Safe Money

What comes to mind when you think of "Safe Money"? What most retirees think of are the accounts that they have that they cannot lose, savings, CDs, cash on hand, and their checking account. These accounts are usually safe from market risk but do not typically provide much in earnings, so sometimes we neglect to keep enough of our money safe. 

Many retirees worry whether they'll have enough income generated from their savings to last through retirement. Day-to-day living expenses, medical expenses, and long-term care costs are on the rise and we need to find a balance between planning for those expenses as well as enjoying retirements luxuries such as travel, hobbies, and entertainment. If you have a gap between the guaranteed income (such as Social Security and any pensions) you'll receive in retirement and your monthly needs, you really have to plan for that by having a Safe Money foundation.

You can get the income you'll need if you build a Safe Money foundation by choosing conservative, income-generating vehicles with guarantees. There are many low-risk options that offer protection for your money, but only annuities can offer market protection and guaranteed income for life!

Unlike other low-risk instruments, annuities provide contractual guarantees like guaranteed income for life. For retirees and pre-retirees interested in money growth opportunities, many people choose a fixed index annuity. Fixed index annuities also tend to offer stronger growth potential with earned interest than bonds, CDs, or other low-risk options. You can let your money grow on a tax-deferred basis and enjoy a steady income stream in retirement with the fixed index annuity's contractual guarantees.

When deciding on whether an annuity is right for you, focus on the contractual guarantees offered by different annuity contracts.

Fixed Index Annuity: Safe Money Alternative

A Fixed Index Annuity is a fixed annuity with an interest rate which is linked to the performance of an index (the S&P500® or NASDAQ® for example). The annual credited interest rate can increase depending on the index. But it can never be less than zero should the index decline. 

A fixed index annuity has many features, including participation rates, interest rate caps, and potential administration fees. It offers many benefits:

  • Guaranteed income for the rest of your lifetime
  • Protects your money from market downturns
  • Guaranteed minimum rate of interest
  • Tax-deferred growth potential
  • The ability to participate in an index through an index-linked interest rate

There are also many methods used to calculate and credit interest such as the point-to-point, high-watermark, averaging, and annual reset indexing methods. Features and indexing methods directly affect a fixed index annuity's potential interest earnings.

How Do Fixed Index Annuities Work?

Like with other annuities, a fixed index annuity is a contract between you and an insurance carrier. Key components include:

  • You pay premiums to the insurance company
  • Issuer promises to make future, periodic payments to you 
  • Premiums can be pay as a lump-sum or installments over time
  • Has guaranteed minimum interest rate in negative index changes
  • Possibility of higher interest credits with equity index-linked performance
  • Interest is credited with formula based on index changes
  • Contract terms dictate how interest is calculated and when

The insurance carrier has cost to cover this protection against loss, so your contract isn't credited interest for all of the index growth. So you won’t lose principal in a falling market, but you won’t fully benefit from this growth. Keep in mind: If you're looking to build your retirement plan on a Safe Money Foundation, a fixed index annuity may be the right solution for preserving your money from market losses.

Who Buys a Fixed Index Annuity?

People purchase a fixed index annuity because of the market protection it offers, its guaranteed income benefits, and/or its growth potential. They aren’t satisfied with the limited growth from their CDs and annuity rates that are fixed, and don't have the time for the stock market.

If you have sufficient time to recover from potential losses, direct stock market investments may be more appealing than a fixed index annuity. However, if your time frame is too short to recover from possible losses due to financial market declines, or you simply don't like the idea of possibly losing principal, a fixed index annuit may be an option. It can be used as an alternative vehicle to bank instruments, fixed rate annuities, bonds, and mutual funds.

If you can be okay with waiting for complete access to money and still need this to be fixed, try a deferred annuity.

Are Fixed Index Annuities Like Variable Annuities? 

No! If a variable annuity account goes down, you could lose principal. Fixed index annuity principal is protected from negative index changes - you can't lose principal if the index declines. On other other hand, with a variable annuity the principal and interest credits aren't locked in.  

Once index-linked interest is credited in an index annuity, it can’t be lost, even if the index declines substantially. Variable annuities also include reinvested dividends. However, neither the index nor index annuities reflect the reallocated dividends.

What is the Growth Potential?

Generally speaking, fixed index annuities may offer future income value growth between 5% and 10% annually (or the value used to determine the income you'll receive at annuitization). Keep in mind they’re designed to offer growth potential somewhere between stock market vehicles and savings instruments, or somewhere between mutual funds and CDs. As far as accumulation value growth, fixed index annuities can be credited between 3% and 6%. Sometimes a fixed index annuity can be credited more than 6%, but it tends to be within the 3-6% range, on average.

Because interest is linked to movements of an index, there could be periods when the fixed index annuity credits double digit interest rates, and years when zero is credited. Index annuities were created with the intention of providing a more realistic potential for higher interest rates than other instruments that protect money from market risk.

Questions to Ask Your Advisor

Not all fixed index annuities, or all annuities for that matter, are equal in the value they deliver. They greatly differ in their features, which deliver varying levels of consumer benefit. Before making a purchase, ask your advisor:

  • Is this a single premium or flexible premium contract?
  • Is this a Fixed-Indexed Annuity?
  • What is the initial interest rate and how long is it guaranteed?
  • Does the initial rate include a bonus rate, and how much is the bonus?
  • What is the guaranteed minimum interest rate?
  • What renewal rate is the company crediting on annuity contracts of the same type that were issued last year?
  • Are there withdrawals, surrender charges or penalties if I want to end my contract early and take out all of my money? If so, how much are they?
  • Can I get a partial withdrawal without paying surrender charges for reasons such as death, confinement in a nursing home, or terminal illness?
  • Is there a market value adjustment (MVA) provision in my annuity?
  • What other charges, if any, may be deducted from my premium or contract value?
  • If I pick a shorter or longer payout period or surrender the annuity, will the accumulated value or the way interest is credited change?
  • Is there a death benefit? How is it set? Can it change?
  • What income payment options can I choose? Once I choose one payment option, can it be changed?

The diversification of your money is one of the most important concepts to understand within your financial plan. 

If you feel a fixed index annuity may be right for your situation, working with an independent financial professional can help. You can find different options out of the hundeds of annuity contracts on the market, and pinpoint an appropriate choice for your needs, goals, lifestyle, and situation.