What is an indexed annuity, in plain English?
A fixed indexed annuity is a contract with an insurance company. Your interest is linked to a market index like the S&P 500, but your money is never invested in the market itself. When the index goes up, you earn interest up to a limit. When it goes down, you earn zero for that period instead of losing money.
Can I lose money in a fixed indexed annuity?
Your principal is not exposed to market losses. In a year the index falls, your credited interest is 0%, so you don't go backward. The main way to lose value is withdrawing more than the contract allows during the surrender period, so liquidity is the risk to plan around, not the market.
What is the catch with indexed annuities?
You trade some upside and some access for protection. A cap or participation rate limits how much you earn in strong market years, and surrender charges apply if you take out more than the free-withdrawal amount in the early years. For money you want protected, many people see that as a fair trade.
Do annuities have high fees?
Some do and some don't. Many fixed indexed annuities have no annual management fee on the base contract; costs usually show up as optional income or benefit riders. Variable annuities are where higher layered fees are most common. Always ask for every fee in writing before you sign.
Can I get my money out of an annuity if I need it?
Most indexed annuities let you withdraw a portion, often around 10% a year, without a penalty. Taking more than that during the surrender period triggers a charge. That's why an annuity should hold long-term money, not your emergency fund.
What is a surrender period?
It's the number of years, often 5 to 10, during which withdrawals above the free amount carry a declining charge. After it ends, your money is fully accessible. Shorter surrender periods usually come with slightly lower caps, so it's a choice, not a trap.
Is the 4% rule still safe for retirement income?
The 4% rule assumes you sell investments every year no matter what the market does. A bad market early in retirement can do lasting damage, which is called sequence-of-returns risk. Many retirees cover their essential bills with guaranteed income, such as Social Security, a pension, or an income annuity, so they don't have to sell during a downturn.
Read more: What if the market drops 30% the year you retire?
What's the difference between a fixed annuity and an indexed annuity?
A fixed annuity pays a set interest rate for a set period, much like a CD. An indexed annuity credits interest based on a market index, with a 0% floor and a cap. Fixed gives certainty; indexed gives more growth potential with the same protection from market losses.
Is an annuity better than a pension?
They're surprisingly similar. Both can turn savings into a paycheck you can't outlive. If you don't have a pension, an income annuity is one of the few ways to create one for yourself.
How are annuities taxed?
Growth inside a non-qualified annuity is tax-deferred, so you don't pay tax on gains until you withdraw them. Annuities funded with IRA or 401(k) money follow the same rules as those accounts. Talk with a tax professional about your situation.
How do I know if an insurance company is safe?
Check the company's financial strength ratings from agencies like AM Best, S&P, and Moody's, how long it has been in business, and its claims-paying history. Annuity guarantees depend on the insurer's strength, not the FDIC.
When should I NOT buy an annuity?
Skip an annuity if you'll need the money in the next few years, if you don't have an emergency fund yet, or if you want full market returns and can handle big swings. An annuity should be one piece of a plan, not all of it.
Who is Gregory Stevenson?
Gregory Stevenson is a licensed insurance and annuity professional (CA License #4132743) with Pacific Ridgeway Insurance Solutions and the author of the book Indexed Annuity Secrets. He helps people near retirement protect their savings and build income they can't outlive.
How do I get the free Indexed Annuity Secrets book?
You can request a free copy of Indexed Annuity Secrets on this website. It explains, in plain English, how to take part in market gains without the downside risk.
Have a question that isn't here?
Get a free copy of Indexed Annuity Secrets, or ask Gregory directly. No pressure, just clear answers.
Get the Free Book Book a CallThis page is educational and is not individualized financial, tax, or legal advice. Annuity features, caps, fees and surrender schedules vary by product, carrier and state, and guarantees are backed by the claims-paying ability of the issuing insurance company. A licensed professional can review contract specifics with you before you decide.