The beauty of fixed index annuities is that they offer the opportunity for accumulation without the risk of losing money in the market.
Providing a reassuring balance of security and potential growth, they can make a great addition to your portfolio, if you're approaching retirement or already retired.
After a lifetime of accumulating wealth, the switch to starting to spend your savings in retirement can be quite an adjustment. You’ll also need to consider ways to ensure your income is sustainable throughout retirement.
As such, even as you begin to draw on your investments, you may still need to grow your portfolio. This usually comes with a degree of risk. Since this is a time when you may be keener than ever to preserve capital, this can create a difficult dilemma.
This is where fixed index annuities can help.
A fixed index annuity can help protect you against most losses
In simple terms, a fixed index annuity is an insurance contract that provides an income in retirement.
Payments you receive are based on the performance of a stock market index, such as the S&P 500. However, unlike owning stocks, a fixed index annuity can help protect you against most losses. The flipside being that your total returns may be limited.
Because they track the performance of indexes like the S&P 500, they are similar to investing in index funds. Yet buying a fixed index annuity means any losses are generally protected against the loss of principal – the money you put in.
Given that you’re gaining protection against losses, you won’t receive the exact return of the market index. Instead, the fixed index annuity limits both potential gains and losses, which is what helps to make them less risky.
Fixed index annuities allow for flexible planning
You can buy an annuity with a single lump sum payment, or over time with multiple payments.
When you’re ready, you can convert your annuity balance into a stream of future income.
Payments can last for a fixed period of time, say 20 years, or for the rest of your life. The amount you’ll receive will depend on several factors, including:
- Your account balance
- Your investment return
- How long you want the payments to last – the longer the period, the smaller the monthly payment.
While primarily used for income, it’s also possible to make a lump sum withdrawal or take all your money out in one go, though this isn’t generally advised.
It’s also worth noting that annuities usually have a surrender period of between five and seven years after you bought the contract. This means that if you take a lump sum out, you may be charged a fee.
As well as this, if you’re more than six months away from your 60th birthday, the IRS may charge an early withdrawal penalty of 10%.
With all this in mind, annuities should be viewed as a long-term investment.
Enjoy tax-deferred growth
As long as you keep funds in the annuity, most fixed index annuities also help shield your money from annual taxation on interest. Funds you hold in the annuity are usually taxed as ordinary income when you start making withdrawals.
Depending on your intention, this may allow you to grow a tax-deferred nest egg, as you accumulate compound interest and shore up more funds for when you’re ready to start taking an income.
Since a fixed index annuity offers the chance to earn interest on principal, and on interest earned (with taxes deferred), this could prove a useful and tax-efficient way to generate retirement assets.
Use your fixed index annuity to take care of loved ones
You can designate a beneficiary to receive a death benefit upon your death, which means funds will fall outside of your estate. One benefit of this is that the money could help loved ones avoid the expense and time of probate.
If you pass away during the accumulation or distribution phase, the annuity will make a direct payment to your named beneficiary.
Depending on the terms of your annuity, payments to your named beneficiary will be made as a lump sum, or a series of payments, or lifetime payments.
Fixed index annuities could form a valuable part of your retirement income strategy
Designed to meet a variety of needs, fixed index annuities could play a valuable role in your retirement income plan. Having one – or several – in your investment portfolio could help you feel more confident about your financial future.
This may be especially true as you approach retirement and wish to reduce your exposure to risk in the stock markets, while securing future cash flow.
Get in touch
If you’re interested in finding out more about how fixed index annuities could help you plan for additional income in retirement, please get in touch.
Email enquiries@alexanderpeterusa.com or give us a call on +1 212 324 1417.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
