“Fixed index annuities have some benefits that may make them the perfect choice to help you ride the economy’s ups and downs with more confidence.”
To say the economy has been unpredictable lately is an epic understatement. There seems to be no place to safely park your savings that will give you some growth.
That’s why, if you are someone within 5-10 years of retiring, you may want to add a fixed index annuity to your portfolio.
While they aren’t perfect for every pre-retiree and retiree, the fixed index annuity, also known as a FIA, is a popular choice for those who want some potential for market-related growth, yet don’t want to take on downside risk.
Generally speaking, fixed index annuities are something you should discuss with your advisor, particularly if:
- You have a low tolerance for risk but like the idea of getting higher gains that you’d get from comparable safe money products, such as certificates of deposit or bonds.
- You want a source of guaranteed income that will last your entire lifetime.
- You believe you may need long-term care when you are older and would like access to the money in your annuity.
- You think you may want to leave a legacy for your loved ones.
If any of these things appeal to you, then you will appreciate some of the advantages of a fixed index annuity such as:
- Tax-deferred growth.
- Contractually guaranteed safety of principal.
- Options that allow you to convert your annuity into a stream of lifetime income.
- Some FIAs give your heirs a guaranteed minimum death benefit.
A FIA’s reset feature will help you lock in gains
Additionally, a FIA has an annual reset feature that means your fixed index annuity will hold its value regardless of whether the underlying index goes up or down.
When the annuity’s index has an up year, your account value gets the market-linked growth in the form of interest credited to the account value. The growth is then locked in and reset to become the next year’s beginning balance.
However, if the index has a down year, the FIA gets no interest for that year credited to the account. At first blush, this may seem like a negative thing. However, you should understand that your annuity didn’t lose any money.
The value of the annual reset can be two-fold. First, your FIA is protected from the market downturn and its’ value won’t go down. Secondly, the beginning balance for the following year won’t require you to “make up” for any lost value in the account. The annual reset feature gives a fixed index annuity the potential to earn more interest than some other types of annuities which can, and often do, lose money in a down market.
Summing it up: Fixed index annuities are powerful, tax-advantaged retirement income tools. They were specifically created so an annuity owner could lock in market gains while protecting against losses using an annual reset mechanism. Whether you are in a prolonged bear market or experience a market “correction” your FIA account value stays intact, with zero losses. FIAs have numerous other advantages that any retiree should consider, especially those who want more gains than those provided by other safe money products. If you are thinking about purchasing an annuity, you should ask your advisor about fixed index products.
