Last year, indexed annuity sales increased 23% to $48.2 billion, accounting for more than half of all fixed-annuity sales for the first time, according to LIMRA.

"A fixed index annuity may be a good financial tool to fill the gap between retirement income from sources such as Social Security and the family's total spending need," says Kathy Nolan, president of Family Focus Financial Group in Wall, N.J. "If clients live so long that they run out of money from their investments, they will still get the FIA checks, providing certain guidelines are met."

FIAs typically are deferred annuities, falling into the fixed rather than the variable category.
However, investors' returns aren't fixed. Often, the interest that is credited is pegged to a market index, such as the S&P 500.
There is little or no risk of loss with an FIA, but returns generally are capped in some manner.

DELAYED GRATIFICATION

What's more, FIAs often are sold with income riders, which may guarantee certain withdrawals after the annuity had been in place for a number of years. Adherents think that these riders offer the possibility of attractive lifelong cash flow.

As an example, Nolan tells of a newly retired client with $875,000 in investments.

She calculated a $700 monthly income shortage so $180,000 was placed in an FIA with a guaranteed income rider.

"This client has an ample amount of liquid assets so he can supplement his retirement income for several years while the annuity's guaranteed income benefit is left to grow," Nolan says.

"If he decides to 'turn on' the income in one year he will receive $900 a month for life," she says. "If he decides to defer the income stream, using other assets for spending money, the guaranteed monthly income would have grown to over $1,250 in five years."

COPING WITH CONFUSION

Skip Santori, president of Santori & Peters, wealth managers in Monroeville, Pa., cites principal protection and the possible guarantee of a specific lifetime payout as FIA benefits.

However, he mentions client confusion between an FIA's accumulation account (real money) and the guaranteed withdrawal rider, as a negative.

Altogether, Santori says that his firm doesn't recommend FIAs, citing "low returns and minimal flexibility for the client."

To Stan "the annuity man" Haithcock, an agent in Ponte Vedra Beach, Fla., FIAs "can be an efficient delivery system for 'income later' or target date income planning," but he also expresses reservations about the sales pitches that might be used by agents.

"Income riders typically have high-percentage growth guarantees," he says.

"Sometimes during the sales process, the lines may get blurred between true yield and income rider growth," Haithcock says. "Too many annuity buyers think they are getting a 6% or 7% yield, when they actually have an income rider, which is a phantom account that can only be used for income."

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

This story is part of a 30-day series on Social Security and retirement income strategies.

Donald Jay Korn

Donald Jay Korn is a New York-based financial writer who contributes to Financial Planning and On Wall Street.