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Fixed Index Annuites Have 4 Big Benefits


It’s nice to see positive articles about annuities like Carter Gray’s “Why You Should Purchase an Equity Indexed Annuity.”  The Fox Business article gives Mr. Gray’s reasons for being a fan of fixed equity indexed annuities.  They have been increasing in popularity because of their benefits like potential market gains with protection against principal losses.  He says that the first thing you should do when considering an equity indexed annuity is consider four things related to your current retirement plan.

Figure out what fees you are currently paying, including management fees, as well as fund, administration, transaction, and other expense fees.  Then determine both the average rate of return and the actual rate of return that you have had since opening your account.  Looking at retirement income, see what your Social Security benefits will equal and calculate what percentage of your nest egg you plan to spend yearly.  Finally, decide what portion of your savings you are willing to lose in your investments.  Along with that, see if your current retirement plans give you any kind of guarantees on your money or future income stream.

After putting those answers in writing, compare your goals to the benefits of equity indexed annuities.  You don’t pay management fees out of pocket, your average and actual rates of return are equal, you will not have a surrender charge if you take 10% or less out each year, and you receive market upside potential without the risk associated with down markets.  The four benefits that Mr. Gray highlights are the protection of your principal, an annual reset that will allow you to protect the gains you’ve made in previous years, little to no fees for management, and guaranteed lifetime income.

For the last benefit, you do need add the guaranteed lifetime income rider, but nearly all purchasers of indexed annuities do so anyways.  Longevity risk is fast becoming the largest fear of retirees as pensions go away, social security is questionable, and interest rates are far too low to live off.  Surrender charges do exist for annuities, but these products typically allow you to take out at least 10% per year.  The point is keeping the money in there to use it over the rest of your lifetime.  For emergencies and other easily accessible income, you shouldn’t tie up all of your money in an annuity anyways.  Spread your savings over multiple investments based on your risk tolerance.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter https://twitter.com/#!/financemama

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