Understanding Fixed Indexed Annuities With retirees living longer, more active lives today, ensuring you have sufficient income for a lengthy retirement is more important than ever. A fixed-indexed annuity (FIA) may assist you in developing a solid income plan for the years ahead. Fixed indexed annuities are an insurance option for long-term retirement planning that can generate a consistent income stream, or “retirement paycheck,” to supplement other income sources like Social Security, pensions, 401(k)/IRAs, and personal assets. Furthermore, you have the opportunity to increase your income over time while protecting any gains from losses due to market downturns. In 2022, Athene conducted a national survey to gauge Americans’ knowledge and attitudes toward retirement planning issues such as retirement savings plans, stock market outlook, and annuities. More than half of Americans (55%) are worried about outliving their retirement savings, and two out of three think guaranteed income is a key feature to look for when comparing financial products for retirement.
FIAs may be ideal if you want to:
- Create a “retirement paycheck” that is guaranteed.
- Pursue growth potential while protecting against market loss
- Minimize the impact of low-interest rates and inflation on savings
- Support a surviving spouse financially
- Provide for unforeseen retirement expenses
- Leave a legacy for your family.
How fixed indexed annuities work Interest in this is partly tied to the rise or fall of a stock market index like the S&P 500. No interest credits will be awarded for a given period if the net change in the index is negative, but you will never receive less than zero. To provide that necessary safety net, indexed interest credits are determined using a formula that may include:
• A cap (an upper limit on return)
• Participation rate (the proportion of an index’s return that is credited to the annuity)
• A fee based on a percentage, such as a spread
Important FIA information:
- Money invested in annuities grows tax-free. All annuities offer deferred taxes on earnings if you do not withdraw funds before 5912. This allows for tax-free growth and higher interest earnings. Furthermore, it defers taxes until retirement, when they are usually lower than during your working years.
- You can stop worrying about losing all of your interest because of market fluctuations. Indexed annuities are a relatively safe investment because they are designed to protect your savings from losses. They are not linked to market fluctuations and are typically structured so that you do not lose money when the market falls. Instead, they earn a percentage of the profit when the index to which they are linked rises.
- Optional riders may provide guaranteed income, a death benefit, or liquidity.
- Guaranteed minimum return. Even if the underlying index loses money, the issuing company of your indexed annuity may guarantee a minimum return. For example, it could pay 2% even if the underlying index has a negative return.
- Provide a greater potential return than CDs. With the opportunity to participate in the market’s upside, indexed annuities offer potentially higher returns than certificates of deposit (CDs) and have the added benefit of deferring taxes on earned interest, which CDs do not.
- Option for a lifetime income. One of the most common concerns among retirees is outliving their income and savings. A lifetime income rider may be included in an indexed annuity contract to guarantee a 5- to 10-percent-per-year return over the next 10 to 15 years.
- The two most popular income riders are a guaranteed minimum income benefit (GMIB) and a guaranteed lifetime withdrawal benefit (GLWB). GLWBs guarantee a percentage of your initial investment as a payment for the rest of your life, even if the account is depleted early, and can continue to grow even after withdrawals. GMIBs also guarantee a minimum annual income, but they cease to grow once the account is annuitized.
Is a fixed-indexed annuity the right investment for me? FIAs are designed to meet a wide range of needs and can be a valuable addition to your retirement plan, allowing you to feel more confident about your financial future and better prepared for life’s uncertainties. A customized approach is required for retirement security planning. Consult a financial advisor to determine if an FIA suits your risk tolerance, retirement goals, and desired retirement lifestyle.
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