Planning for retirement can be a minefield, especially when so many different financial professionals are giving different advice. And it may be that each one is giving valid advice, but you still want to know who is giving the best advice. And where we come in is not as advice, but as information so that you can make the best choice knowing all of your options and how each option works.
Ed writes in: “Hi, I’ve been following the blog for a while and I’ve recently been meeting with a financial advisor. She’s been talking to me about something called a fixed index annuity. She tells me there’s guarantees and the product cannot lose value, but it will still grow because it’s tied to the performance of the market. Curious to know your opinion. Thanks for the help.”
Thanks for writing in, Ed. She’s not wrong. A fixed-index annuity generally won’t lose value and some even guarantee a minimum return (maybe 0-3%) even when the market goes down. They’re relatively conservative vehicles for retirement. That being said, their performance is tied to the stock market, as their name suggests, a market index.
In return for guaranteeing a minimum return on your money, the insurance company will generally cap the returns of the annuity so the annual growth will not go above a certain amount (maybe 3-4%).
The insurance company does not mind giving you guarantees in this because when the market goes up (which is does more often than it goes down, historically), the insurance company keeps the growth on your money beyond the cap. Over a medium to long time horizon, the insurance company wins by a landslide.
That being said, they’re not the worst products and generally they don’t carry any fees (the implicit “fee” is the insurance company keeping your excess gains). If you are overly conservative by nature, have a mild heart attack when any of your investments take a small dip, or have a short time horizon from the time that you purchase the annuity, this may be a great option for you.
Make sure to explore other options also, though, such as fixed and variable annuities and see if these are more suited to you. Review prospectuses carefully and with a professional.
We hope this helped explain this option a little better and thank you for taking the time to write, Ed.
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This article does not constitute legal, financial, or tax advice. For help regarding your situation, please consult your local tax advisor.