Various financial products can provide regular income for retirees in retirement planning. Annuities are popular, but making the right choice isn’t always easy. Two commonly compared options are “fixed-indexed” and “variable.”
In 2016, the Department of Labor proposed a rule imposing a fiduciary standard on brokers to reduce conflicts of interest. It led to a significant drop of 52% in sales of high-expense products, making sales more sensitive to expenses and improving investor welfare.
Despite their economic benefits, many retirees who could benefit still need to purchase them. Continue reading to determine if a variable or a fixed index annuity aligns with your needs!
Fixed Indexed Annuities
Fixed indexed annuities provide a guaranteed minimum return, ensuring the safety of your principal (initial amount). A portion of your premium is invested in high-grade government bonds, while the rest links to a stock market-related index like the Standard & Poor’s 500.
You can take part in market gains without worrying about the possibility of a market decline. Typically, you need to stay in the annuity for a minimum period and then receive part of the index’s appreciation, known as the participation rate.
Fixed Indexed Annuities Benefits
A fixed index annuity provides greater returns than regular fixed annuities and protects from market declines. They provide tax-deferred returns and guarantee a minimum set interest rate. They are connected to an index, e.g., the S&P 500, allowing you to profit from index growth.
Can You Experience Financial Losses With a Fixed-Indexed Annuity?
Gains are based on a cap or participation rate, but minimum interest rates ensure your principal investment remains safe. With fixed-indexed models, you can enjoy more protection for your investment as they involve lower fees than variable options.
Variable Annuities
Like fixed-indexed annuities, variable models allow investment in sub-accounts akin to mutual funds. Returns fluctuate based on the performance of these accounts investing in stocks, bonds, and other assets.
Contract owners can direct funds to a general account for guaranteed returns or a separate account for higher potential returns. With a different account, there is no guarantee, but it offers flexibility and control.
Variable Annuities Benefits
Benefits depend on the account’s performance. A variable annuity responds to economic conditions, acts as an inflation hedge, and requires appropriate licensing.
Contributions convert to accumulation units whose value changes based on underlying investments. During payout, these units become annuity units with fluctuating values.
Variable annuities may provide higher returns than fixed annuities. They offer tax-deferred opportunities for growth and diversification through sub-accounts.
Can You Experience Financial Loss With a Variable Annuity?
Does it sound good? Hold up, stop, and consider this: variable annuities carry the risk of losing money! Unlike fixed, their returns are unguaranteed.
A variable annuity may experience fluctuating value based on how chosen sub-accounts perform. Poor performance may result in a decrease in value and potential loss of money. Additionally, fees associated with a variable annuity can reduce overall returns.
Ensuring a Secure Investment With Fixed Indexed Annuities
Guarantee lifetime income by choosing the right type based on your personal financial goals. A fixed index annuity protects against market declines and is the best choice for most.
In contrast, a variable annuity offers higher returns but with increased risk!
Ease the process by consulting a financial advisor and researching options. At Annuity Associates, we assist investors and retirees with managing fixed-index annuities.