account can grow. When the index falls, your account value holds steady, so a market drop alone does not reduce what you have accumulated.

This works through two features:

• Floor, usually 0%. If the index loses value, your account is credited 0% for that year rather than a loss. Your principal is protected from market losses.
• Cap or participation rate. This limits how much of the index gain you receive. With a 10% cap, if the index gains 20%, you are credited 10%. In exchange for that limit, you get the floor protection. Caps are illustrative and vary by carrier.

How is an FIA different from a regular annuity?

• Fixed annuity. Grows at a guaranteed fixed rate, for example 3.5%. Fully predictable, with no growth beyond that rate.
• Fixed indexed annuity. Grows based on index performance within a floor and a cap. More growth potential than a fixed annuity, with protection of principal from market losses.
• Variable annuity. Invested directly in market sub-accounts. Full upside potential, but also full downside risk, so you can lose money.

Who is an FIA best for?

• Pre-retirees within 5 to 15 years of retirement who want to grow savings with less risk
• Retirees who want predictable lifetime income options that are not tied to market swings
• Anyone who has been hurt by market losses and wants protection with some growth
• Conservative savers looking for potential above CDs or savings accounts
• People who want to turn savings into income they will not outlive

What about fees?

One advantage of FIAs compared with variable annuities is that the base contract often has no explicit annual management fee. The insurer earns through the spread between what the index returns and what it credits to your account. Optional riders, such as a lifetime income rider, do carry a fee. Always review the specific product's terms with your agent, since structures vary by carrier and product.

What are the downsides?

• Surrender charges. Early withdrawals during the surrender period, often 5 to 10 years, can trigger a penalty.
• Capped upside. In an exceptional market year, you will not capture all of the gains.
• Complexity. Products use different crediting methods, so an agent's guidance helps.
• Not for short-term money. FIAs are meant to be held for the long term.

Next steps

Curious what an FIA could do for your retirement? A licensed Eterna agent can compare options across multiple top-rated carriers to fit your timeline and goals. For the bigger picture, start with Annuities 101.