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Investment Services, Annuities & Income

Retirement with a Fixed Index Annuity

It can take years to build up a solid retirement, and putting all your funds into one asset class can prove to be detrimental. Markets can swing greatly so having all your money in one basket doesn’t offer the kind of protection most people need. While some financial products can help with significant growth, others can add security and counteract any market decline. To get a good combination of both, consider a fixed index annuity.

Protect Your Principal while Having Growth Potential

Fixed index annuities can offer a competitive interest rate by using a method referred to as index linked interest crediting. The value of the contract is protected because it doesn’t lose value even when the market declines. A fixed index annuity offers retirement income when you need it and it can be set up to guarantee payments for life.

How Do Fixed Index Annuities Work?

Fixed index annuities are provided by insurance companies that offer contracts for them. The insurance company sets up a purchase price, which can be paid for in one lump sum or by making payments over a specified period of time. By paying for the contract, you can get:

  • Security that your investment won’t go down in value
  • Potential for growth outside of the market
  • Tax-deferment of post-tax assets
  • Access to the money
  • The option to choose a specified timeframe or lifetime to receive payments
  • Beneficiaries listed on the account

Markets resemble a roller coaster ride over years with highs and lows, and can even be volatile from one day to the next. When you have a fixed index annuity, regardless of what the market is doing, your money remains the same if the market is down, but in every other circumstance it has the power to gain.

Magnified Compounding

Fixed index annuities are tax-deferred, meaning there’s no taxes on any of the interest until you pull the money out. So every dime the policy earns goes right back into the policy, allowing that extra money from interest to increase the overall value. The longer you wait to start pulling from the account, the more tax-deferral works in your favor.

You Choose How Interest is Earned

When you first purchase your policy you get to decide how you want to earn interest to help the value increase. The payment(s) for the policy can be either fixed-rate interest crediting or index-linked interest crediting. Fixed-rate interest crediting is secure in that your policy will earn interest at a guaranteed rate for a specific time frame, such as annually. As long as you keep the contract during that time, you are guaranteed to get a pre-determined rate of interest.

There are a few types of index-linked interest credit options. The amount of interest earned is linked to the market over a set amount of time. When the index goes up, the value of the contract can increase. When the index falls, you don’t lose any value.

Scenario 1 - You choose Annual Point-to-Point

A specific timeframe is set, such as annually. The price of the index from the start of the time frame is compared to the ending of the time frame. If the price has increased, an index return is added to the contract, up to a predetermined percentage (called a cap). If the price has decreased, the value remains the same, having locked in the interest that was earned during the year.

Scenario 2 - Declared Interest

As with scenario 1, a timeframe is set and the index price at the start of the time frame is compared to the end of the time frame. If the price has remained the same or increased, the value of the contract increases with a certain rate of interest. If the price has lowered, the value of the contract remains the same.

Scenario 3 - Monthly Sum

Monthly increases and decreases in the index price are added up for each year. If the sum of the both are positive, the contract will earn the sum of the interest up to the cap. If the sum is negative or there’s no change, the value of the contract remains the same.

Calculating Maximum Interest-Crediting Amounts

For crediting options that are index-linked, there are formulas used to figure the greatest amount of interest during a specified time frame that can be earned. Some contracts will use one formula while others may use a combination. It’s important to understand just how a contract works before making a decision on which one to choose.

Other Advantages of Fixed Index Annuities

You Have Access to Your Money

Life can certainly throw curveballs once in while and if you find you’re in a situation where you need money for an unexpected circumstance, most annuities will allow for a partial or full withdrawal. For new contract owners there may be a waiting period before being allowed to withdraw funds, and the timeframe is outlined in the contract. If you need access to the money prior to the end of the waiting period there may be a penalty. Fixed annuities typically allow for a 10% withdrawal per year with no fees charged.

You Choose How You Get the Money

Steady streams of income can include different options. You can choose for the income to last your lifetime, you can choose to cover you and one other person where the contract will continue until both parties are deceased, or you can predetermine how long you want the income to last. 

Death Benefits

If you were to die before receiving all the income payments, the contract will stipulate how much is payable upon your death. There is typically a guaranteed minimum the contract is worth and that money would go to your beneficiaries.

What to Consider Before Signing on the Dotted Line

Possible Benefits to a Fixed Income Annuity

  • Protection of the principal with the potential for growth
  • No exposure to the markets while still accessing some market based growth
  • Tax-deferred growth
  • You get to choose which interest crediting method you want to use
  • Different income options
  • The ability to leave money to your designated beneficiaries

Possible Downsides to a Fixed Income Annuity

  • Limited growth potential
  • Contracts are typically long term, tax-deferred, and only for retirement
  • No dividends can mean limited interest
  • Limited access to your money during the withdrawal charge period
  • No interest earnings if the index-linked option is picked and the return is flat or negative during certain time frames
  • Earnings on interest are taxed as regular income upon distribution
  • IRS penalties of 10% can apply if money is distributed prior to age 59½ or, in the case of non-qualified contracts, there can be an additional 3.8% on investment income
  • In the case of insolvency, there is a chance you could lose some or all of the money that was invested

 


To learn more about Fixed Income Annuities, contact one of our knowledgeable Financial Advisors who can help guide you through the process.

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The financial advisors of Orange County's Retirement & Investment Services are registered with and offer securities and advisory services through LPL Financial (LPL), a registered investment advisor and broker/dealer (member FINRA/ SIPC). Insurance products are offered through LPL or its licensed affiliates. Orange County's Credit Union and Orange County's Retirement & Investment Services are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Orange County's Retirement & Investment Services, and may also be employees of Orange County's Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Orange County's Credit Union or Orange County's Retirement & Investment Services. Securities and insurance offered through LPL or its affiliates are:

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