When it comes to saving and investing, there are usually certain types of “tradeoffs” that you must make. For example, more aggressive options could lead to large gains. But they will typically also involve the highest amount of risk. On the other hand, if you choose to go with “safer” alternatives, you will generally have to settle for low returns.
So, as you progress towards retirement, how can you increase your potential return without adding any additional risk?
One way is through the purchase of a fixed indexed annuity.
How Fixed Indexed Annuities Can Provide a Nice Return without Added Risk
Fixed indexed annuities, or FIAs, have become a popular financial vehicle for retirees and investors over the past decade or so. One reason for this is because FIAs offer the opportunity to obtain index-linked returns while at the same time keeping your principal safe. So, an FIA can provide a return without much risk.
These annuities will typically track one or more market indexes, such as the S&P 500. When the index performs well in a given contract year, your annuity is credited with a positive return – usually up to a set limit, or “cap.”
However, if the index incurs a loss in a contract year, your annuity will not risk a loss in value. Rather, it will still be credited with a guaranteed “floor” that has a stated minimum return. This is usually somewhere in the range of 0% to 2%.
Because there is no loss of principal (or loss of any of the previous gains,) when the tracked index performs in the positive again, there are no losses to make up for. Therefore, your return can continue to build.
As with other types of annuities, the growth that takes place in the account is tax-deferred. This means that there is no tax due on the gain until the time of withdrawal. Therefore, the value of the annuity can grow and compound exponentially over time.
In addition to the opportunity for a nice return and the protection of principal, fixed indexed annuities can also pay you an income stream. Payments can be for either a set period of time or even for the remainder of your lifetime. This can help to alleviate the risk of running out of income in retirement.
What You Should Consider Before Buying a Fixed Indexed Annuity
Even though fixed indexed annuities can offer many enticing benefits, there are still several factors you should consider before you make a long-term commitment to purchasing one. These can include the following:
- Index(es) that are tracked by the annuity
- Method of generating return
- Caps and/or other limits to positive growth
- Surrender charge/surrender charge period
- Your risk tolerance
- Insurance company ratings (which reflect the carrier’s financial stability and its reputation for paying out its claims)
Is a Fixed Indexed Annuity Right for You?
It may seem that a fixed indexed annuity would easily fit into your portfolio. But it is typically best to discuss your objectives with a retirement income specialist before you make a long-term commitment. Otherwise, you could risk having to pay a surrender charge if you cancel the annuity.
In addition, not all fixed indexed annuities are exactly the same. So, it is also important to compare different FIA options in order to determine which one – if any – will help you to achieve your goals.
At Annuity Gator, we focus on annuity education. It is our mission to assist consumers and financial professionals alike with obtaining a deeper understanding of how annuities work. We also help to determine where annuities may fit into various financial planning scenarios.