Before making any financial commitments, you should weigh the potential downsides and upsides of fixed index annuities. First, learn about the interest rate, the surrender term, the interest penalty, and the return cap. Then, if you decide to put your money into fixed index annuities, it's important to select a policy that works for you.
Investing in a fixed index annuity can be smart because it offers inflation protection and a greater after-tax return than a traditional brokerage account. In addition, the taxation of investment profits can be postponed until the time of withdrawal, which is another perk of a fixed index annuity. But there is a catch: if you cash out before the term is up, the corporation will charge you a surrender fee of up to 10% of your initial investment.
Yet another drawback of fixed index annuities is that they restrict your ability to gain value. Thus, your returns will be lower than they would be in a good year for the stock market, but you will have peace of mind knowing that your money is safe from the risk of depletion. In addition, the high fees and surrender charges associated with these investments can quickly erode any profits you make.
It's common for the early withdrawal fee to increase in the first few years of a retirement plan. However, the fine diminishes over time, and eventually, you can get out of it without paying anything. The surrender fee may reach 5% in some circumstances. An annuity with an investment period of eight years, for instance, would have an early withdrawal charge of 8% the first year but just 7% the second year. However, beginning in year two of the annuity, the penalty will decrease by one percentage point per year.
There is typically a surrender term associated with fixed index annuities. This time frame could be as long as ten years or as short as six months. At this point, the option holder faces a choice: keep the money in escrow for a predetermined period or pay the penalty. In most cases, the index used to determine the surrender period will also determine the amount of the charge.
Despite their name, fixed index annuities do not invest in the underlying index. So, dividends are not factored in. The value of the contract will increase by the amount of index interest earned if any. If, on the other hand, the index has a negative return, then the contract value will not increase due to index interest. An overly aggressive withdrawal strategy can lead to a loss of the initial investment.
Companies have different surrender periods. If you cancel your contract with a certain company, there may be additional fees. Some will have a higher surrender charge, while others won't have any.
There are a few potential issues with fixed index annuities. To begin, they frequently demand yearly administrative fees. The annuity provider will use this fee to cover the price of estimating your future payouts. In addition, riders, for which some annuities levy fees but which add valuable extras, are not standard. You may be required to pay an annual charge to use these optional features.
The fact that the rate of return is predetermined is another drawback of fixed index annuities. The return on an annuity investment of five percent of your retirement assets would be three percent. Your annuity's value would fall by 10% if the index dropped by 10%. The rate of return on some fixed index annuities is limited. This is a crucial factor before putting money into one of these annuities.
Understanding your choices might help ease your mind about the costs and potential losses associated with fixed index annuities. In this case, consulting a financial adviser is your best bet. Thrivent financial consultants can help you select the most suitable assistance for your situation.