Individuals looking to invest to plan for the future quickly learn they have a number of different investment options. If you’re like most people, you might need a little help understanding exactly what your options are when developing an investment strategy. That’s where the CFP® professionals LTR Financial Services can help.
Fixed Index Annuities are a common place to invest for those with familiar with the stock market. Understanding the pros and cons of Fixed Index Annuities can help you decide if they’re the best option for you.
What is a Fixed Index Annuity?
A Fixed Index Annuity is usually recommended for sophisticated investors who have a complete understanding of the product since it is quite complicated. Fixed Index Annuities differ from Traditional Fixed Annuities in that they include a crediting option to calculate returns based upon an outside index or other public marketplace indicator. Fixed Income Annuities are not registered products and it is not a security. It is an insurance product, which tries to mirror the index it is tracking.
To simplify this very complicated product, a Fixed Indexed Annuity is a tax-deferred, long-term savings option that provides principal protection in a down market and opportunity for growth. It gives your investment more growth potential than a Fixed Annuity along with less risk and less potential return than a Variable Annuity.
What You Should Know
With a Fixed Index Annuity, the annual growth is bench-marked to a stock market index rather than an interest rate. A Fixed Index Annuity’s growth is subject to rate floors and caps, meaning it will not exceed or fall below the specified return levels even if the underlying stock indices fluctuate outside of those set parameters. You cannot lose any of your principal with a Fixed Index Annuity, and your potential gains are usually capped at a rate between 3% and 9%.
Fixed Index Annuities have many benefits, as well as a few downsides. Here’s how we see it:
- Guaranteed interest rate floor.
- Investment grows tax deferred.
- Potential to gain more interest vs a Traditional Fixed Annuity.
- Most allow 10% penalty free yearly withdrawals.
- Some types ARE NOT RMD REQUIRED. (Let the money grow tax deferred longer!)
- Supplements maxed out 401k/IRAs for extra tax deferred growth.
- Capped upside investment return.
- High surrender fees.
- Contract can be very confusing. (We can help.)
- Hard to compare competing products. (We can help.)
- Product is designed with lucrative sales incentives for the person selling it. (Potential for non-fiduciary activity.)
The CFP® professionals at LTR find Fixed Index Annuties are best for investors who want to protect their principal but aren’t overly concerned with non-guaranteed growth. The potential for a larger return with Fixed Index Annuities make them attractive to many investors when weighing their options.
Full Service Financial Planning
LTR Financial Services is a Full Service CFP® Firm that offers a broad scope of financial services. Our experience allows us to help in multiple areas of your financial plan so you can get the most complete advice available. We offer help with investment planning, estate planning, retirement planning, tax advisors, irs tax representation, general insurance, mutual funds, accountants so you can get a complete picture of your financial health.