The popularity of annuities – especially fixed index annuities – with people planning for retirement is on the rise. Fixed index annuities take 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.
A Fixed Index Annuity (FIA) is a contract between you and a life insurance company. You pay a premium to the insurance agency in return for regular income payments over a period of time, beginning at some point in the future. Over the years, annuities have gotten a bad rap in the investment world. The trouble is some of the most vocal critics of annuities, specifically of Fixed Index Annuities, either misunderstand or misrepresent how the plans work. As a result, a lot of misinformation has found its way into the media and has been adopted as fact by many mainstream financial professionals. However, increased life expectancies and a decrease in pensions make fixed index annuities increasingly relevant to new retirees.
Americans are living longer, so keeping your money safe and income guarantees are essential to the success of any retirement plan. The typical American can expect to live 25 years or more in retirement. In some cases, people actually need to draw retirement income for more years than they earned money working. Traditionally, retirees have relied on pensions to supply income during their golden years. Since the vast majority of employers have eliminated pensions, understanding the benefits of fixed index annuities is now more important than ever before.
A fixed index Annuity can help you:
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 the total amount of the 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. Fixed index annuities offer the fixed income nature of bonds but are not affected by interest rate changes. They also offer gains as the equity market rises without being subject to equity market losses.
Here is one thing you should understand fully. In exchange for principal and earned-interest protection, fixed index annuities limit the amount you can make if the markets go up. These limits can be pretty steep. To protect yourself, you need to understand what exactly you are getting into––especially when it comes to managing your performance expectations.
If you are looking to make a killing on the stock market then annuities are not a good fit for you.
If you are looking for a retirement investment strategy that protects your principal, has some good upside potential, and provides a predictable guaranteed lifetime income stream in retirement, a FIA may be something to consider.
There are hundreds of details about the merits and disadvantages of considering a fixed indexed annuity. When you factor in that there are a wide range of FIA products on the market, there is no way we can cover everything there is to know about them on a single webpage.
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Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer.