Can we achieve secure retirement provision and reasonable returns?
Most of us hope to supplement our future retirement income through savings or investments. That can be pretty hard to do these days.
- Traditional safe savings accounts or certificates of deposit don’t seem to pay much interest. In terms of inflation, we might actually find ourselves losing ground.
- Market products like stocks can promise much better returns. But anyone who’s survived the past few years knows that stocks can be risky.
- Is there a way to earn decent returns while keeping our money safe?
For some people, a fixed indexed annuity, also known as a stock-indexed annuity, can provide some balance. While you accept some restrictions and limits on your profits in booming market years, you also get the assurance that you are protected in downturns with a guaranteed return.
Remember I’m writing about this solid products, and non-variable annuities. Fixed annuities are produced and sold by insurance companies and are very different from variable annuities. Also note that your contract may vary based on the individual product, insurance company and your state. Before considering purchasing a contract, you need to understand the unique details of the product. This is for educational purposes only and is not intended to persuade you to purchase a particular product.
What are Equity Indexed Annuities?
These products tie their return to a market index. A common example is the S&P 500 stock index. When the market goes up, your returns go up. If the market falls, a guaranteed interest rate protects you from actually losing money. The ability to benefit from rising stock markets but protect against negative growth is one of its key selling points.
However, this does not mean that these products are the best choice for everyone. Before proceeding, you should also familiarize yourself with your contract’s market capitalizations, ownership percentages, and buyback terms.
- The participation rate limits the actual amount of profit you can make if the index goes up. For example, if your participation rate is 80 percent and the index increases by 6 percent, you may only see a 4.8 percent increase credited to your account.
- Market caps can reduce the total amount of upside credited to your account. If the market cap is 8 percent and the stock market is up 10 percent, the extra 2 percent won’t do you any good.
- Return policies vary by contract, but they’re typically a few years long. If you do not keep your account by the end of this period, you may be subject to a large penalty. In general, these products are medium to long-term investments and not short-term savers.
You must balance the rules and penalties against the fact that you may have a guaranteed return, even during a period when the index is negative. In other words, if the index falls 10 percent and you have a 2 percent guarantee, you’re still making 2 percent of your money.
Fixed index stock annuities are not the perfect product for every retirement saver. However, they can offer a middle ground that balances risk and opportunity for many.