When buying annuities, several things must be considered including what type of annuity would be best for you. There are two main types of annuities: variable annuities and fixed annuities. A fixed annuity would give you a stable income when retirement rolls around in exchange for an upfront payment of principal. Fixed annuities are kind of like CDs (Certificates of Deposit) in this manner. Variable annuities, on the other hand, are more like mutual funds in that the principal you put up will be invested in sub accounts whose rate of interest will depend on the market like a normal stock investment would.
The downsides to huge potential gains are downswings in the market and enormous annuity fees. Looking at these general annuities pros and cons, it’s a little hard to decide which would be the best for your retirement supplementary savings. However, there may be a way to have the best of both worlds.
How Do Equity Indexed Annuities Work?
Equity indexed annuities are sort of like a combination of guaranteed income (like a fixed annuity) and they also have the potential to earn interest as they’re linked to a stock market index. Annuity rates in this scenario would apply only in the sense that principal can have gains and losses like a regular investment but still be paid to the annuitant at the end of the accumulation period without loss to the original principal.
Equity indexed annuities gains lie in stock investments and depend on the upswing of the market but doesn’t take losses when the market falls. This is a guaranteed outcome and is the most attractive feature of this kind of annuity. Retirees and those close to retirement are often seduced into buying annuities of this sort so that they can have somewhere safe to put their retirement money into.
Equity Indexed Annuity Disadvantages
However, one must be wary of the drawbacks of annuities like this. Learning how annuities work in general would further reveal the advantages and disadvantages of fixed equity indexed annuities. Annuities also exist in two other types, deferred and immediate. This also applies to equity indexed annuities. Deferred annuities are for those intending to receive payment later in life. These kinds of annuities take a long time to mature. For those close to retirement, however, immediate annuities may be their smartest move. Since retirees often have other retirement funds to draw from, the biggest concern might that they won’t have enough money from the other funds for whatever plans they might have. In this case, an immediate annuity would provide them with a lump sum payment through a shorter annuity term. Having these annuities explained, deciding the best equity indexed annuities should be much easier.
The only drawback that should really concern those interested in equity indexed annuities is that while they may be guaranteed in terms of getting payouts and possible interest, they have to be willing to sacrifice a portion of their upswing market potential. In equity indexed annuities, one can never fully get the 100% interest earnings from the linked stock index. While you don’t get any backlash from a falling rate, part of those market gains will go to the insurance company. This might be a downside to the entire thing but it’ll make more money than a normal fixed annuity and will be less of a headache than a variable one.