The best thing about fixed index annuities is their protection from any downside risk. And when you get closer to your retirement, you need protection if the market is facing another bad year.
Annuities are a financial product that often take intense criticism from some advisers like David Alan Snavely however others highly recommend them. So, the big question arises, are they right for you?
Why Many Experts Believe Annuities a Win for Retirees
Annuities, for some people, may seem complex, but that is largely only because there are various product types and options. On the one side of the spectrum, there are high-fee, high-risk, high-potential-gain variable annuities, where your returns rise and fall depending on the stock market. However the other side is steady, CD-like fixed annuities generate a fixed rate of return for the investors. But the fixed index annuity can offer you the best aspects of each spectrum.
What Are Fixed Index Annuities?
An FIA (Fixed Index Annuities) is a contract between a client and an insurance firm where you give a fixed amount of money to the company for a pre-agreed time, and your return depends on how the performance of a chosen stock market index, or indexes will be in that time. With FIAs, your principal will always be guaranteed, which means that even if the chosen indexes that might go down at the end of the year, you will not lose any money.
Every client always asks a few common questions to David Snavely:
- What is the catch?
- How can you not lose money with an FIA if the market is down?
One simple answer is that the insurance company keeps your money for an extended time and they can reinvest it. Then some FIAs limit your total returns with caps and participation rates.
A cap is a ceiling, the highest percentage of interest you can gain, regardless of the index performance. You need to forgo any gains that exceed the pre-determined cap rates. The amount of interest you earn is a percentage that is predetermined by the insurance company of the total gains of the chosen index.
Your FIA’s index rates are fixed for the duration of one or two years. Those rates might increase or decrease during the duration of the contract, reflecting the current interest rate environment—this is known as the FIA’s “renewal rate.”
What Are the Benefits of Fixed Index Annuities?
The primary fixed index annuities advantage is their protection from any downside risk. As many people nearing retirement and no longer have any assets, they do not want 100% of their money to be down if the market takes a dip.
Another significant benefit is the annual lock, or reset feature, which gives access to clients to lock in their gains when the annuity’s index has had a positive return. This growth is then locked and resets to become the following year’s beginning balance. Understand it by this example assume you have $100,000 in FIA, and you get a 5% return. The next year, you would begin with $105,000. Your FIA value can only go up or sideways; it will never go backward.
You can also use FIAs to generate a continuous income stream in retirement. Except for a few, all FIAs allow clients to withdraw 10% of account value without any penalty after the first year. Moreover, some FIA products include an income rider to generate an income stream for life, which acts as a private pension.
As per David Snavely, another advantage is that fixed index annuities have no fees whatsoever assessed to the owner. It is an attractive option to reduce the “income gap” in retirement.
At the end of the day, there is no perfect investment scheme, there are always some roadblocks. If there were, I would be long out of business! If you want a reliable source of secure and continuous income after retirement, FIAs might be the most ideal financial product for you.
Of course, do not just take our word for it. Having a face-to-face conversation with a financial adviser such as David Alan Snavely is the best way to determine if FIAs are the right investment for you.