Choosing the right accumulation vehicle for your retirement can be difficult and complicating. With so many choices out there, which product will be really right for you?
On one hand, you want the safety and guarantee of principal and credited interest. On the other hand, most people prefer the potential of higher interest by being linked to the market—the return potential that a fixed-rate product cannot offer.
In the past, the choices were either (1) receive the guarantee of principle and a minimum amount of interest, or (2) link to the market with the potential of higher returns, but also accept the downside risk to your principal. Now you can have the best of both worlds: guarantee of principal and the potential of market-linked growth with no risk of loss of principal due to market downturns. Enter the fixed index annuity concept, a concept designed to help you reach your retirement goals.
A fixed index annuity (also referred to as an equity indexed annuity) provides you with the best features of a traditional fixed annuity – a guarantee of principal. Unlike most securities or mutual funds where your account balance can fluctuate due to market performance, premium deposited into a fixed index annuity is guaranteed to never go down due to market downturns. A contract owner of a fixed index annuity participates in market-indexed interest without market-type loss.
All annuity values accumulate on a tax deferred basis until withdrawn. Therefore, your money can grow faster because you earn interest on dollars that would otherwise be paid as taxes. Your principal earns interest and the interest compounds allowing you to accumulate more money over a shorter period of time, thereby earning a greater return on your money.
Let’s give an example, 3 different people with 25%of an income tax rates put long-tem savings in 3 different accounts. The 1st one puts money in taxable account, 2nd person puts in tax-deferred account, and the last person puts in tax-free account. Let’s say that they invested $100,000 each, and put $5,000 with 8% of interest for 20 years.
The person who had least of the money would be of course, the account with tax, with the amount of $504,642, then the tax-deferred account with the amount of $571,179, and tax-free account is the highest with the amount of $694,906. At this moment, the total amount of tax-deferred account is $694,906 before withdrawal. The amount changed at the end because 25% of tax was required to pay. Since the account with tax-deferred have to pay 25%of tax, the value of this account gets shrink.
Fixed index annuity contracts generally allow for some form of penalty-free withdrawals, up to 10% of the full accumulation value, once each contract year after the first contract anniversary.
Fixed index annuities can provide you with a guaranteed income stream with the purchase of a fixed index annuity. You have the ability to choose from several different annuity payment options. With nonqualified plans, a portion of each annuity payment represents a return of premium that is not taxed, which reduces the income tax on your annuity payments.
While the index annuity concept offers many features of a traditional fixed annuity, it has a rather unique feature that allows a potential of stock market-linked interest credits without the potential of any market-type loss. In contrast to a securities-type product or mutual fund where the investor bears the market risk, the fixed index annuity concept insulates the contract owner from any risk of loss of principal due to market downturns. Look at the graph based on an actual credited rates for the period shown on the Index-5 product by American Equity company.
Earnings on a fixed index annuity are based on stock market-like performance from certain indices. But what is indexing? Indexing is simply an investment strategy that follows the performance of select securities, such as the Standard & Poor’s 500® Index. The S&P 500® is a collection of 500 select industry leaders and thus a benchmark for U.S. Stock Market performance. A fixed index annuity is linked to the performance of this type of market index, without the risk of directly participating in stock or equity investments. With indexing, you can participate in a diversified passive investment strategy: a link to the market and its potential gains without subjecting yourself to the potential downfalls of the market.
Fixed index annuities have the potential for market-linked interest without exposure to the market risk. Contract owners enjoy the guarantees and safety of principal even while being linked to market growth. However, they should not expect fixed index annuities to mirror the exact performance of any stock market indices.
Since a fixed index annuity uses a passive investment strategy, it will not mirror the exact return of the stock market index. The fixed index annuity is a powerful financial tool designed to meet your long-term retirement needs.
There are several payout options before or after FIA get expired. The most basic option is to withdraw your entire principal. You may receive same amount of payouts regularly for 10, 15, or 20 years, or else, you may choose to receive lifetime income, bonus, and index interest after you reach the age of withdrawal. You may expect for high earning in the inclination of index.