Index Annuity with 45% Bonus. What Could Possibly Go Wrong???

Let me paint you a picture: a client, a new immigrant couple in their early 60s, got on the zoom with me at the help of their child. They're unsure about their retirement plan and are eager for some guidance. They're presented with what seems like a tempting offer—a 45% bonus on an index annuity with a ten-year accumulation period. Sounds like a dream, right? Who wouldn't want a hefty bonus to boost their retirement savings?

But as with most things in life, if it sounds too good to be true, it probably is. ??

The Reality Check on Index Annuities

An index annuity may promise a lot—bonuses, guarantees, and growth without the downside risk of the market—but it’s essential to dig deeper and understand the bigger picture. My clients were primarily concerned with securing a stable income they could rely on throughout their retirement years. The bonus had them intrigued, but they didn’t fully grasp the limitations and potential pitfalls of locking their money into such a product.

Spoiler alert: It’s not just about bonuses and guarantees.

Understanding Their Needs ??

For many immigrants, especially those without Social Security or pensions, the transition to planning for retirement can feel overwhelming. But here’s the thing I’ve noticed—it's not just about "permission to spend," it’s often also "permission to live." ?? The anxiety around outliving their savings is very real, and the appeal of a guaranteed income through something like an index annuity can seem comforting at first.

But when you start to look closely at the fine print, the shiny bonus becomes less attractive.

One Alternative (among many others): Immediate Annuity Ladder

Given their primary goal—secure, predictable retirement income—I recommended a more practical alternative: an immediate annuity ladder. Here’s how we approached it:

Initial Investment: $500,000 now.

Additional Investments:

• $30,000 per year with payout money between 2025-2027.
• $40,000 per year with payout money between 2028-2031.
• $50,000 per year with payout money between 2032-2034.

No additional annuity purchases after 2034.

Annual Payout: Starting in 2035, the annual payout would be $56,542.

By 2036, their total accumulated payout would exceed the initial $500,000 investment. And by 2043, the net dispensable payout (even accounting for the annuities purchased 20205-2034) will surpass their starting capital. For the number nerds, please message me for the chart and details.

Downsides to Consider ??

Of course, immediate annuities have their limitations:

1. Lower Returns: An immediate annuity generates lower returns compared to a well-managed investment portfolio.
2. No Legacy: Unlike other investments, annuities don’t leave money behind for kids.
3. No Inflation Protection: The payout is fixed, meaning inflation could eat away at the purchasing power over time.
4. The quote on the payout for 2025-2034 is based on today's information and is subject to change.

My Other Suggestions:

• Start building Social Security benefits if possible.
• Contribute to a Roth IRA for additional tax advantages.
• Think it through and talk to me again in the coming weeks. ??

Why It’s Important to Explore Options

Believe it or not, even for a simple immediate annuity, quotes can differ dramatically between providers. So, it’s worth doing the legwork and exploring all avenues before settling on any product, especially one as complex as an index annuity. Easy to quote platforms I've found are: Nationwide and Fidelity .

But more often than not, I help clients get out of index annuities. After seeing all the options—immediate annuity quotes from different providers, and comparing the estimated results from a well-managed portfolio—they usually realize that they don’t need to "buy into" a product with flashy promises. ????

Key Takeaways ??

Before jumping into any product that seems to offer guarantees and bonuses, take a step back and ask yourself: does this truly align with your goals? Is this product putting a box over your head, limiting your flexibility?

In this case, the immediate annuity ladder allowed my clients to secure stable income without overcomplicating things, while avoiding the pitfalls of long-term, restrictive annuity products.

What Do You Think? ??

For those who work with similar clients or are considering retirement products, what’s your approach to annuities? Have you had clients considering index annuities? How do you guide them?

For anyone interested in learning more about annuities, I also have a video discussing how to get annuities right! Check it out here: https://www.youtube.com/watch?v=gv9fpCEAyY0

Let’s keep this conversation going and share our experiences!