Annuities offer an array of benefits to those nearing or planning for retirement. The biggest advantages is that annuities are an investment vehicle that serves as a complement to other retirement income sources such as Social Security and pension plans, that enable individuals to save a larger amount of cash and defer paying taxes.
And unlike other tax-deferred retirement accounts such 401(k) s and IRAs, annuities do not have an annual contribution limit. All invested money compounds year after year. When an individual wants to cash out of an annuity, he or she can withdraw a lump sum or withdraw in the form of payments for a specific period of time, providing a steady and reliable income stream.
Each type of annuity, deferred and immediate, fixed or variable, offers its own array of benefits. However, a fixed indexed annuity (FIA), which is essentially a contract between an individual and an insurer, offers distinctive benefits that include indexed interest potential, optional benefits and tax deferral.
Despite their unique, positive attributes, FIAs still remain a bit of a mystery to some. David. F. Babbel, professor of insurance and finance at The Wharton School at the University of Pennsylvania, presented the research from a team of Ph.D. economists and two senior actuaries, regarding facts about FIAs and why they’re a great component in individual retirement plans in report based on a two-year in depth study of fixed indexed annuities.
Here is what the study found:
1. Annuities of all types are wise investments and FIAs are no exception. In a separate study, Investing Your Lump Sum in Retirement, Babbel notes that “the list of positive attributes of annuities, i.e. guaranteed payments you cannot outlive, access to investment capital and legacy benefits, the argument for this income solution in retirement is compelling.”
2. Earnings from a fixed indexed annuity are tied to an external market index like the Standard & Poor’s 500 and provide upside potential, but protect individuals from downside risks inherent in stock market involvement.