A fixed-index annuity is one type of investment that secures your retirement savings so that you can receive a predictable flow of income in the future. Including fixed-index annuities in your retirement plan protects you from losing money during negative years, and earnings can grow over the long term. Unlike higher-risk investments, you may not earn a lot of money, but you won't lose any of your investment. Therefore, it may be to your benefit to look into fixed-index annuities to understand how they work and the benefits they offer.
How Fixed-Index Annuities Work
With a fixed-index annuity, the annuity contract between you and the insurance company guarantees that you will receive regular, periodic payments for a fixed amount of money at a minimum rate of interest. This type of annuity is regulated by the insurance commission in your state, rather than by the Securities and Exchange Commission (SEC)—an agency of the U.S. federal government.
If you buy fixed annuities as an additional source of income during your retirement years, you can set up the contracts so that you receive periodic payments for the rest of your life. You invest a sum of money by paying a premium. A minimum investment is required. In return, there is the opportunity for investment growth, often connected to the value of stocks invested in the S&P 500 Index.
When the S&P 500 rises, the interest—minus the insurance company's fees—is credited to your account. The interest rate is lower than those offered by riskier investment vehicles, but the account principal is protected against a falling stock market.
Although you may not lose money in your investment with a fixed-index annuity, there generally is a limit—referred to as a cap—on how much money your investment can earn. Therefore, you can't earn more than the cap, even if the S&P averages a higher annual gain.
You also receive a participation rate—the percentage rate stated in your contract that is credited to your account when the earnings grow. The insurance company gets the remainder, which allows the insurer to continue to pay investors during years when there is low or no growth.
Advantages of Fixed-Index Annuities
Indexed annuities offer optional riders that guarantee some amount of lifetime income. While some annuity contracts include a lifetime annuity guarantee as part of the standard policy, others offer the benefit only through the availability of riders for which you pay an additional premium. Options for increased income also may be available to help keep pace with inflation. In addition, some riders offer benefits that you can use to supplement traditional long-term care coverage.
Any gains you earn are locked in permanently. And as far as savings vehicles go, you often can get a higher rate of return than those offered by certificates of deposit.
If you use a fixed-income annuity as a guaranteed source of income throughout your retirement years, most fixed annuities have a higher calculated percentage payout than variable annuities.
Taxes on interest credited to your account are deferred. While you don't receive a tax deduction on money you deposit into the account, you do not pay taxes on earnings until you start withdrawing money from the account.
For more information, contact a financial institution like Precision Brokerage Group.