Optimize Your Retirement Portfolio With Annuities

Bob Densmore, Annuity Sales Director, First Republic Private Wealth Management
October 5, 2021

  • Have you been struggling to find higher yields for your “safe money”?
  • Has it been a challenge for you to break down the complexities of fixed or indexed annuities?
  • Perhaps you already know the benefits of these inexpensive, low risk insurance products—but how do they work?
  • Learn how annuities can leverage popular indices to generate higher-yielding investment gains.

The ultra-low interest rates currently available in cash-equivalent and fixed income markets have created challenges for pre-retirees, particularly those who need a safe harbor hedge against inflation. That’s where an attractive insurance company product—the fixed or indexed annuity—can step in.

Annuities, in general, may get a bad rap but this new generation solution is inexpensive, easy to understand, and low risk. In other words, it’s a consumer-friendly cousin to the complicated annuity products you may have previously come in contact with.

Even better, these fixed or indexed annuities can replace a portion of an investor’s cash or bond allocation with a higher-yielding, yet ultra-safe investment alternative. Here’s how it works:

Optimize your portfolio with this enhanced yield opportunity

With fixed income yields at historical lows, many long-term investors are seeking cash or bond alternatives that can offer higher gains. And yet, within the current market environment, there are very few options available within the fixed-income and cash asset classes.

That’s why some forward-thinking investors are seeking the higher-yielding gains often available through certain fixed or indexed annuity products.

  • Fixed annuities generally offer three-, five- or seven-year terms with a guaranteed rate for the full term. At the same time, these low-risk contracts provide full downside protection. In short, a fixed annuity investor will not lose their principal investment—no matter the market conditions.
  • An indexed annuity, meanwhile, offers even greater potential for financial gain. The terms are similar to the fixed alternative—typically five  or seven years—but gains are tied to the participation rate of a particular index. The proxy is often the S&P 500 but there are other index options for those who prefer gains that rise with an international market, small-company stocks or whichever market segment is preferred. In essence, the participation rate is a percentage of the index gain. Say that’s 65%; that would mean an index annuity investor would realize three-quarters of the gain of the price appreciation of the index. At the same time, the investor will not lose their principal investment—they are fully protected from market downturns.

While traditional annuities can be expensive or confusing, either of these newer-generation fixed or indexed products are straightforward investment options that can act as a higher-yielding complement to or replacement for a portion of an investment-grade allocation.

Boost portfolio liquidity and flexibility

When it comes to annuities, many investors assume their money is “locked up” and unavailable during the duration of the holding period. For many products, that’s often the case. For these particular fixed and indexed annuities, however, investors often have fee-free access to up to 10% of the contract value each year. That’s true throughout the entire holding period (typically three, five or seven years).

Some of these offerings even come with a “return of premium” feature, which offers full access to the initial investment at any time throughout the contract. In exchange for the return, the investor agrees to forfeit any earned interest. While this isn’t the recommended course of action, the provision does provide easy access to cash for those who face a significant life event, are unexpectedly offered a highly attractive investment opportunity, or want access to their original investment for any other reason.

When it comes down to it, these fixed and indexed annuities compare nicely to bond and cash alternatives for a number of additional reasons:

  • Reduced interest rate risk. The guaranteed minimum rate associated with these annuities compares nicely to a fixed-income investment, which can decline in value as interest rates fall. Since these annuity products are not technically bond investments, the risk is carried by the insurance carrier, not the investor.
  • Shorter-term commitment. These annuities can remain in place indefinitely but they can also be cashed out at the completion of the contract, which typically lasts three, five or seven years. This can be an attractive alternative to intermediate- or long-term bonds, which can require a financial commitment for 10, 20 or even 30 years.
  • Decreases volatility of returns. The combination of participation rate and fixed minimum return essentially reduces the market variance often experienced by broad market investors.
  • Reduces investor cost profile. There are no explicit fees associated with these fixed or indexed annuities.

Secure a tax-deferred investment option

Many high net worth investors don’t expect to be in a lower income bracket when they reach retirement. For this reason, the tax-deferral feature provided by most annuities is not attractive when the product is used as an alternative to equity investments (which are often held in tax-deferred retirement vehicles).

However, the tax-deferral feature can be attractive when a fixed or indexed annuity is used as an alternative to cash or fixed-income investments, which are often held outside of tax-deferred accounts.

Even so, it’s worth noting that earned interest is taxed as ordinary income when distributed. Earned interest on distributions taken before age 59 ½ are also subject to a 10% tax penalty. The IRS-mandated order of distributions is earned interest first, principal investment last.

While it’s true that many annuity products can be expensive and confusing, that isn’t always the case. Fixed and indexed annuities can be an easy-to-understand investment products that can serve as a low-risk, attractive alternative to cash or fixed-income investments, particularly during an ultra-low yield environment.

Talk to your First Republic Bank wealth manager to find out if a fixed or indexed annuity could be an attractive addition to your overall investment portfolio.


The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.