Fixed Index Annuities for Retirement
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.
Why Do Retirees Buy Fixed Index Annuities?
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:
- eliminate market losses
- have tax deferred growth
- protect your principal and
- generate retirement income you can’t outlive
- provide a legacy
A Closer Look at the Benefits
- Stock market loss elimination – Fixed index annuities provide the opportunity to participate in stock market gains. When you purchase an FIA, your money, less any applicable fees, has the potential to earn interest based on changes in an external index, like the S&P 500 or Nasdaq-100. If the markets go up, you enjoy the opportunity to participate. If stocks fall, then your contract value does not decrease.
- Principal protection – Your principal and accrued interest are 100% protected and guaranteed by the insurance company against stock market losses. You will never lose your premium value or any of the interest you have earned.
- Tax deferred growth – The interest accrued from your contributions is tax free and is only taxed when withdrawn. Also, you no longer have to pay federal income tax on an annuity’s proceeds if you use those proceeds to pay for long-term-care coverage. In regular long-term-care insurance policies, payments are forfeited to insurance companies even if services aren’t utilized. But with an annuity, unspent funds belong solely to the account holder and can eventually be withdrawn. In addition, if you’re too ill to qualify for a regular long-term-care insurance policy, you might have an easier time getting coverage through a long-term-care annuity because there are fewer hoops to jump through.
- Income you can’t outlive – After a set period of time, you can begin to receive Income payouts from your annuity. Many products have provisions that allow the income check to grow with inflation. Depending on how the annuities are structured, they also can provide benefits beyond guaranteed periodic payouts including emergency funds when necessary, death benefits, nursing home benefits, and lifetime income benefits, meaning the holder will never outlive the income provided by the annuity.
- Provide a legacy with death benefits – As a person facing a longer life expectancy, you will also want to consider the economic impact this could have on your family. Most us will want to leave a legacy to our heirs. Fixed index annuities have a death benefit that allow unspent funds to be passed onto beneficiaries.
How is a Fixed Index Annuity Different?
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.
The Trade Off
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.
Including Fixed Index Annuities in Your Retirement Strategy
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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