What is an Indexed Annuity?
An indexed annuity, also known as a fixed indexed annuity, is a type of retirement investment that combines features of both fixed and variable annuities. This financial product is designed to provide a reliable income stream during retirement while also allowing for potential growth linked to a stock market index, such as the S&P 500.
How it Works
When you invest in an indexed annuity, you typically pay a lump sum or a series of premiums to the insurance company. The returns on your investment are tied to the performance of a specified market index. While the annuity does not directly invest in stocks, it credits your account with a percentage of the index's gains, often subject to a cap.
Benefits
- Principal Protection: The principal amount you invest is typically protected from market downturns, providing peace of mind.
- Potential for Higher Returns: Indexed annuities offer the chance for higher returns compared to traditional fixed annuities, depending on market performance.
- Tax-Deferred Growth: Earnings in indexed annuities grow on a tax-deferred basis until you begin withdrawals, allowing for compound growth over time.
Considerations
Indexed annuities often come with surrender charges and can be complex products. It’s essential to review the specific terms, including participation rates, caps, and fees, before making a decision.
In summary, indexed annuities provide a blend of security and growth potential, making them an appealing option for many retirement planning strategies.