We hear the same question about retirement planning from many of our clients in Walla Walla, Washington, Kennewick, and Richland, Washington. They want to know how they can enjoy good returns upon their retirement savings while minimizing risk. Safe savings products, like savings accounts and most CDs, offer low-interest rates these days. Very often, the returns won’t even keep up with inflation. Meanwhile, our clients understand that they might enjoy higher returns from securities, but they will also have to take big risks. One solution that we can offer our clients is called a fixed index annuity.

understanding fixed index annuity

There are two basic things to learn first about fixed index annuities:

    • Since they are fixed annuities, they come with a guarantee that locks in previous profits and principal, so annuity owners don’t risk losing money. The annuity company will offer this guarantee in the original contract, and it is backed up by the company’s financial strength and strong insurance regulations.
    • Companies use a market index to calculate returns, so they can perform very well when the market does well. Most commonly, annuities use the S&P 500, but some products use other indexes or even let the owner select an index.

    When the index increases, the index for the annuity will also rise as some percentage of total gains. To understand how much value the stock will gain, it’s also important to consider the participation and cap rates of each individual product:

    • Fixed annuities:  Fixed annuities will guarantee a return even if stocks, bonds, or other bank interest rates decline. The simplest fixed annuities offer a fixed return rate.
    • Variable annuities: Variable annuities don’t guarantee growth but might offer more potential growth. The value of investments, like stocks, bonds, money markets, or funds, within the account determines the account’s value.


    How do annuities compensate owners for not realizing maximum gains?

    When the index decreases, the guarantees kick in. Some products even offer a two or three percent fixed return as a guarantee for down years. Even though the annuity owner won’t make quite as much as he or she would by owning that stock, the owner also won’t lose anything if the stock declines. In fact, when the market decreases, annuity owners may still make money when people who put money in securities, real estate, and other investments lose money.

    Do you want a retirement planning tool that can still help your earn positive returns over time?  If so, speak with Dee Dee Hafen about fixed index annuity products in Kennewick, Richland, or Walla Walla, Washington.