Key Features to Consider When Choosing a Fixed Index Annuity

Fixed index annuities can help ensure there is guaranteed income, even after you no longer work. Get tips on some of the important questions to ask and what to consider when choosing whether or not an annuity is right for you.

Graphic of someone looking at a question mark

Mykyta Dolmatov / iStock / Getty Images Plus

When most of us think about retiring, we think about assets. How much have I saved? How much money do I need before I can retire, and how do I make sure I can do the things I want once I retire? 

Throughout our careers, most retirement strategies focus on retirement savings. Saving for retirement and growing assets is central to a sound retirement strategy – but it is only part of the equation. The next step is transitioning assets into a reliable income stream. Mapping out a successful retirement income strategy typically involves these two questions: What do you need your money to do? What do you want your money to do?

A fixed index annuity (FIA) is a long-term retirement tool, uniquely designed to provide a protected path to guaranteed income. In fact, other than Social Security and pensions, it is one of the only retirement products that can provide guaranteed lifetime income. 

In general, all fixed index annuities offer the same benefits of principal protection from market loss, tax-deferral, and guaranteed income, however not all fixed index annuities do the same thing. Here are a few examples of what to consider as you identify what you want your money to do, and how a fixed index annuity can help you do it.

I want to grow my nest egg before retiring, can I use an annuity to shore up my income for the long-haul?

It’s no secret that Americans are under-saving for retirement. PwC’s Retirement America report shows that a quarter of Americans have nothing saved for retirement. A fixed index annuity can offer a conservative path to growth opportunities, allowing for asset accumulation without risking principal.1^PwC Market Research Center: Retirement in America, time to rethink and retool, https://www.pwc.com/us/en/industries/asset-wealth-management/library/retirement-in-america.html 2021

For a growth-minded accumulation strategy, you may want to consider a fixed index annuity that focuses more on growth opportunities, with diverse allocation options to different crediting strategies and indices. An accumulation-centric annuity allows you options for how hard you want your money to work for your retirement, versus a more income-focused fixed index annuity that focuses more on generating lifelong income. 

Fixed index annuities can offer a wide variety of options to balance out portfolios. You are able to manage risk and reward in the long-term without the possibility of losing the growth in your annuity due to market loss.2^Fixed Indexed Annuity Leadership Council: Benefits of Fixed Index Annuities, https://fiainsights.org/benefits-of-a-fia/ 2021

I want my money to be there when I need it, for as long as I need. Will it outlast me?

A fixed index annuity is an insurance product. In exchange for premium, you receive a combination of benefits, including principal protection and guaranteed income. As an insurance product, your money is never directly invested in the market or any stock. It serves as a safeguard that prevents the annuity from losing its value when the market fluctuates. Because a fixed index annuity is designed to ensure retirement income, funds contributed to a fixed index annuity can never be lost due to market volatility.3^American Equity: Fixed Index Annuities, https://www.american-equity.com/annuities/fixed-index-annuities 2022 

There are two phases to an annuity, an accumulation phase and an income phase. Throughout the accumulation phase, your principal is protected and your annuity value can increase based on the performance of an external market index to help grow your future income.4^American Equity: Annuities, https://www.american-equity.com/annuities 2022  Many fixed index annuities have liquidity features built-in, for ongoing access to money when needed. For example, American Equity fixed index annuities offer an annual 10% penalty-free withdrawal from either the paid premium or contract value.5^The annual free withdrawal amount available differs by insurance company and annuity product. Withdrawals made before age 59 1/2 may be subject to a 10% federal tax penalty. of the annuity’s value each year without a penalty, during the accumulation phase.   A fixed index annuity with a lifetime income benefit rider can offer added flexibility to lifetime income options, including joint payout, increased payouts and the ability to start and stop payments. Different riders offer different benefits and may be available at no fee or an annual fee.6^American Equity: Managing Retirement Expenses: What to Know About Lifetime Income Riders,https://www.american-equity.com/resources/blog/managing-retirement-expenses-what-to-know-about-lifetime-income-riders. May, 2021


One of the most important questions to ask is, will my decision to go with a fixed index annuity outlast me? When you purchase a fixed index annuity, you pay for guaranteed principal protection and the opportunity to grow retirement assets through fixed and index-linked interest crediting strategies. The contract specifies how those guarantees are calculated and eventually paid out as a lump sum, a series of payments or lifetime income. This ensures that your money is protected from market volatility, and will be there when you decide to draw income.
7^American Equity: Benefits of Fixed Index Annuities,https://www.american-equity.com/resources/blog/top-fixed-index-annuity-benefits. October, 2020As part of a comprehensive retirement strategy, a fixed index annuity can offer the confidence and dignity of a guaranteed income in your golden years.

Will my money keep pace with my cost of living?

The goal of having a fixed index annuity as part of your retirement planning strategy is to protect your hard-earned money and secure an income source for when that regular paycheck you are used to, stops.

American Equity’s IncomeShield Series offers a variety of rider options that are available with different income generation and distribution features that vary by product. These options include different interest crediting methods, accumulation periods and potential fees.8^American Equity, How the American Equity IncomeShield works, https://www.american-equity.com/incomeshield-annuity/how-it-works. 2022  It’s important to look at rider options available when thinking about an income-focused FIA. Talk with a financial professional about what options are best for your financial goals.

Another benefit of some fixed index annuities is adding a Wellbeing Benefit Rider. A rider like the Wellbeing Benefit Rider allows for increased income payments to help supplement finances if unexpected health care costs arise. Riders help make fixed index annuities more flexible, and if your cost of living does increase, to help ensure your annuity grows with you.

What will happen to my money when I’m gone?

When deciding to go with a fixed index annuity as part of your retirement plan you might have questions about what happens when you pass on. Do I lose my money? Does it go back to the insurer? Or will my family benefit from it?

The short answer is, it depends on your contract. It’s important to understand what your contract stipulates about how it treats events like death. Fixed index annuities can be set up in a way to benefit your spouse or other beneficiaries you designate. Joint lifetime income payouts enable you to transfer your guaranteed income to a beneficiary no matter how long you both live.9^ Indexed Annuity Leadership County, 10 Myths About Annuities You Shouldn’t Believe,https://fiainsights.org/10-myths-about-annuities-you-shouldnt-believe/ 2022

Some annuities, like American Equity’s Estate Shield 10 fixed index annuity, also offer enhanced death benefit options. Beneficiaries named in your contract will have the option to receive a lump sum payment or multiple payments over time. With a fixed index annuity, you have options to help ensure your legacy is protected and your loved ones can count on these funds after you are gone, while helping to avoid the time and expense of probate.

How do taxes affect my retirement income?

Taxes are a part of life - from simple daily purchases like paying for groceries to buying a car or a house. The same goes for your portfolio and retirement plan. However, paying less taxes means more assets for your nest egg in retirement.

A benefit of a fixed index annuity is tax-deferral. You don’t pay taxes on the interest and any potential growth during the course of the contract until you withdraw money from the account. Adding a fixed index annuity can provide a variety of benefits when it comes to your taxes. While your traditional 401(k) comes with annual contribution limits set by the Internal Revenue Service, a fixed index annuity purchased outside of a qualified retirement plan does not. There are no government-imposed limits - your interest growth is tax deferred and you don’t owe any taxes until the withdrawal.

One of the most common advantages you might hear about is “annuitizing payments”. Annuitizing means converting your annuity investment into a series of periodic income payments. It combines your principal and interest earned, potentially resulting in part of your income stream not being taxed during your retirement.10^ Indexed Annuity Leadership Council, https://fiainsights.org/tax-benefits-of-using-a-fixed-indexed-annuity-in-your-retirement-plan/ 2022

There are many tools available to determine the impacts taxes might have on your retirement nest-egg. Retirement calculators are a great way help with retirement planning.  While there are many aspects to consider when it comes to finding the right fit for your retirement plan, fixed index annuities can help provide key advantages to help secure a retirement income source that cannot be outlived.

 

 

 

Sources

Annuity contract and Rider issued under form series ICC17 BASE-IDX-B, ICC21 BASE-IDX-MSP, ICC17 IDX-11-10, CC20 MSP-10, ICC17 IDX-11-7, ICC19 E-PTPC, ICC19 E-PTPR, 21 MSP-10, ICC20 E-MPTP-C, ICC20 E-PTP-C, ICC20 E-PTP-PR, ICC19 E-MPTP, ICC16 R-MVA, ICC19 R-NCR, ICC19 R-TIR, ICC20 R-EBR, ICC20 R-LIBR-FCP, ICC20 R-LIBR-FSP, ICC20 R-LIBR-W-FSP, ICC20 R-LIBR-W-FCP, ICC21 R-LIBR-W-BAV and state variations thereof.  Availability may vary by state.  For complete details please see product specific sales brochure(s) and disclosure(s).
This is not a comprehensive overview of all the relevant features of fixed index annuities.  Please read the sales brochure and disclosure for complete details and limitations.
Lifetime Income available through [Optional] Lifetime Income Benefit Rider. The Income Account Value is only used to calculate Lifetime Income. It is not part of the underlying Contract Value, or available in a lump sum.
Rider fee is calculated based on the income account value and deducted from the contract value on each contract anniversary as long as the rider is attached to the contract.
The wellbeing benefit can only be activated one time after a two year waiting period.  Contract owner must be unable to perform two of six ADLs and requires annual certification by a qualified physician.  See disclosure and sales brochure for additional details.