4 Essential Pros and Cons of Fixed Index Annuities

4 Essential Pros and Cons of Fixed Index Annuities

by / Comments Off / 79 View / Feb 15, 2015

Planning for retirement is something that you have to start early on. Growing your savings takes time and you need to choose the best investment vehicles to set you long-term for the future. Selecting the best accumulation vehicle for retirement is not quite as easy or straightforward as it might seem. There are so many options that you can choose from that the sheer volume can be overwhelming for most. A fixed index annuity is an investment vehicle for retirement that is growing in popularity. More and more people are taking advantage of this investment opportunity.

The Pros of Fixed Index Annuities

1. Guaranteed Principle
With most investment options it is important to somewhat limit your risk. Even though you are looking for a high return, you do not want to expose yourself to high risk. Fixed investments are ideal as you get closer to retirement because they offer a principal guarantee. This is a great investment option when you are looking to protect the assets that you have accumulated over most of your lifetime. This is not the time to be risky, but to be a bit more cautious with your investment options. A fixed index annuity is designed to be a secure investment that is principal guaranteed. This also gives investors access to a normal interest rate no matter how the market is moving. Limiting risk is what a fixed index annuity can provide.

2. Market Participation
Even conservative investors that do not want to be open to high amounts of risk can still participate on the market with a fixed index annuity. With this type of investment vehicle investors see a gain in principal as the market goes up. This means that as the index rises investors can add to their earnings. More than just the minimum guaranteed can be earned by investors if the market does surge ahead. This means that market participation can pay off.

The Cons of Fixed Index Annuities

1. Duration
The one downside to this investment that you should be aware of involve duration. It is important to note that almost all fixed index annuities are for at least a minimum of 5 years. This means that this duration minimum is a requirement and all of your assets have to remain on the market for this period of time. You can afford to choose a fixed index annuity if you are not sure that you can remain solvent for at least 5 years. This is especially true if harsh market periods do occur. If you are looking for more liquidity in your retirement options, you might not opt for a fixed index annuity.

2. Limited Gain
Since this investment vehicle is a bit more cautious, it does not give you access to high upside or huge gain. It is specifically designed to be a bit safer and the market participation is a limited to some extent. You are only open to limited risk, but the potential for gain is also limited as well. This is something that you have to take into consideration when deciding if a fixed index annuity is right for you.

What Do You Normally Look For in Investments?

Most people are looking for investments that are safe, but also allow for the ability to grow in principle by a significant amount. Fixed rate investments products do not offer the potential of higher interest rates on the market. It is now possible to have the best of both worlds with a fixed index annuity, because they are specifically designed to guarantee principle without risk of loss due to unpredictable market downturns.

What is a Fixed Index Annuity?

Annuities are an investment that allows for tax deferred growth on assets that are supplemental retirement accounts. This means that fixed index annuities are a bit of a hybrid model of traditional fixed or variable annuities. This means that people choosing to make this type of investment are guaranteed a minimal return, but have the potential to earn even more. This works by the guarantee made for the amount of years the market is down, but higher returns possible if the index is up at that time. You are not open to total risk, because there is a guarantee even when the market trends downward.

Is it Good or Bad?

Determining if a fixed index annuity is right for you is not always easy. There are a variety of factors that must be considered. This type of investment vehicle leaves you open to both advantages and disadvantages. You need to be informed on what to expect. This is only possible if you take a look at both the pros and cons associated with a fixed index annuity.