The liquidity issue is a serious one, but most FIA’s permit — after the first anniversary — withdrawals of to 10% of cumulative value in any year.

Second, most FIA’s offer a multiplicity of indices including a fixed interest strategy.

Currently, I always choose to allocate 50% of my investment in the fixed interrest strategy. The remaining 50% I divided between various indices such as the S&P 500 and the NASDAQ 100.

I am earning an 10% bonus on every premium dollar I invest over the course of the first 7 years.

Of course the surrender charge — if I exceed the 10% penalty-free limit — is high. That’s fine with me, the surrender charge needs to be high to recover the bonus and more from those investors who “jump ship.” I think high surrender charges safeguard the interests of those who remain on board for the duration of their contract.

No better investment is available that:
(1) Provides safety of principal;
(2) Provides protection against inflation;
(3) Provides adequate (albeit limited) liquidity;
(4) Provides estate protection.

The case against FIA’s should be dismissed !

Question two. Doesn’t every study availalbe today indicate the maximum withdrawal rate an investor should use is 4% with adjustments for inflation each year? If a person can use an annuity and access 10% per year, doesn’t that fit the “safe withdrawal” provision?

Question three. Does the tax treatment of an asset help a person in retirement? Less taxes means lower gross withdrawals, which leads to a higher probability of success. Annuities offer tax deferral and an “exclusion ratio” when withdrawing income.

Does anyone understand how index annuities work and where they fit? Index annuities establish rates each year depending on the interest rate environment and the cost of options. In a low interest rate environment with high option costs you will typically see lower caps or participation rates and vice versa. Given today’s environment, if interest rates do start to climb and the market stays volatile, index annuties may provide a perfect middleground.

I am not suggesting that index annuities are the answer. I believe a person should hold equities for long-term investment purposes. It is not a good idea to make periodic withdrawals from an equity portforlio though. Bonds typically fill the role on the other side for withdrawal purposes, but if interest rates do indeed rise, the market value of bonds will decrease. The thing to remember is that stocks and bonds are marketable – not liquid. We do not know what the value of a stock or bond will be later on down the road, but we do know what the value of a fixed annuity or fixed indexed annuity will be. The fixed annuity cannot and should not fit in the same category of a stock. It is a “safe” investment and therefore the comparison should reflect other “safe” investments like CDs, MMs, bonds, and other high quality fixed income investments.

Additionally, actual history is more important than hypotheticals. If you would like see actual historical numbers, visit the following link:

http://fic.wharton.upenn.edu/fic/Policy%20page/RealWorldReturns.pdf

I don’t see this as being a dealbreaker (although it is certainly a factor that needs to be taken into consideration). You noted above that it is possible to shop for a 3-year commitment rather than a 10-year commitment. That would make a big difference.

And even a 10-year commitment doesn’t make these of no value to a retiree. If you retire at 65, you might live 30 years. You could finance the first ten years of your retirement with something else and then use the funds accumulating in the 10-years to finance the remaining years of your retirement. Retirees don’t need to have access to all of their money at one time.

I also don’t agree at all with the idea that young people should always be in stocks. Big price drops actually hurt young people more than old people because in a price drop you lose not only the nominal amount of the loss but all compounding returns on that amount for many years to come. Young people have more years ahead of them, so the loss associated with giving up compounding returns is greater for them. I think that young people and old people should invest heavily in stocks when prices are reasonable and avoid them when prices are dangerously high.

Rob