Page 162 - Ready Set Retire

Stephen J. Kelley
what you can earn (but remember they eliminate market risk,
as long as you abide by the contract terms). So they may have
a cap, a spread, a participation rate or some other mechanism
to limit their payouts. This is not done to skim profit off the
top, it is a necessary component of the mechanism that makes
these products possible. This is beyond the purview of this
book, but we will be happy to explain this to you if you wish
to pursue this further. Briefly, however, none of your money is
actually in the market. Only your interest rate is tied to it; all of
your principal and accrued earnings are in the insurance
company’s very safe general fund. Think CD safe.
Assume now that you started in an annuity when the S&P 500
was at 1000, and the annuity has a 7% cap* (this is the
maximum payout for the year).

Figure 29: Simple graph showing FIA vs. S&P 500 for three year
period

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