In times of market volatility, such as this, many are turning to fixed indexed annuities as a safer way to invest. But with so much confusion and misconceptions on how the product actually works some are skeptical about purchasing one.
Instead of comparing FIAs to investment security products, like mutual funds, these annuities should actually be touted as insurance products. They allow consumers to protect the principal of their investment while letting the annuity be credited with growth based on certain indexes like the S&P.
Here are three advantages of using fixed indexed annuities in your retirement planning, according to a recent article from InvestmentNews.
1. Bond replacement
The data collected on using FIAs as a bond replacement in retirement income planning looks very favorable. Research has shown that FIAs can outperform bonds, making them a better way to chase yields and provide return while protecting principal, especially in extremely low interest rate environments.
2. Steady income for life
One of the most unique aspects of an FIA is its ability to provide a steady income for life. Including lifetime income sources in a retirement income plan is very valuable. Having a secure flow of income in retirement allows investors to take more risk with the rest of their portfolio, which can result in investors ending up with more disposable income in retirement and even a higher legacy amount.
Dave Alison, executive vice president at C2P Enterprises, added that many FIAs also allow for withdrawal of up to 10%, penalty free, even in the early years of the contract. This liquidity is just another perk of FIA products.
3. Tax-deferred growth
Interest gains earned inside the account are not taxed until an investor withdraws money, providing tax-free growth. Additionally, when investors do withdraw and incur taxes, it is likely during retirement when they’re earning less and therefore are in a lower tax bracket.
Also, if an FIA is purchased outside of a retirement account and then annuitized, the income will be taxed pro rata. This is especially helpful in managing taxable income in retirement and is a tax-efficient means to grow wealth.
With an interest-rate floor, fixed indexed annuities will never earn less than the original investment. They also allow investors to grow their principal, up to a certain cap, without the uncertainty of market volatility. The security and growth opportunity combined provide investors a solid option for retirement income planning.
Written by Rachel Summit