Echelon Family Office

Guaranteed returns, you ask? Yes, but it’s complicated – one simple word can make a big difference.

If you have a fixed annuity, you get a fixed rate of return. If you add one simple word “indexed” creating a fixed indexed annuity, you’re tied to the market index rate in anticipation of greater returns. Both have a place in the market, and understanding their differences will help determine which one is best for your retirement savings strategy.

1. FIXED ANNUITY: In exchange for a lump sum or a series of payments now, the insurance company provides a guaranteed set income amount at a future date. The money in the policy grows tax-deferred at a fixed rate during both the accumulation phase and the annuitization phases. It’s a safe investment strategy with a guaranteedpayout.
2. FIXED INDEXED ANNUITY: This type of annuity’s returns are usually based on the performance of an underlying index like the S&P 500. Purchasing a fixed indexed annuity allows the investors the opportunity to diversify their portfolio. The payoff for the option to diversify means it comes with a higher risk level.

A KEY DIFFERENCE: A key difference between these annuities lies in how insurance providers calculate interest. A fixed annuity offers a guaranteed interest rate for a specific amount of time. If you find the rate of return is too low or the surrender period expires, you can exchange your annuity for another without any tax consequences. A fixed indexed annuity offers a guaranteed interest rate and additional returns if the stock market performs well. However, the trade-off is typically a larger surrender charge, and the formula for calculating returns can often be highly complex.¹

IMPORTANT NOTE: It’s important to note that annuities aren’t liquid assets. If you choose to withdraw your funds before the term of the annuity is up, you may have to pay a surrender fee. If you’re under 59½ years old, you could also be subject to a 10% penalty. Therefore, if you think you may need cash soon, tying up all your assets in either kind of annuity may not be the best decision.

If you’re looking to invest now in exchange for a guaranteed return later, it sounds like it’s time to consider adding an annuity to your portfolio. Annuities are complicated, so you’ll need some professional guidance. Contact us today to discuss your options.

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This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results.  Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.

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[1] https://smartasset.com/financial-advisor/fixed-annuity-vs-fixed-indexed-annuity