Are Fixed Index Annuities a Good Option For Retirement Savings?
In today’s tough economic climate, fixed index annuities may provide you with the security and confidence you are seeking for your retirement savings.
The ‘Fixed Index Annuity’ is also known sometimes as an ‘Equity Index Annuity’. Fixed indexed annuities came onto the market in 1995 and have been steadily gaining popularity. Insurance companies are writing these annuities with a minimum guaranteed return and tying the annuities into another stock market index, such as the S&P 500 or Dow Jones Industrial Average.
You can determine if a fixed index annuity it right for you by looking at your investment goals and time frame. Short term investors seeking maximum returns should shop elsewhere. These annuities are vehicles for long term investors seeking stable returns, not double digit yields. Also, if you like to constantly rebalance your holdings, you should probably not invest in an index annuity. The ideal candidate for an equity indexed annuity would be a long-term, conservative investor who is seeking a stable and steady return. Someone who wants to no risk to their principal but would like to realize higher returns than a CD or money market account, which are also tax-deferred. An equity indexed annuity is a valuable addition to reaching your retirement goals.
Some Contract Features of Fixed Index Annuities:
- Guaranteed Minimum Rates of Return: Fixed Indexed annuities guarantee a minimum rate of return no matter how the market performs. This return is usually 3% and is credited to a portion of the account value during the contract term.
- The Stock Index: Fixed Indexed Annuities interest calculations are tied in the performance of a stock price index, such as the S&P 500, without taking into account dividends and capital gains.
- Participation Rate: The participation rate is set in the contract terms and determines how much the contract owner shares in the index increase. They participation rate percentage is multiplied by the index change percentage to determine what interest rate the contract owner will be credited. If the participation rate is 70%, the contract owner will enjoy 70% of the index change.
- Caps: A cap is the opposite of the guaranteed minimum rate of return. In essence, an annuity cannot earn more interest than the cap states in a particular period.
One should also note that equity indexed annuities have early withdrawal penalties, or surrender fees. The surrender fees may decrease over the years, but check contract clauses for details on these fees as they can be quite expensive. Remember, these annuities are best for investing long-term, so it is best to only invest money you will not need for several years.
When selecting equity indexed annuities there are is array of components to take into account. Every company offers different products and every annuity has different contract terms. Terms that vary include participation rate, cap, surrender fees, annual reset, etc.
While you may have heard some negative comments about equity indexed annuities (AKA fixed index annuities), this is largely in part to unscrupulous or un-knowledgeable sales agents selling these products to consumers who do not know what they are buying into. Do your research, find a reputable agent with experience in the equity index annuity field and know what product best suits you and your retirement needs.
Find more about Fixed Index annuities in The Annuity Report .
Learn more about this on the The Annuity Report by signing up below or to the right. Or, explore these pages on Fixed Index Annuities or these pages on their popular income- rider siblings, Hybrid Annuities.