The indexed annuity often gets a bad rap. In brief terms, it is a type of annuity that offers principal protection as well as an interest rate tied to a market index, such as the S&P 500 index, the Nasdaq composite index, the Dow Jones industrial average, and many others. They may even guarantee a certain level of income if you option for certain riders. Because index annuities offer protection during down markets — you won’t lose money — they can serve as a safe way to turn retirement savings into reliable retirement income. With that said, a lot of negative things have been said about indexed annuities. Ken Fisher, a well-known investment analyst and founder of Fisher Investments, said this about annuities: “I would die and go to hell before I would sell an annuity.” He says this, in part, because he manages money in the stock market — something he charges a fee for. This is pretty standard. Even I manage money and charge a fee for the service. But, when it comes to annuities and their bad rap, here’s my take: Bad advisors sell bad annuities. Indexed annuities aren’t for everyone, and you shouldn’t tie up all your money in annuities, but it can make sense for some of your money. Most indexed annuities don’t even charge a fee. Instead, you earn a percentage based on how the index is performing (whether it’s the S&P 500, the Nasdaq, or any others the insurance company may be invested in). The good news is you won’t lose anything if the index drops to zero or into the negative. This makes indexed annuities appealing to retirees. There’s no fear of losing money. If you’re invested in the stock market and you go through a couple years of negative returns, or if there’s a recession, you can lose a significant portion of your investments. During the 2008–09 financial crisis, the U.S. market plunged almost 50%. A lot of people couldn’t retire when they planned. If A Deeply Misunderstood Investment That May Be Worth Your Time Figure 1
we enter a recession in the next year or so, as many economists are predicting, your
money would be protected in an indexed annuity.
On the flip side, if the market goes up, you might see 60–70% of that return. One client of mine saw a 10.4% return so far this year (see Figure 1.) The
bottom line is indexed annuities are good products for retirees who want principal protection and decent gains. No, you will probably not outperform the market, but without suffering losses, you may be ahead of the game. If anything, they offer reliability, and you won’t lose money in a down market. Some indexed annuities do have fees, but you almost always get something extra for that fee. It might be a boost in returns. But you can still find decent indexed annuities with zero fees that put 100% of your money to work for you with no losses.
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