Why Right Now Makes a Lot of Sense to Own a Fixed Indexed Annuity (FIA)
- May 12
- 5 min read
The Simpson Firm — we focus on de‑risking portfolios while maximizing the return‑per‑unit‑of‑risk compared with alternatives. Put simply: we aim to get you more return for every unit of risk you take.
The volatility math most investors overlook
If you had $100 and your portfolio went down 20% on Day 1, then up 20% on Day 2, how much would you have? If, instead, your portfolio went up 20% on Day 1 and then down 20% on Day 2, how much would you have?
Don’t calculate it yet.
Here’s the big idea: the fall hurts more than the climb helps because percentage losses compound off a smaller base. That asymmetry is why minimizing drawdowns is so powerful. This is why a Fixed Indexed Annuity is a great tool to have in any portfolio.
Notes (answers to the 20%/20% question): Down 20% first ($100 → $80), then up 20% ($80 × 1.20 = $96). Up 20% first ($100 → $120), then down 20% ($120 × 0.80 = $96). This illustrates “volatility drag” even with the same average return.
What is a Fixed Indexed Annuity?
A Fixed Indexed Annuity (FIA) is a long‑term retirement savings contract from an insurance company that offers:
Principal protection (subject to the claims‑paying ability of the insurer)
Index‑linked growth potential without direct market investment
Tax‑deferred compounding
Annual lock‑ins of credited interest (you keep what you earn each crediting period) [annuities....iclife.com]
To make this concrete, consider Pacific Life’s FIA lineup (as an example, not a recommendation). Their Pacific Index Foundation® provides multiple interest‑crediting options you can allocate to and re‑allocate each term:
1‑Year Point‑to‑Point with Cap (e.g., S&P 500®): Your credit equals the 1‑year index change up to a stated cap.
1‑Year Performance‑Triggered Index Option: If the index change is flat or positive, you receive a declared trigger rate for the term; if negative, the credit is 0% (your account value does not lose due to index declines).
Fixed Account Option: A declared fixed rate credited daily for the term.
How the Performance Trigger works (plain English): You earn a preset rate if the selected index ends the period ≥ 0%—you don’t need a big rally, just non‑negative performance. If the index is negative, you earn 0% (no loss). This method is offered by multiple carriers and is designed for simplicity and downside protection. Here is a video on how they work
A 20‑year look‑back: What if the trigger rate were 9%?
Let’s run an illustrative, rules‑based thought experiment:
Period: 2006–2025 (20 full calendar years)
Index: S&P 500® (total return) for determining whether the year is non‑negative or negative
Strategy: Performance Trigger @ 9% → Credit 9% for each non‑negative year; credit 0% for each negative year (no losses from the index)
Data source for S&P 500 total returns by year: SlickCharts (which compiles the official annual total return series)
What happened since 2006?
The S&P 500 had 17 positive/flat years and 3 negative years (2008, 2018, 2022).
A 9% performance trigger would have credited 9% in 17 of 20 years and 0% in 3 years.
Compounded result (hypothetical): ~7.6% CAGR for the trigger method.
Over the same span, the S&P 500 total return compounded at ~11.0% CAGR—with sizable drawdowns in 2008 (-37%) and 2022 (-18%).
Takeaway: In this period, the S&P 500 won on absolute return, but it required enduring deep, sequence‑risk‑heavy declines. The **triggered FIA path delivered steady, bond‑like calm with equity‑linked potential and no negative annual credits—useful when your priority is a better return‑to‑risk ratio and behavioral comfort. (Index performance in FIAs typically references price‑only indices and excludes dividends; the simple trigger comparison here focuses just on whether the year is non‑negative.)
Where does a Fixed Indexed Annuity fit vs. a 60/40, bonds, CDs, or bank cash?
We like to compare outcomes per unit of risk rather than chase the tallest return bar. Here’s a practical, 20‑year perspective using well‑cited market references:
60/40 portfolio (stocks/bonds): Over long horizons, diversified portfolios have produced solid mid‑single to high‑single‑digit returns, but with drawdowns (notably 2008 and 2022, when both stocks and core bonds struggled). The MFS 20‑year “best & worst” tables illustrate how leadership rotates and why diversification tempers—not eliminates—volatility.
Core bond funds: A proxy like the Bloomberg U.S. Aggregate Bond Index shows roughly ~3% annualized over long spans with a historic -13% calendar year in 2022—reminding us bonds aren’t risk‑free. (See AGG/Index summaries for multi‑year totals and 2022 drawdown.)
Bank savings accounts: The FDIC national average savings rate sat near 0.06% for years post‑GFC and only recently crept up—still far below long‑term equity or FIA potential.
Certificates of Deposit (CDs): Average 1‑year CD rates spent much of the last decade below 1%, rising again in 2024–2025 (averages near 1.6%). CDs are stable, but historically lag long‑term growth vehicles.
Fixed Indexed Annuities: Provide downside protection/0% floor, tax‑deferred compounding, and index‑linked upside via methods such as point‑to‑point, performance trigger, and fixed allocations—positioning FIAs as a compelling substitute for part of the bond sleeve when your goal is a better return‑risk ratio.
Bottom line from a risk vs. reward lens: At attractive crediting rates, FIAs can compete with (and in many environments exceed) the long‑run, risk‑adjusted efficiency of the traditional 60/40—especially for investors who value floor protection and tax deferral—and they can handily outpace many fixed‑income‑only allocations over long horizons. (Your results will vary by product, carrier, rates, and allocations.)
Current rate context (simple snapshot)
As of this writing, new‑business rate sheets we’re seeing for a 10‑year FIA contract show 6.95% on contracts of $100k+ and 6.50% for under $100k (fixed account option and/or trigger rates vary by carrier, product, state, and change frequently). Always confirm the current rate sheet and product disclosures before placing funds. For perspective: national‑average bank savings remains a fraction of that, and average 1‑year CDs are around the 1.6% range (recent period), though top‑tier CDs can be higher at times.
The tax‑deferral edge
Unlike bank accounts and taxable bond funds, interest in an FIA compounds tax‑deferred until distribution, which can materially improve after‑tax growth for high‑bracket investors. Pacific Life’s client guide demonstrates how tax deferral can add up over time (hypothetical). Taxes are due upon withdrawal; withdrawals before age 59½ may incur IRS penalties.
Quick refresher: Crediting methods at a glance (using Pacific Life examples)
Point‑to‑Point with Cap: Tracks the index price change over the term; credits up to a cap. Best when you expect moderate upsides.
Performance Trigger: Credits a declared rate (e.g., 7–9% in some markets) if the index is flat or up; 0% if down. Great for sideways/volatile markets.
Fixed Account Option: A declared rate for the term; the simplest, most bond‑like choice.
All guarantees/credits are subject to the claims‑paying ability of the issuing insurer. Product features and rates vary by state and change over time; read the prospectus/guide and disclosures.
Bringing this home
At The Simpson Firm, our philosophy is simple: reduce downside, smooth the ride, and maximize return per unit of risk. A Fixed Indexed Annuity can be a powerful component of that approach—preserving principal during bad years while still letting you participate when markets cooperate. For many families, that combination supports better plan‑adherence (staying invested) and better long‑term outcomes.
No one investment is one‑size‑fits‑all. A healthy portfolio uses a diversified mix tailored to your goals, time horizon, taxes, and tolerance for risk and complexity.
Call to action
Curious whether an FIA belongs in your plan—and how much? Let’s run a customized scenario (carrier‑agnostic) using your horizon and risk constraints. We’ll compare a performance‑triggered FIA allocation against cash, CDs, bonds, and a 60/40, including tax impacts, so you can decide with clarity. Reach out to The Simpson Firm to begin a no‑pressure “smart decisions” review.
Sources
Pacific Life — product pages, fact sheets, and guides for Pacific Index Foundation® and crediting methods. [annuities....iclife.com]
Allianz — how the Performance Trigger crediting method works. [allianzlife.com]
National Life Group & American Equity — plain‑English explanations of performance‑trigger strategies. [nationallife.com]
SlickCharts — S&P 500® total returns by year (2006–2025). [slickcharts.com]
MFS — 20‑Year Best & Worst asset class rotation charts (diversification case). [mfs.com]
Bloomberg/AGG & related summaries — bond index behavior and long‑run returns. [bloomberg.com], [upmyinterest.com]
YCharts & FDIC links — national savings rate and 1‑year CD averages. [ycharts.com]
Written by Frank Simpson | Senior Private Wealth Advisor
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