Fixed Index Annuities & Their Growing Popularity

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With its market introduction in 1995, the fixed index annuity is a retirement vehicle with a 20-year record. Despite the Booming 90s, economic volatility swept the bond and stock markets in 1994. These trends gave rise to consumer demand for a new retirement product – one which offered some growth potential, but which extended principal protection in times of economic hardship.

As a result of the shift in consumer psychology, insurance carriers unveiled the fixed index annuity. And since that time, this retirement product has grown in popularity. According to data from the research firm Advantage Compendium Ltd., Americans have purchased roughly $400 billion since 1995. It's a statistic which continues to grow.

Factors behind Fixed Index Annuity Consumer Growth

What are the variables behind this growing attraction to fixed index annuities? There are a number of factors:

Traditional retirement vehicles like pensions disappearing – Towers Watson notes a heavy shift in the traditional retirement vehicle landscape, particularly pensions. The business consultancy firm reports in the last 15 years, the percentage of largest American companies offering defined-benefit pensions to new employees has declined from 60% to 24%. Fixed index annuities are being accepted as a new option as a retirement income solution.

Volatility in American employment – American employment continues to be volatile. Job turnover is higher, and as a result, many employers seek new retirement options to offer their employees. Fixed index annuities are increasingly becoming a preferred option for employees in their retirement portfolios.

Consumer psychology – Since fixed index annuities arrived on the scene, Americans have been through the longest and strongest bull market in United States history. They've also been subjected to the hardships of the two worst bear markets since the Great Depression. With these trends and the lingering recovery from the Great Recession, retirement products which offer guaranteed income and principal security are likely to be more attractive to consumers.

Consumer demographics – Baby boomers have made up a large segment of the consumers purchasing fixed index annuities. But in recent years, consumers from younger generations have been flocking to fixed index annuities, as well. Having come into the stifled job market during the economic downturn, many millennials realize the importance of income security now and for the long-term. As these consumers age and advance in their careers, they're likely to become a powerful segment of fixed index annuity buyers.

Potential trendoverhaul of military retirement – In recent months, lawmakers in Congress have been looking at ways to replace the current, 20-year retirement system with a new one. It's estimated around 83 percent of military members leaving the service do so without any retirement benefits. Lawmakers have looking at the merits of a “blended” compensation plan, with a 401(k)-like investment plan.

One proposal currently calls for federal contributions and matching alongside what service members would put in – the “traditional” monthly annuity would be retained for service members who stay in for 20 years or more. With this shift from the old system of growing a pension over 20 years, consumer interest in fixed index annuities might further strengthen.

What Do Fixed Index Annuities Offer?
Fixed index annuities offer some measure of growth potential, but in times of economic hardship, your principal is protected from market volatility. These annuities are tied to exterior indexes such as the Standard & Poor's 500 index. No shares of stock or an index are involved. Usually return-on-money consists of a percentage of how the specific index performed in an investment year.

During times of economic hardship, these annuity products come with minimum guaranteed rates for growth (often 1-2%). Fixed index annuities also have a pre-set maximum rate at which your contract is credited a percentage of the index's yearly change (or whatever time period you chose for calculations of crediting interest. This could be monthly, for example).

If you are wondering whether a fixed index annuity may be right for your portfolio, can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Super User

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