In recent years, you’ve probably heard a lot about annuities. The reason you’re hearing so much about them now is that after the last 20 years of market upheaval, many retirees and pre-retirees are looking for a more conservative strategy that still offers sufficient returns, which can be exactly what fixed index annuities offer.
What are Annuities?
Annuities are contracts issued by insurance companies. In exchange for a principal paid by an individual, the insurer promises payments based on the terms of the annuity contract. There are many different benefits and options that an annuitant can choose.
Annuities can also include added protections and benefits through contract riders*, which offer features such as guaranteed** income benefits, inflation protection and death benefits.
Features of Fixed Index Annuities
Not all annuities are created equal. Some annuities, such as variable annuities, offer a higher return, but they also have a greater risk which could expose an account holder to losses of principal. Other annuities, such as fixed annuities, can restrict the owner’s upside potential making it so his/her nest egg has little opportunity for competitive growth. However, the fixed index annuity allows for more upside potential than the fixed annuity in that its growth follows the performance of a chosen outside index, such as the S&P 500®. But it offers protections that variable annuities lack. Fixed index annuities have something called a “floor”, which means that if the chosen index chosen does poorly the annuity may not gain anything, but at the same time, it will not lose anything which prevents a loss of principal.
The fixed index annuity also locks in prior gains, an option that variable annuities don’t offer.
Another great benefit of fixed index annuity is the capability to build in guaranteed** minimum income benefits often through a rider. These allow the owner to receive a fixed monthly payment that’s guaranteed** for life and can increase depending on when the owner decides to trigger the payments.
Who Needs a Fixed Index Annuity?
In 1980, 66 percent of Americans had pension plans. By the year 2011, that number had dropped to just 20 percent.*** Pensions used to offer extremely important benefits and allowed retirees an income in retirement. Today employers rarely offer a pension, but a pre-retiree can set up his or her own defined retirement income benefit through a fixed index annuity
Not only does a fixed index annuity help extend a retiree’s retirement dollars, but when purchased inside of a Roth IRA, it can allow the retiree to draw a tax-free post-retirement income. This not only gives the retiree some level of income security but can be a tremendous advantage in a consistently changing tax environment.
Choosing the Right Annuity
When selecting a fixed index annuity for your retirement strategy, it’s important that you qualify the insurance company issuing the contract. A. M. Best offers an objective letter grade for insurers based on their overall financial strength. Choosing an A or higher rated company will help allow you to determine a top-rated insurance company.
An agent can help you understand the various options available within annuity contracts and help you narrow down the annuity or annuities that best suit your financial situation. He or she will discuss with you the objectives you have for your retirement income and help develop a retirement strategy that can help you accomplish those objectives.
*Annuity riders may be available for an additional annual premium that may provide additional benefits and income guarantees.
**Annuity Guarantees are backed by the financial strength and claims-paying ability of the issuing company, and may be subject to restrictions, limitations or early withdrawal fees. Annuities are not FDIC insured.
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