If I were to ask you what the perfect retirement investment is, I’m sure you would say something along the lines that it should provide a great interest return, be liquid, have minimum taxes due on the gain and protect you from losing principal. Up to about 10 years ago, no such thing existed because, as you know, there is no gain without risk. As a matter of fact, the greater the potential gain, the greater the risk. Thats true of virtually all investments.
Introducing Indexed Annuities or "How To Have Your Cake and Eat It"
Indexed annuities were created about 10 years ago by some forward-looking, creative insurance companies in an attempt to provide the consumer with a product that is extremely suitable for retirement. Before I go into the details of the features of an indexed annuity, I would first like to describe the features of all annuities.
As you probably already know, an annuity is a contract with an insurance company that enables you to receive a steady, fixed payment for a specified number of years depending on the amount of money invested. In a way, annuities are similar to CDs except for the fact that your money is invested with an insurance company versus a bank and since insurance companies are highly regulated, your money is actually safer invested with a quality insurance company.
Essentially there are 4 types of annuities as follows:
1. Immediate annuities
2. Fixed Annuities (deferred)
3. Variable Annuities
4. Indexed Annuities
Here is a brief description of each of the above annuities.
Immediate annuities start paying you a monthly income the very next month after you invest your money. The period of time that you choose to receive payments can be as little as 5 years or a lifetime.
Fixed Annuities are also referred to as deferred annuities since the money accumulates in the account for a certain number of years after which you can choose to "annuities" your account which means that you now start to receive a fixed monthly payment depending on the amount of money that has accumulated. The problem with these annuities in the past has been that the returns have not been that high but, nevertheless, higher than CDs. Of course, the great benefit of ALL annuities is that money continues to grow inside the account on a tax-deferred basis which makes all annuities superior to CDs as a retirement investment.
Variable Annuities - unlike fixed annuities, variable annuities can pay very high returns since the performance is tied to underlying stock and mutual funds and therefore, if the market goes up, so will your account. The big problem here is that you can also lose a substantial amount of principal.
Indexed Annuities to The Rescue
In order to resolve the problems associated with the above traditional annuities, insurance companies created the "indexed annuity" which combines the best features of all annuities into 1 product. Through the use of very sophisticated investment techniques, insurance companies were actually able to create a product that enables you to get a nice return and participate in the stock market without risking principal! Exactly How an Indexed Annuity Works.