An annuity is a contract between you and an insurance company for the purpose of various retirement goals:
While you’ve probably heard the term, you may not know that annuities have actually been around for centuries, helping hard-working people secure GUARANTEED lifetime income. This can be especially important for retirees, as studies show that most of us actually have a greater fear of running out of money than even death.
Benefits of annuities versus other types of investment opportunities include:
An annuity investment may be an excellent opportunity for:
Annuity income can be paid out monthly, quarterly, annually, or even in a lump sum. Additionally, annuitants can decide if they want annuity income to begin immediately or be deferred for as long as they want, which can be many years into the future.
Fixed Index Annuities (FIA) give you “best of both worlds.” They give you all the benefits of annuities such as principal protection, ability to receive a guaranteed lifetime income stream you cannot outlive, tax-deferral, etc., but they also allow you to have interest credited to your account based on the markets you allocate your funds into (like S&P 500, Nasdaq, etc.). However, unlike 401K’s, mutual funds, or stocks, you will not take any of the negative hit of a down market year. On the positive years you get a percentage of the upside move, but never any of the downside move (please see the chart below).
The two main differences:
1. In a down market year, your Fixed Index Annuity account balance actually stays the same. Your account value, as well as, all prior interest credited to your account are “locked-in” so that any future market downturns will not affect the value of your account. However, if you have invested in the markets through mutual funds, IRA’s or 401K’s, and the markets go down you could see your retirement savings take a major hit as well. At the age of 55, 60, 65 or 70, can you handle a 30% or 40% downturn in your retirement savings? You need your retirement money to live on now; not in 20 or 30 years. Can you handle taking that kind of hit emotionally?
2. The participation rate in an Index Annuity is a percentage of the move in the index that is credited to your account in a positive year. For example, say you have allocated the funds in your Fixed Index Annuity into the S&P 500 option, and the index goes up by 10% that year. If your Index Annuity offers a 60% participation rate then 6% interest is allocated to your account.
You are probably asking yourself why you should give up that extra 4%. The reason it may be worthwhile, especially if you are close to or into your retirement is that you never take any of hits in a negative year. That means if the next year the S&P 500 is down 10%, you are allocated a zero for that year. If it is down 40%, you are still allocated a zero for that year. Also, all prior year interest credited to your account, and your account value are “locked-in.” Your account value will not go down because of down markets. The chart below gives a good example how allocating your funds into the S&P 500 strategy in a Fixed Index Annuity can compare to a mutual fund S&P 500.
You can see in the chart below that in the Fixed Index Annuity your balance never goes down because of down market years. Your account balance simply goes sideways. In the positive years in the FIA, you get percentage of the upside move. However, in the long term, because you never take any of the hits of a down market, you have the potential to earn a competitive return compared to the underlying index itself. All without having the worry of market exposure and volatility.
Please contact us for more information.
Please contact us for more information.