And when it comes to solving retirement problems, in every case there exists a “best” way to get things done. Sometimes you need to disprove conventional knowledge to find it.
There is a way that 99% of the industry prefers to sell fixed indexed annuities. That works for some people but most often it is not the “best” way to solve your problems.
A better way…
When you run the numbers, many annuity strategies decrease your net worth over your retirement years. For many people it’s a necessary evil because it’s too risky to go without guaranteed income. What if you can have the protection you want but get it in a way that allows you to increase your net worth through retirement?
For those of you who have saved enough to retire comfortably you will notice this is based on a few basic asset management principles. You can eliminate the two biggest complaints about annuities and receive more benefit than you will get from any other strategy. I don’t care who you saw on TV that says otherwise!
This is the beginning of a safe and flexible strategy that allows you minimize the cost for protection and in turn maximize the output from your portfolio. You can check it out now using the link below.
Or, continue reading if you’d like to start with the basics and learn what you can expect from fixed indexed annuities. You owe it to yourself to make an informed decision. Whether you use an annuity or not is a decision that needs to be made based on facts.
PROS AND CONS OF FIXED INDEXED ANNUITIES:
Each of the individual components of a fixed indexed annuity can be seen as a pro or a con, depending on your expectations and goals. Let’s look at each of the major components and the positive vs. negative attributes of each.
Pro- You will never lose money. The insurance company invests your premium in a portfolio of safe investments and backs it up even further with substantial company reserves giving your money the protection and guarantee that you need.
Con- This isn’t good enough for some people. The cost for safety is limited growth and there are those that don’t mind risk in return for unlimited growth potential.
Pro- Once interest is credited to your account it is also guaranteed against loss. Protected principal and earnings is a powerful benefit that pays off when markets are volatile.
Con- Most interest is credited once per year, although there are options for two and three year crediting as well. This means your earnings potential depends on how the market finishes on a single day. A significant drop in the market at the end of your crediting period can wipe out expected gains. That can be positive as well but it’s important to not place all your expectations on a single year.
Caps, Participation Rates and Spreads:
Pro- You get a risk-free option to track performance of a stock market index. Option costs dictate how much of that gain you receive. Specifics go deeper but the benefit is that you will experience yields that are far greater than any safe asset.
Con- Again, it all speaks to expectations. If you think you can buy your own options and do better then go for it.
Pro- This is all relative to other safe money options. CDs and Bonds have some long commitments as well but the annuity comes with access to funds and protection from interest rate risk.
Con- Many supposed experts tell you not to lock money up for extended periods of time. It all depends on your plans for the money so if the annual free withdrawal is not enough to meet your needs then an annuity is not right for you.
Indices and Crediting Methods:
Pro- Considering the entire annuity market, you have an overabundance of indices to choose from and crediting methods to use so no matter what your preference, there is an option available that will work for you.
Con- This can be seen as fairly complicated given all available options and strategies. If you start by looking at this then you may as well just give up. Start with how the annuity will help you reach a goal and decide on this last.
Now- The Basics of How Index Annuities Work
Index Annuities, Fixed Index Annuities, and Equity Indexed Annuities, all mean the same thing. These are all the same insurance product with different labels, but the correct name is a ‘Fixed Index Annuity’.
Fixed Index Annuities are nothing more than fixed annuities with a different method of crediting interest. With a fixed annuity, which is a lot like a CD, the contract owner receives a stated rate of interest each year.
But with an Index Annuity, the appreciation rate is calculated based on growth in an outside market index, like the S+P 500 or the Dow Jones index.
The beauty of Index Annuities is that if the market index goes up, the contract makes money. But if the index goes down, the principal is protected and the contract does not lose value.
Index annuities give consumers a partial participation in the markets, but offer a principal guarantee.
How Insurance Companies Make This Possible
How can insurance companies make a guarantee that your Fixed Index Annuity may go up, but will not go down?
Insurance companies in general use the premium they bring in to invest in safe assets in the general account. Think of it like a large pool of conservatively invested money. In fact ,Warren Buffet made his money buying insurance companies, and then using the premiums to buy other businesses that increased the overall corporate financial strength.
In a Fixed Index Annuity, the insurance company uses your premium to invest in bonds, mortgages, and other instruments in the safe, core general account. This produces an annual rate of return, often known as the ‘general account’ yield. you will see this rate credited in fixed annuities, and also in many cash value life insurance products.
But with an indexed annuity, instead of accepting this ‘general account’ fixed rate, the insurance company uses the interest earned from the conservative portfolio to purchase an option position in a market index. An option is simply the right- but not the obligation- to purchase securities at a future date for a contractually stated price.
If the market goes up, the company will exercise the option and realize a gain. They credit a portion of the gain on that option contract to your annuity contract.
If the market moves sideways or down, the option expires worthless and no interest – or gain- is available for crediting.
Potential for Gain with No Risk of Loss
When talking about the pros and cons of fixed index annuities, the biggest positive is that index annuities truly offer you the potential for gains based on market appreciation, without the risk of loss to your principal.
Your principal is not at risk, rather, it’s only the earnings from your principal are invested in potentially higher yield options. Thus, an indexed annuity is a safe asset with upside potential.
This explanation also gives you a good idea why these are called “Fixed Index Annuities”. Income from the FIXED account growth is used to buy options in a market INDEX for potential gain.
If the market rises, you may profit. If the market falls, the company has wagered only your income from the FIXED account, so your principal at all times remains safe.
Using Fixed Index Annuities
Fixed index annuities are a great alternative to bonds and are a core, safe money holding often used to make sure principal is safe, and to preserve assets and options for later.
The typical buyer of an index annuity seeks the potential for growth without risk of loss, and appreciates principal protection and tax deferred compounding.
But far too often, the simple and elegant fixed index annuity gets clouded with bells and whistles and add-on riders, turning it into more of a ‘hybrid annuity’.
It’s crucial to know that most ‘hybrid annuities’ are not optimized for safety and growth.
In fact, there are over 350 different index annuity contracts on the market today and it’s growing every day.
Far too many agents have one preferred contract they work with for all scenarios. That is just not appropriate, and it’s why we start by understanding your objectives first before looking at any specific contract.
For more than 13 years we have watched, analyzed, and sold these annuities and have come to understand them intimately. Better than anyone, we understand the pros and cons of fixed index annuities and how to use them in retirement.
We’ve produced The Annuity Guide as essential reading for retirees considering Fixed Index Annuities. It is available for a free download at Annuity Straight Talk, and will help you find the safety and guarantees you need.
If you seek a qualified adviser well versed in the pros and cons of fixed index annuities, please do not hesitate to contact Annuity Straight Talk today on 800-438-5121.