Many people are concerned about not getting a regular paycheck anymore once they retire. They are also concerned that a market downturn could wipe out a significant portion of their nest egg. Some insurance companies offer contracts called annuities, which allow a consumer to create a consistent stream of income in retirement. Some types of annuities offer fixed interest rate while others vary and may be tied to the market. One commonly misunderstood annuity is the Fixed Indexed Annuity (FIA). This product combines principal protection with the potential to earn interest tied to an external market index.
Here are the basics of how FIAs work:
Fixed indexed annuities provide the consumer with a minimum guaranteed interest rate, usually ranging from 0-2%. In addition, they have the potential to earn interest based on the performance of a market index, such as the S&P 500, without ever being invested in the market.
The interest is limited by caps, spreads and participation rates so you generally won’t receive all of the upside of the market. FIAs tend to appeal to those who want the opportunity for a guaranteed stream of income along with the potential for conservative growth
Some Pros of FIAs
- Guaranteed stream of income
- Principal protection
- Interest growth potential
Some Cons of FIAs
- Fees and expenses, including surrender penalties
- Lack of liquidity – you will pay surrender charges if you need to access a significant portion of your money early
If guaranteed, consistent income in retirement is one of your goals, an FIA may be right for you. If you want to protect a portion of your savings from market volatility, an FIA may meet your needs. If you are looking to generate significant gains on your investment, a fixed indexed annuity may not be the right choice for you. While they do offer the potential for modest interest growth, you shouldn’t expect an FIA to perform as a riskier investment would. They help protect retirees in down markets.
Get the answers you need and start planning today
Are you considering purchasing a fixed indexed annuity? Speak with a knowledgable professional today and find out if it makes sense for your financial situation and future goals. Absolute Retirement Solutions can help you create a personalized strategy for generating guaranteed income in retirement. Our goal is to help our clients live well and retire with confidence. Contact us today.