If you are considering a fixed index annuity for your retirement goals, you may have heard of different ‘crediting methods’ tied to an indexed annuity and how your money can grow with them. But what is a fixed index annuity, and how does their growth exactly work?
Fixed indexed annuities are a tool for building up retirement savings on a tax-advantaged basis. They are becoming more popular for many retirement savers, as they let your money grow by earning interest, protect your principal against losses, and offer a guaranteed income stream in retirement.
If you are thinking about this retirement-saving option, one key aspect is understanding fixed index annuity crediting methods. These are the means by which your annuity money can earn interest.
A fixed indexed annuity usually has a fixed option that will pay a guaranteed rate for a certain timespan. However, indexed annuity crediting methods aren’t guaranteed, but they generally offer growth potential above the fixed option. You can also have more growth potential with a fixed index annuity than other types of fixed annuities.
In this article, we will go over the different types of crediting methods, their components, and how these crediting methods work. These annuity crediting methods are linked to underlying index benchmarks. Those benchmarks can be everyday financial indices that you know (the S&P 500 price index) or niche indices that focus on domestic, foreign, or different asset classes.
For some time, U.S. investors and retirees have been in the strange environment of extremely low interest rates coupled with high equity-market valuations. This has kept returns on annuities lower, but interest rates can change at any time.
Of course, all of this can change at any time. It’s good to consider your interest rate environment, inflation, and other economic issues when considering an annuity.
In volatile markets, retirees and those close to retirement worry about the sequence of returns risk. Sequence risk arises out of the timing of losses. Losses late in one’s investment life, particularly near retirement, are challenging to recoup because of the short time window available. A loss that might be serious at 35 can be catastrophic at 55.
When you are building your nest egg, you have time to recoup from losses. That time may be shorter or longer, depending on your age, but it’s there, and you can recover. On the other hand, when you are actually living off those same assets, a bad return or loss can have a severe impact on your lifestyle. Moreover, since you are likely in a far more conservative asset allocation strategy, your ability to recover from the loss is more limited.
Markets can take huge up or down swings at any time – or simply fluctuate in a small range. Those facing disastrous sequence losses when a market veers rapidly down wonder if there is a way to participate in market gains without facing the full fury of potential market losses.
In these conditions, retirees are looking for a place to obtain some growth but not face the risk of losses in the stock market. They want to be able to participate in some market gains, but not be fully exposed to the risks of actually being in the market. One place to achieve that goal is in the fixed index annuity, or FIA.
When using an annuity for retirement income security, there are many questions that need to be considered. Annuities can pay you a guaranteed income for life, but they aren’t for everyone. They need to have a defined purpose in your retirement plan that solves a specific problem.
The annuity owner can determine when the annuity begins to pay out, and how the payouts occur. The payouts can occur for a fixed period of time, or they can be set up to pay out for the remainder of the contract holder’s life.
Done? Not yet. The financial professional offering you the annuity might suggest a series of additional benefits, called “riders,” which can be attached to your annuity. A rider can offer add-on benefits to your base contract. It can make the decision-making process even more involved.
Here are some of the types of riders you might find on a fixed index annuity. We will also answer some of the questions that can arise when you explore these riders.
Thinking about a fixed indexed annuity for your retirement? When considering a fixed index annuity, or any annuity contract for that matter, it’s helpful to think through all the pros and cons of your options before making a decision.
Nothing is perfect for every financial situation or contingency. Fixed index annuities are no exception in that regard. Rather, a strategic mix of financial vehicles and strategies will help create a balanced, personal retirement plan that fits your needs and situation.
A fixed index annuity can give your plan a strong foundation with its contractual guarantees. Your money can grow more in an indexed annuity than it might in other fixed-type annuities with guaranteed rates. However, this kind of annuity has some areas where it’s not as strong as other annuities or financial vehicles are.
With markets in turmoil right now, many retirement savers are looking for ways to protect their money now so they can retire later. And not for just any retirement. They want a comfortable retirement that they can enjoy on their own terms and where they stay retired.
What can you do now to preserve the money you have accumulated and grown for so many years? The answer will be different for every person. It depends largely on their situation, risk tolerance, need for liquidity, and goals.
When Roger Ibbotson recently published a new report on fixed indexed annuities and their place in an optimized retirement portfolio, everyone took notice. Few economists and financial researchers garner the attention and level of respect that he does.
He is Professor Emeritus at Yale School of Management, former chairperson of research firm Ibbotson Associates, and chairman as well as chief investment officer at Zebra Capital Management. Ibbotson is also a prolific author, having conducted financial research on many topics including investment returns, mutual funds, international markets, portfolio management, and valuation.
In past studies, his analysis has been groundbreaking and his principles adopted by financial markets at large. So, it’s not surprising why his research on fixed index annuities has gained such wide attention.
In his latest study, Fixed Indexed Annuities: Consider the Alternative, Ibbotson expands his view of the use of a fixed index annuity (FIA). Here, he defines a fixed index annuity as a tax-deferred retirement savings vehicle that “eliminates downside risk while allowing for the opportunity to participate in upside market returns.”
As baseline benefits, he believes that fixed index annuities, if properly structured, can help control financial market risk and mitigate longevity risk. Read More
In previous blog posts, we’ve discussed topics such as the growing appeal of fixed index annuities. Changes in the American retirement landscape, such as the shrinking availability of defined-benefit pensions, is prompting many workers and retirees to investigate alternative retirement income vehicles. As a result, total fixed index annuity sales in 2014 shot up 104.3% from total sales figures in 2004, according to Beacon Research ($47 billion in 2014 versus $23 billion in 2004).
But what, then, about CDs? How do fixed index annuities stack up against them? To get a comparative overview of both financial solutions, let’s cover some history as well as key differences. Read More
Are you considering a purchase of a fixed index annuity? It’s important to evaluate your unique financial needs and determine if it’ll be a suitable fit. Many Americans have found fixed index annuities to be an effective vehicle for achieving retirement income security.
Consider the following data:
Since 1995, Americans have purchased almost $400 billion in fixed index annuities (From Advantage Compendium Ltd)
99.994% of indexed annuity owners have no complaints about their indexed annuity purchase (Advantage Compendium Ltd)
Only 0.006% of indexed annuity owners have registered complaints about their annuity product purchase (Advantage Compendium Ltd)
In a 2012 study, 83% of indexed annuity buyers and 86% of traditional fixed index annuity buyers reported satisfaction with their annuity purchase (LIMRA)
At the close of 2014, fixed index annuity sales were $47 billion, a 104.3% increase from sales in 2004 ($23 billion in sales that year) (Beacon Research)
Fixed index annuities were originally created as a financial alternative to CDs and their meager potential for retirement income. The catastrophic effects of the 2008-2009 financial crisis and the changing dynamics within the American workplace landscape also have had an impact. Now many Americans are exploring fixed index annuities as an alternative retirement vehicle. Read More
Many investors have opted for fixed index annuities as a source of retirement security. But what exactly is a fixed index annuity? And for that matter, how does it stack up against other financial options?
Comparatively, financial products such as CDs offer low return potential. They also don’t offer a guaranteed lifetime income option. And for seniors looking to bolster their retirement income, the ups-and-downs of the stock market puts retirement dollars at risk. After all, the market moves through cycles. Historical data shows it can take years for the market to recover. Read More
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