With the near disappearance of traditional defined benefit pension plans, annuities have become more popular with retirees. These financial vehicles can generate an ongoing income stream for life. This, in turn, can help to alleviate the biggest fear on the minds of retirees – running out of income while you still need it. But if fixed and fixed indexed annuities can provide you with an income guarantee, which of these is better for you?
The answer can be found by determining your short and long-term financial objectives. For instance, in addition to the generation of ongoing income, are there other benefits you are seeking, such as:
- Tax-deferred growth
- Safety of principal in any type of stock market environment
- Lifetime income
The answers to these questions can help you get a clearer picture of your financial objectives.
Fixed versus Fixed Indexed Annuities
Fixed annuities are known for their safety and guarantees. These annuities can provide you with a set amount of return – which may even be locked in for a pre-specified period of time. Your funds in the annuity grow on a tax-deferred basis. This means that there is no tax due on the gain until the time of withdrawal.
While the return on a fixed annuity is usually quite low, the protection of principal is an enticing benefit for those who are seeking safety. This is true, even in the event of a significant stock market correction. And this, in turn, can allow you to sleep much better at night.
The guaranteed income stream from a fixed annuity is another big draw for retirees who are looking for an income “floor” or a way to fill in an income “gap” between expenses and other sources of retirement income generation.
Fixed indexed annuities are actually a type of fixed annuity. The primary difference is the way in which the return is determined. With fixed indexed annuities, one or more market indexes are tracked, such as the S&P 500.
When the index rises in a given contract year, a positive return is credited to your annuity contract – oftentimes up to a certain limit, or “cap.” But in contract years when the index is down, there is no negative impact on the value of the annuity.
Rather, a guaranteed minimum rate, which is typically between 0% and 2%, is credited to the account. So, while there is a limit on the upside growth, a fixed indexed annuity will also keep your principal safe.
Income and Other Fixed Annuity Features
Both fixed and fixed indexed annuities offer an income stream. These payments can continue for a set period of time, such as ten or twenty years, or even for the remainder of your lifetime. There is often a joint income option available, too. In this case, the income will continue throughout the lifetime of two individuals – such as a husband and wife.
Fixed and fixed indexed annuities may also include other benefits, too, such as a(n):
- Death benefit (usually if the annuitant dies before the contract value has been paid out)
- Penalty-free waiver(s) to access funds if the annuitant or owner is diagnosed with a terminal or chronic illness and/or must reside in a nursing home for at least a certain period of time
Typically, both fixed and fixed indexed annuities will have a surrender period during which you could incur a withdrawal fee if you access some or all of the funds in the account. In most cases, the percentage of the surrender penalty will gradually decrease until it eventually disappears.
Fixed Annuity versus Fixed Indexed Annuity
|Fixed Annuity||Fixed Indexed Annuity|
|Protection of Principal||Yes||Yes|
|Guaranteed Minimum Return||Yes||Yes|
Which Annuity is Right for You?
Annuities can offer a number of enticing features. But they are also fraught with a lot of moving parts. With that in mind, it is recommended that you discuss your objectives with an annuity specialist before you make a purchase.
At Annuity Gator, it is our mission to ensure that both consumers and financial professionals know how these financial vehicles work and are able to determine whether or not they are the right option.
If you have any questions about annuities, or if you would like to compare several annuities in order to determine what to anticipate, feel free to contact us directly. We can be reached by phone at (888) 440-2468 to chat with one of our specialists. Or you can also send us an email at our secure online contact form, with any questions or concerns that you have.