Why An Equity-Indexed Annuity? Because It Is Unlikely That You'll Lose Your Money

An equity-indexed annuity sounds like the perfect retirement planning product in our unsure financial climate. It is also called a fixed index annuity and in short EIAs.

The Financial Industry Regulatory Authority, or FINRA for short, is the largest independent regulator for all securities firms doing business in the United States. According to their Website “EIAs are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity. EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.”

It's a very eloquent way of saying that it is unlikely that you'll lose your money and it is likely that you'll receive a surprisingly good indexed interest on your annuity. Insurers use offsetting hedges to limit the upside as well as the downside for you.

You're not investing directly in equity or stock. Earnings are calculated on a link to the potential gains of the market without risking the potential losses of the market.

During my accumulation years, and at my retirement, this product was not around or at least still unknown. But I think I would have been interested. My main criticism is that it is a very complex financial instrument and it varies from one insurance company to another. This makes it difficult, really impossible, to compare historical performance. In general, past performance do look impressive.

But I have not yet encountered one person among former colleagues and friends that has actually invested in a fixed index annuity.

For a better understanding of the dynamics surrounding annuities in general, do read the other discussions around annuities on this Website.

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