If you have a fixed annuity, you get a fixed rate of return. If you add one simple word, “indexed“, you create a fixed indexed annuity. In other words, you’re tied to the market index rate in anticipation of greater returns. Both have a place in the market. Understanding their differences help determine which is best for your retirement savings strategy.
In exchange for a lump sum or a series of payments now, the insurance company provides a guaranteed set income amount at a future date. Money in the policy grows tax-deferred at a fixed rate during both the accumulation phase and the annuitization phases. It’s a safe investment strategy with a guaranteed payout.
FIXED INDEXED ANNUITY
This type of annuity’s returns are usually based on the performance of an underlying index like the S&P 500. Purchasing a fixed indexed annuity allows the opportunity to diversify. The payoff for the option to diversify means it comes with a higher risk level.
A KEY DIFFERENCE
A key difference between these annuities lies in how insurance providers calculate interest. A fixed annuity offers a guaranteed interest rate for a specific amount of time. If you find the rate of return is too low or the surrender period expires, you can exchange your annuity for another without tax consequences. A fixed indexed annuity offers a guaranteed interest rate and additional returns if the stock market performs well. However, the trade-off is typically a larger surrender charge, and the formula for calculating returns can often be highly complex.1
It’s important to note that annuities aren’t liquid assets. If you choose to withdraw your funds before the term of the annuity is up, you may have to pay a surrender fee. If you’re under 59½ years old, you could also be subject to a 10% penalty. Therefore, if you think you may need cash soon, tying up all your assets in either kind of annuity may not be the best decision.
If you’re looking to invest now in exchange for a guaranteed return later, it may be time to consider adding an annuity to your portfolio.