In a recent article by Scott Burns titled “Best place for ‘safe money’ may be in CD-like annuities“, a reader had emailed the following question.
“My wife and I are in our late 50s, so we certainly do not want to be 100 percent in stock funds. Our 401(k)s do not allow us to purchase individual bonds that we can hold to maturity, and the money market option pays next to nothing. What is a person to do?”
Part of Burns’ response to the reader was as follows.
“Other than a stable value fund, you likely have no options in your 401(k) plans. Sadly, there are no “good old days” options anywhere. All we can do is look for the best safe offer available. Right now that appears to be in CD-like annuity contracts. The highest yield among these can produce a good deal more than the highest-yielding certificates of deposit.
The “Mr. Annuity” web page, for instance, currently lists a three-year CD-like annuity guaranteed to yield 2.25 percent and a five-year contract guaranteed to yield 3.05 percent. Both contracts require a minimum investment of $10,000. The highest yield CDs on Bankrate.com at the same time was 1.2 percent for three years and 1.31 for five years.”
While I wholeheartedly agree with Mr. Burns, I’d like to expound on his response to include fixed index annuities.
A fixed index annuity (FIA) is a hybrid annuity product. It takes the best of what other types of annuities have to offer, combining the attractive features of each while working to eliminate the not-so-great features.
Fixed index annuities, just like old school fixed annuities, earn a baseline fixed interest rate over a fixed term while also providing a principal guarantee. The interest will vary from company to company, but the rate will be much better than the 3.05 percent of short-term CD-like annuities.
In addition, just like variable annuities, fixed index annuities provide the opportunity to participate in stock market gains. However, unlike a variable annuity, your principal is 100% protected against stock market losses. And, fixed index annuities have eliminated the fees involved with variable annuities, making them a much less expensive option for a retirement income solution.
Unlike 401Ks and IRAs, you can make unlimited contributions to your annuity and the growth is tax-deferred. After a certain time period (as soon as 12 months) you can begin withdrawing an income stream based on the accumulation value of your contract. The accumulation value is equal to how much total premium you have paid plus 100% of interest earned minus any withdrawals, surrender charges, unpaid loans you have taken against your principal, and charges for optional riders you may have selected.
If you’d like to learn more about fixed index annuities and how they work, please sign up for our free and instantly viewable video series “Securing Your Retirement Future“. In this series, we explain the pros and cons of the 4 types of annuities, how fixed index annuities make money in good markets and bad, and much more.
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