Fixed index annuities help balance growth and capital preservation in your portfolio. You receive a fixed interest payment from the annuity but also limit your upside and downside potential. You could consider investing in a fixed index annuity when you're close to retirement.
Your retirement may be decades away or a matter of months. But at some point you’ll have to cross the retirement red zone—that final seven to 10 years before you stop working.
This period can be a bit tricky for some investors. You may still need to grow your portfolio, which entails taking market risks, and at the same time preserve capital, which entails reducing your market risk. It’s a dilemma—taking and avoiding risk at the same time. And while some investors may think “growth” and “capital preservation” are contradictions, combining them is possible if you know where to look. Consider a fixed index annuity.
Enjoying the benefits of market gains while keeping your losses low might be difficult if not impossible with traditional assets such as stocks and bonds. But a fixed index annuity—essentially a type of insurance product—might help you pursue both, assuming you can accept limiting your upside in exchange for downside portfolio protection.
An annuity is a contract between an investor and an insurance company that’s designed to provide a steady income stream. You buy an annuity, either paying all at once or over time. After a predetermined waiting period (which can be long or short, depending on the annuity), you begin receiving regular income. There are many different types of annuities, so here’s some basic information on annuities to help get you up to speed.
A fixed index annuity is a different kind of beast—a hybrid of a couple types of annuities. Similar to a traditional “fixed deferred” annuity, it’s designed to provide regular interest payments. But instead of being fixed, the interest earned is tied to an index or indices—kind of like a variable annuity. Because it’s linked to an index, you may participate in some of the underlying indices’ positive returns, but—unlike most variable annuities—you’re also protected during negative years.
Most fixed index annuities have both a “performance cap” on positive returns (a ceiling on your upside) and a “floor” to protect you from negative returns.
Say you bought an indexed annuity with an upside cap of 5%. Here’s what you could expect:
Annuities have earned the reputation of being highly complex and unnecessarily complicated instruments. But not all annuities have convoluted terms and conditions.
Learn more about investing in income-generating annuities.
Indexed annuities can be straightforward and less complex.
“Locked-in rates” are indeed locked in upon purchase. The interest rate on a fixed index annuity may vary annually depending on the performance of the underlying indices. But once you purchase an annuity with a locked-in rate, say, at 5%, that’s what you should get.
Also, performance caps and floors should deliver at face value. If your performance cap is set to 4%, then you may receive an annual payment of 4% as long as the market returns 4% or more. If the market returns a negative figure, you take no loss. No other variables should get in the way of this basic agreement between customer and provider. Please note, however, that all guarantees are based on the claims-paying ability of the insurer.
As you approach retirement, you may be looking to reduce your equities exposure to reduce your risk of loss. At the same time, you may also want to continue seeking growth to increase the value of your investments and future cash flow.
Rebalancing your stock and bond allocations might help you pursue this sweet spot in your portfolio. But remember that a fixed index annuity is designed to pursue this balance of security and relative growth. It may be worth considering as a potential addition to your portfolio.
Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment objectives of the underlying investment options. This and other important information is provided in the product and underlying fund prospectuses. To obtain copies of the prospectuses, contact an annuity specialist at 800-347-7496 or email firstname.lastname@example.org. Please read them carefully before investing.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.
Investment Products: Not FDIC Insured * No Bank Guarantee * May Lose Value
Insurance products/services are offered through The Insurance Agency of TD Ameritrade, LLC. Brokerage services provided by TD Ameritrade, Inc., and TD Ameritrade Clearing, Inc. The Insurance Agency of TD Ameritrade, LLC and TD Ameritrade, Inc. are both wholly owned subsidiaries of TD Ameritrade Holding Corporation.
The annuity products offered are issued by separate and unaffiliated third-party insurance carriers. TD Ameritrade and these companies are not responsible for each other’s policies or services.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.