Forecasting the future of the financial landscape is no easy feat, but many experts agree that interest rates are set to increase. While fixed index annuities may be part of your financial plans already, a hike in interest rates can make these products even more attractive. Understanding more about how interest rates affect these annuities can better prepare you to make sound choices when it comes to building your retirement portfolio.

Fixed index annuities can become more attractive as interest rates rise by increasing caps, spreads and participation rates. However, they also work well in a low interest rate environment since their interest is paid based on stock performance without stock market risk. Since rates have been historically low, the projected hike in rates will allow annuities to continue offeringmuch higher rates than banks. However, fixed index annuities are not exposed to the risk of directly investing in the stock market. Again, the benefits of a fixed index annuity must match the objectives and goals of each investor. Understanding how each product works and if a product can achieve your goals makes it easier to manage expectations and plan successfully.

Since some fixed annuity values are calculated when the initial premium is deposited, a rate hike does not impact an existing already issued fixed-rate annuity.  If you are in the market for an annuity, it’s not a good strategy to sit and wait for the interest hikes.  While we all want to get the “best rates”, there are far too many stories of investors trying to time their purchases, only to remain sitting on the sidelines with their money in low-interest bearing savings, checkingor money market accounts. One approach is to get some of your funds into an annuity now and ladder them over time.

Fixed indexed annuities credit interest based on the changes to a specific market index. When the index value increases, the account is credited, but the interest rate is guaranteed never to be less than zero, even if the market goes down. The investment principal which is called premium, as well as all previously credited interest earnings, can never be lost and are always protected from any downturn in the market. However, all fixed indexed annuity interest crediting formulas also employ some cap or limiting factor. In exchange for the protections offered in the annuity, not all index market gains are applied to the fixed index annuities cash value.  This is a trade-off for this type of financial protection.

Some annuity contracts allow the addition of an income rider. The rider, usually offered for a fee, is designed to generate a higher level of guaranteed lifetime income at a future date. While these can be useful, the increased benefits take time and require patience on the investors end. Again, each product must be evaluated against the goals and objectives of the investor.

Annuities, like all financial products, can be an important part of retirement planning.  Understanding how they work in the current financial climate is one important step in evaluating if they are a proper vehicle for some of your retirement funds. Depending upon your retirement strategy and income goals, annuities can give you a high degree of security and peace of mind.They have proven to be beneficial for millions of individual retirees.

Categories: Investment