Is An Indexed Annuity Right For You?
If you are shopping for annuities to add to your retirement income plan, you have probably run into quite a few options. When it comes down to the decision between a standard annuity and an indexed annuity, it helps to understand the difference between the two and the level of risk and return for each option.
What Is The Difference?
An indexed annuity is very similar to a standard annuity; both are offered by insurance companies and provide a monthly income as a return on investment. The return on both is based on interest earned as laid out in the annuity contract. The main difference, in fact the only difference between the two, lies in how the interest rate that provides your return on investment is calculated. In a standard annuity, the interest rate is set out in the contract from the start. With an indexed annuity, however, the method of calculating the interest is a little different.
An indexed annuity is a standard annuity that is connected to a particular index, and it is from this index that the interest is derived. A formula is used to determine how much your return will be—based on how the index performs—as well as a cap that is placed on the return in the contract. This type of annuity usually also has a fee attached to the return, which lowers the return even further.
Why Choose An Indexed Annuity?
Indexed annuities are a good fit for those with a relatively low tolerance for risk but who are still planning for their upcoming retirement and willing to take on a little more risk in order to garner a larger income. Indexed annuities have a low risk because there is a minimum return that is guaranteed in the contract. Still, risk is involved, because the return on the investment can fluctuate quite a bit, whereas a standard fixed annuity is more stable.
Choosing an indexed annuity increases the potential for returns while increasing your risk very little. Many investors, especially those looking to boost their retirement income a little, are willing to take on the small risk of an indexed annuity in the hopes of seeing a good return.
Of course, the choice of annuities is a personal one and based on your financial position and your retirement needs. Your insurance agent can help you to determine if indexed annuities are right for you and show you how they can fit into your portfolio to help you reach your retirement goals.