Today's Top Ten Fixed Annuity Rates (MYGA)
Fixed Index Annuities Performance Surprises Critics!
These conservative investments have become a popular alternative to bonds
Fixed index annuities can be a very useful retirement strategy. As the name implies, Fixed Index Annuities are fixed annuities linked to the performance of a stock market index (often the S&P 500, DOW Industrials or the NASDAQ). Because of this stock market indexing strategy, they can sometimes bring conservative investors very nice returns, often considerably better returns than CDs, bonds, or money market accounts. Throughout most of the last decade, many fixed index annuities have actually outperformed the indexes they were correlated with. However, they really aren’t designed to outperform the stock markets – even though they do at times; they are designed to outperform the fixed markets over the long term.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Premium protection and a chance to benefit from the positive financial and economic market make fixed index annuities quite attractive. The annuity contract usually **guarantees you a minimum rate of interest on your purchase payments. And while the annuity is growing, the insurance company involved will credit you with either the minimum return stated in the contract or a return based on the performance of the linked index.1
If you are skittish about stock market investing, you can potentially realize the benefits of stock market participation through this comparatively no-risk annuity. There is a small risk when the stock market loses money in that year. You will not have a gain; however, you will not lose any principal or accumulation. The nice thing is that percentage gains are based on the anniversary reset. So if the market was down 25%, your crediting would start at the new market low. Any percentage gains from that low point would be credited to your account up to a specified amount, usually half or more of the market gains for the new year with of loss to accumulation or principal. This works especially well with flat or declining markets over long periods of time.
Participation rates to note. Each Fixed Index Annuity has a particular participation rate. The participation rate signifies the percentage of the invested assets within the annuity keyed to the linked index.
Let’s say you have an Fixed Index Annuity linked to the S&P 500 and the participation rate is 60%. That means 60% of your annuity assets will raise with the index. If the S&P 500 gains 10% across a year, this means your annuity gives you a 6% return for the year (with typically no fees or administrative charges). It is not uncommon for an annuity to consistently offer a return typically 1-3% better than what is offered by banks via CD and money market accounts.
Some Fixed Index Annuities measure an index’s gain on an annual basis, others over the entire term of the annuity. Sometimes there are ceilings on just how high a return you can realize. From time to time, participation rates may be reset by the insurance company. Occasionally, a margin or spread determines the index-linked interest rate instead of a participation rate. In this case, if your annuity gains 10% and the spread is 2.5%, your credited gain is 7.5%.2
Tax-deferred growth, an income stream, and often a death benefit. Most Fixed Index Annuities give you all the features of a fixed annuity: your earnings are not taxed, and when the distribution phase of your annuity starts, you can receive periodic (usually monthly) income payments. (Sometimes you can take the entire value of your annuity as a lump sum at the end of the contract term. It is your withdrawals that are taxed.) There is often a **guaranteed minimum death benefit payable to your beneficiary when you pass away.
No annual contribution limit. If you need to put away more retirement savings NOW, the contribution limits on IRAs and 401(k)s can be frustrating. Would you rather have a retirement account you can only put $5,000 or $6,000 in annually, or an account to which you can contribute as much as you want? Fixed Index Annuities (and other types of annuities) have no contribution ceiling, and there are no IRS-imposed income limits above which you cannot contribute.3
Make no mistake, these are long term investments. Many of these annuity contracts are 8-12 years or longer. If you need to withdraw your money from the annuity in the accumulation phase, there is usually a considerable penalty. Fixed index annuities do require a long term outlook and a long term commitment.
Would you like to learn more? If you are planning to maintain or improve your quality of life in retirement, maybe you would like to see how fixed index annuities can potentially help you. If that’s the case, then ask a financial professional/educator about these hybrid annuities to learn more.
These are the views of AnnuityGuys.com, which does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent financial professional planner/educator.