Annuities retirement Uncategorized

“What is a Fixed-Index Annuity?”

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.

Annuities retirement

When Should I Use a Fixed Annuity?

Before talking about when it is appropriate to use a certain financial tool, we should discuss what it is and how it works. Anthony writes in, “When should I use a fixed annuity for retirement?”

Thanks for writing, Anthony. See, a fixed annuity is a tool that one might consider for retirement when they want guaranteed payments growing or paying out at a certain rate. The term ‘fixed’ here means the account grows at a fixed interest rate and is therefore not subject to investment risk or fluctuations with the market.

As you might have guessed, this type of account is primarily useful for a person who is especially conservative (risk-averse) and cannot bear to see their hard-earned money fluctuate in their account.


So When Should You Use a Fixed Annuity?

For some people, the answer to this question may be “never.” It really depends on your time horizon for the investments in a given account and your tolerance to bear risk.

While annuities are a particularly useful tool for retirement planning, your investment objectives and financial goals will determine what tools you use.

Something to consider, however, is that utilizing any kind of fixed account will have its benefits and its drawbacks. For instance, it is not uncommon for fixed accounts to grow at a guaranteed rate of 2-3% a year. Considering this is guaranteed, many people may like the idea of a risk-free account that grows at many times what a savings account at a bank may grow at.

However, it is important to consider the opportunity costs with a fixed annuity. First, there is the fact that the fixed annuity may struggle to even keep up with inflation.With inflation averaging greater than 3% a year, a fixed account may not be the greatest option for accumulating wealth for a younger person with a long time horizon and the ability to withstand short-term market losses.

The second important factor to consider is that a diversified variable annuity account may average 6-7% annually. This kind of allocation would allow a person to absorb the 3% inflation rate and realize a real 3-4% increase in their money annually. And if the person is retired, it allows them to draw the 3-4% of their account value annually without drawing down the value, theoretically allowing the account to last in perpetuity.

It is important to consider what your objectives are and to discuss your goals with a professional before making any kind of long-term decisions like retirement planning.

But what do you think? What kind of tools have you utilized for retirement and how has it fared for you?


The information in this article does not constitute legal, financial, or tax advice. For help determining what tools to use in retirement, please contact a local retirement professional.