We Are Living Longer
Are indexed annuities good for Retirement? You bet they are!
Saving more for your retired life is growing in relevance as individuals live much longer. Many seek to supplement their nest-egg by acquiring annuities. There are so many features and benefits to chose from that Indexed annuities have actually been increasing in popularity over the last few years as more insurers and insurance agents offer them.
Insurers typically market them as the very best of both worlds: between fixed and variable annuities: They have a mix of safety and security tied to market participation, that could attract the most conservative investor.
Continue reading to discover exactly what an indexed annuity is, just how it varies from other annuities and also whether it is a potentially good fit for your retirement.
Indexed Annuity Defined
An indexed annuity is a long-term, and in my opinion, supplement to your retirement, that incorporates the potential returns of variable annuities, but, with no downside risk. It’s comparable to fixed annuities because it has a minimum guaranteed interest.
Vs Variable Annuities
Indexed annuities resemble variable annuities because returns adhere to the efficiency of the securities market. Fancy way of saying they are tied to a performance of an index, such as the S&P 500 or a bond index and interest is credited to your account based on that performance, without actually investing in the markets as variable annuities do.
Indexed annuities are known by various other names such as equity-indexed annuities (EIAs) and also fixed-index annuities.
The Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA) do not control indexed annuities as they are not considered securities, They do not invest directly in the markets. Nonetheless, state insurance divisions do manage them.They are marketed and sold by Insurance Companies through licensed insurance agents.
When buying an indexed annuity, you could select to receive and pension style income in the form of a guaranteed lifetime income stream or a delayed choice. A immediate annuity, like it’s name denotes, starts paying instantly after acquisition. A deferred annuity continues to grow uninterrupted for a given time period.
Indexed Annuity vs. Variable Annuity
Considering that an indexed annuity is itself a hybrid type, it shares numerous characteristics with the variable annuity. Both choices could bring you greater returns based upon the efficiency of the stock or bond markets or a combination of the two. With a variable annuity, the rate of return is tied to the subaccounts you buy. Sub-accounts are like mutual funds and can be invested in the stock, bond as well as money market funds. The rate of credited interest of an indexed annuity, on the other hand, is tied to the performance of the market index and a multiple index strategy may be chosen.
The biggest distinction in between both is, Indexed annuities have a minimum guaranteed rate of interest, while variable annuities do not. Fixed Index Annuities have the upside potential of the market, with no downside risk! Due to these two important points, indexed annuities are commonly marketed as a much safer choice to a variable annuity. There is, and I agree, no such product as a totally safe financial investment, but the fixed indexed annuity comes as close as it gets.
The Variable annuity is completely invested in the markets and therefore subject to the daily swings with no downside protections and no guaranteed minimum rate of interest.
Should You Buy An Indexed Annuity?
If you’re searching for an investment with a more aggressive style compared to a fixed annuity, and like the benefit of a guaranteed interest rate, the fixed index annuity might be a great product to consider.. Remember the claim that fixed index annuities are “the best of both worlds” does have its merits. The challenge is that many fixed Index annuity contracts are frequently far more complicated compared to their fixed or variable equivalents. Therefore, it is best to discuss the features and benefits with a licensed agent who is also a CERTIFIED FINANCIAL PLANNER™ and who is familiar with your financial situation is the best course of action.
As an example, if the index returns 10%, it’s not likely that you will see a 10% return. Initially, your rate of interest will likely have a cap. So despite a 10% boost in the index, your return is tied to the participation rate selected when you signed the application.
Moreover, many fixed index annuities determine the rate of return as I mentioned, the participation rate. This suggests your last rates of return are a percentage of an index’s increase. If the index increases by 10% and you have a 75% participation rate, you will be credited with a 7.5% return, if that does not also rise above your cap rate.
Lastly, these caps as well as participation rates are generally conditional throughout the life of your annuity unless you choose features and benefits that state otherwise. You can buy the annuity with a 6% cap, and also it can lower to 4% in 5 years is one such scenario. Many times participation rates will slowly lower over time.
These issues do not always indicate that you must dismiss fixed index annuities. Instead, it can be added value as long as you are totally knowledgeable about the specifics of your contract before you move ahead..
A fixed index annuity is not simply a variable annuity with a guaranteed interest rate.. It’s far more complicated than that. However, the ability to capture market returns with downside protection still makes it eye-catching to reasonably aggressive investors as well as conservative investors who are searching for an annuity to assist with their retirement savings objectives.
With indexed annuities, it’s essential to be educated on just what you’re investing in. You should not anticipate profitable returns, as that carries no guarantees.. However, if you’re searching for a guaranteed minimum rate of interest well as the potential for much more, a fixed index annuity can be appropriate for you. Make certain to review all the information in the contract with your insurance agent. Know any type of caps, participation rates or various other fees that can chip away at your returns.
It can be a challenge to prepare your retired life all on your own. Consulting with a CERTIFIED FINANCIAL PLANNER™ who is expert in the alternatives could save a great deal of time and also distress. A CFP® is trained to consider your full financial picture. To fit the pieces of the puzzle together to build an overall plan to give you the peace of mind so that the possibility of outliving your money is lessened. Are Indexed Annuities good for retirement? Yes, they should be considered when planning your retirement strategy The ability to create a “Personal Pension” makes it very attractive..
As always, please feel free to comment or ask any questions below and I will respond ASAP. Also please click on the products tap above and learn about the Fixed Index Annuity Products I recommend.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.