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Why Fixed Annuities Are Appealing in Volatile Times

The last ten years have been dominated by what investment pros call risk on/risk off, which is just another way of saying volatility.


Figure 1 - S&P 500 12/31/10 to 7/9/12

The markets have been up and down like a roller coaster. And in this kind of environment, fixed annuities, and especially fixed-indexed annuities are particularly appealing.

An annuity is a contract with an insurance company. In exchange for making a payment to the insurance company now (either as a lump sum or in installments), you are guaranteed a stream of income at some point in the future.

Fixed annuities - are often used by people who are about to retire and need help stabilizing income from their investments. These annuities are appealing for several reasons. First, your capital is safeguarded by the insurance company because federal law stipulates that insurance companies must hold a reserve that equals the value of each annuitant’s policy. Second, by offering a guaranteed rate of return, the insurance company assumes all market risk, insulating you as the annuitant. Additionally, your money grows tax deferred and you have several income payout options to choose from.

Fixed-Indexed Annuities – are often used by people who are looking to accumulate money over a period of time. These annuities offer all the benefits of the fixed annuity plus the potential of equity market-linked growth.  Fixed-indexed annuities credit interest using a formula based on changes in the equity index to which the annuity is linked. The formula decides how interest is calculated and credited. The interest rate applied will not be less than a minimum guaranteed interest rate. This means the annuity’s rate of return has market linked upside potential but will not lose money even when the equity market declines.

Fixed annuities can complement your other retirement-income sources, offering a guaranteed stream of income for life or a specified period of time.

Whether you want to convert a portion of your retirement savings to an annuity depends on the type of retirement savings you have. Social Security and pensions already provide assured income for life, so if those are your primary retirement-savings vehicles, you may not need an annuity.

On the other hand, Individual Retirement Accounts and 401(k) plans may fluctuate in value with the market, so if the bulk of your retirement savings is in those vehicles, you should consider an annuity.

Fixed and fixed-indexed annuities aren’t suitable for everyone and insurance companies offer many types of annuities so you should consult with us before purchasing an annuity.

The CORE Financial Group associates are annuity experts and can help you select the most appropriate annuity for accomplishing your financial goals.

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