Do Fixed Indexed or Variable Annuities Fit into Your Financial Investment Strategy?

As you build your financial investment strategy and work toward goals like retirement, you want to keep your focus on investment products that grow with you and work for you. Annuities can be an excellent way to diversify your portfolio and create income when you need it.

mature couple riding bikes stress free with annuities financial investment strategy in place - Stableford

Annuity Essentials

An annuity is a contract between you and an insurance company. You make a financial investment or series of investments/payments up front, then receive guaranteed lifetime disbursements. You choose when and how you want to receive your income; disbursements can begin immediately (immediate annuity), or they can be scheduled into the future (deferred annuity). This steady guaranteed lifetime stream of income makes annuities an attractive financial investment for retirement.

Similar to other retirement accounts, such as an IRA and 401(k), annuities are tax deferred. Any contributions and growth within the annuity contract is tax-free until you withdraw, then the withdrawal is taxed as ordinary income. Contributions to annuities are not a tax deduction and do not lower taxable income, however.

You can withdraw without penalty as long as you are at least 59 and a half years old. Early withdrawal is an option for many annuities, but you’ll pay a fee.

Fixed Indexed Annuities Provide Financial Investment Stability

Fixed indexed annuities are structured around an investment portfolio that tracks a major financial index, like the S&P 500.

S&P 500 stock market graph for annuities financial investment strategy - StablefordThis financial investment strategy benefits both parties – the insurer and the client. Minimal management from investment staff that yields competitive returns is a draw for the insurer. For clients, the returns are more attractive than most in-house portfolio offerings, while also diversifying investments in large, stable companies.

Indexed annuity contracts boast a guaranteed minimum return of zero…meaning they will not lose any money each year. The return is based on the balance of your account and the performance of the market index, which also adds to the stability factor. The return depends on either a participation level or cap, which you select at the start of each year. The participation rate is a rate of less than 100% of the return of the index. The cap rate is the maximum return the account will return.

For example, if the index returns 32% and you have a 50% percent participation. Without a cap, you’d make 16%. With a 10% cap, you’d only make 10%. If the index return is 7% with those same stipulations above, if you chose to use participation rate your return would be 3.5%. If you chose to use the cap rate then you would receive the full 7%.

Variable Annuities Lend to Flexibility

Variable annuities are more like a traditional investment.

mutual funds stock market ticker for financial investment strategy blog - StablefordYour money goes into an investment account or portfolio of mutual funds. You select the funds from a menu, making up your personal sub-account. You can then change your portfolio within the annuity. This flexibility is not available in fixed index annuities, since those include caps and participation rates.

Variable annuity payments are tied to the markets and performance of financial investments in your sub-account, which means the potential for higher gains but the potential for losses as well. You do receive the whole return for the funds where you invested – there is no participation level or cap.

Guarantees on the return of a variable annuity can sometimes be bought as a separate rider to your contract, usually between a fraction of a percent and 1.5% each year. This rider only guarantees a specified return on the value that determines your income in the future, and is only valid for living benefits. Death benefits typically require an additional rider.

Annuity Financial Investment Strategy

Investing is often described in the context of risk and reward. Fixed indexed annuities protect from downturns, but limit your return (or reward). Variable annuities will provide the same investment risk and reward as a tax-deferred retirement account. Both come with the added benefit of taking payouts for life, so you don’t have to worry about outliving your investments. But they each have downsides, too.

The costs and fees associated with variable annuities are typically higher than comparable investment products. Annuities have three layers of charges and fees.

  1. The financial investment’s own cost structure.
  2. A set of management fees.
  3. Underwriter fees. Similar to an insurance policy, annuities are underwritten to determine your life expectancy and subsequent payment schedule.

All of these costs are deducted from your investment and can then affect your returns, especially if you want to withdraw early.

So which is best for your financial investment strategy? Potentially both.

Fixed indexed annuities are usually more conservative and stable, providing modest returns that should be higher than a CD. Variable annuities help you diversify your financial investments as you strive for greater gains. Each can have a solid place in a well-rounded wealth investment plan.

To learn more about how we help you in your financial investment strategy, contact us online or call 480.493.2300.

Nathan Faldmo
Nathan Faldmo
Nathan is Stableford Capital’s Director of Advisory Services. Before joining Stableford, he was a Senior Associate with Bernstein Global Wealth Management and he served the U.S. House of Representatives as an intern for the Committee on Ways & Means. Nathan is a Certified Financial Planner.

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