Both fixed annuities and indexed annuities can offer stable retirement income, but there are some key differences to consider.
Fixed annuities are lower risk and simpler to understand. Safe & easy.
Indexed annuities offer higher potential returns and more flexibility. Riskier, but powerful.
Interest Rate
Fixed annuities provide a guaranteed interest rate over a specific period of time. This rate is set by the insurance company and remains constant for the duration of the guarantee period, generating predictable and stable returns.
Indexed annuities tie their interest rate to the performance of a market index, such as the S&P 500. The returns can vary based on market performance, but there’s also usually a minimum guaranteed interest rate that they won’t dip below. There may also be a maximum interest rate cap.
Potential Returns
Fixed annuities usually offer lower, but more consistent returns when compared to indexed annuities. They’re ideal for individuals who value consistency and prioritize stability over growth potential.
Indexed annuities have the potential for higher returns than fixed annuities, especially in strong market conditions. However, these returns are often capped or limited by participation rates and other factors.
Risk and Principal Protection
Fixed annuities offer a high level of principal protection and are generally considered low-risk investments.
Indexed annuities also provide principal protection, ensuring that your initial investment is safe even if the market index performs poorly. However, they carry slightly more risk than fixed annuities due to their market-linked component.
Complexity
Fixed annuities are generally straightforward and easier to understand.
Indexed annuities are more complex, with various terms, conditions, and methods for calculating returns. They often involve participation rates, caps, and spreads that can be difficult for the average investor to fully comprehend.
Suitability
Fixed annuities are generally suitable for those who prioritize guaranteed returns and principal protection over growth potential.
Indexed annuities may be appropriate for investors who want some exposure to market gains while still maintaining principal protection. They can be a middle ground between the safety of fixed annuities and the higher risk/reward profile of variable annuities.
Which Annuity Should I Choose?
Choosing between a fixed annuity and an indexed annuity depends on your risk tolerance, desire for potential returns, and comfort with complex financial products.
Fixed annuities offer more predictable returns and simplicity, while indexed annuities provide the opportunity for higher returns linked to market performance, but with more complexity and possible limitations on gains.
Questions? That’s okay. Ask an experienced Benevize agent and make a plan for your future.