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Indexed Annuity vs. Fixed Annuity: What’s the Difference?

Nov 28, 2021 | Annuities

Approximately 35% of Americans are changing the date they were planning on retiring since the pandemic started. The majority of these people are retiring later than they initially planned.

However, compared to 2019, this year is showing that people are retiring almost one year earlier on average. The pandemic shed light on how outside occurrences can change retirement plans and savings.

Have you wondered what the difference is between indexed annuity vs fixed annuity? Annuities can contribute to your retirement income. By knowing the difference between the two, you can make a more informed decision on what is best for your retirement funds.

If you have an interest in learning more about fixed and indexed annuities, then keep reading on.

What Is a Retirement Savings Plan?

Annuities fall under a type of retirement savings plan but are considered insurance products or savings accounts. What is a retirement savings plan? There are a few different types of retirement plans including:

  • Employer-sponsored
  • Individual Retirement Account (IRA)
  • Government-sponsored
  • Health Savings Account (HSA)

Employer-sponsored programs are traditional and Roth 401(k) plans. They are offered by employers and often the company matches a certain percentage of contribution.

You must start withdrawing money from this account at 72 years old. Additionally, you can acquire 10% penalties in some instances for withdrawing before 59 and 1/2 years old.

IRAs are exactly as it sounds – they are individual plans that you can contribute to independently or in conjunction with an employer or government-sponsored retirement plan.

A Roth IRA does have income restrictions unless you use a backdoor approach, and you can only contribute up to $6,000 per year in a traditional or Roth IRA account. If you are over 50 years old, you can contribute up to $7,000.

If you qualify for an HSA, you can contribute and withdraw money tax-free. However, it can only be used for medical expenses. Additionally, you can contribute a maximum of $3,600 each year or $7,200 for family coverage.

Lastly, government-sponsored plans include pensions and the Federal Employees’ Retirement System (FERS). These plans are only offered to government employees and can also include a savings plan.

What Are Annuities?

Your retirement income does not solely have to come from these structured plans. Retirement annuities offer options for retirees who want a fixed income.

At its core – you pay into a specific type of annuity through scheduled payments or in one total sum of money. They can act as a type of savings plan with insurance companies. Once you reach retirement age, you can start receiving money from these annuities.

How you receive the money is up to you. You can choose monthly, quarterly, or even annual payments. Retirement annuities will typically give you payments until you die. Many people use annuities as supplemental income to their other retirement plans outlined above.

Indexed Annuities

There are four main types of annuities – indexed, variable, fixed indexed, and fixed. Indexed annuities are a contractual agreement between you and the insurance company. They will pay you returns on your money based on a specific market index.

You can still receive structured payments, but the amount of payment that you receive can vary. Additionally, if the market is doing well you don’t necessarily receive significant amounts of money.

Your investments are not directly linked to a market index. If an indexed annuity is not monitored by the U.S. Securities and Exchange Commission, then it is likely under state regulations.

These regulations can still work at protecting your money and losses. However, be sure and check with your insurance or financial company on the minimal guarantees.

Fixed Annuities

Like indexed annuities, fixed annuities are a contract agreement between you and an insurance company. However, it differs from indexed annuities in that the insurance company agrees to pay a guaranteed amount.

This amount depends on how often you receive payments and how much you have contributed. They will pay a set amount of interest on your contributions based on how many payments you will likely need.

These investments often pay higher than CDs and give retirees peace of mind that they have a set amount coming in. Your money can also grow tax-free in these accounts until you start withdrawing from it.

So – what are fixed index annuities vs fixed annuity?

These retirement annuities sit somewhere in the middle of indexed and fixed annuities. They give retirees peace of mind that they have a guaranteed minimum payout, but it also provides more growth opportunities if the market is booming compared to fixed annuities.

It also grows tax-free and can have scheduled pay-outs. It is designed for medium to long-term investments and can provide higher pay-outs.

Indexed Annuity vs Fixed Annuity

Indexed annuities function as a type of fixed annuity with greater variability and a higher rate of potential return. They also provide more security than variable annuities in that there is typically a guaranteed minimum payout.

Additionally, they are tied to market indexes which provide a bit more security than investing in a single stock. Fixed annuities typically give you the rate of return beforehand.

These contracts are usually more simple than indexed annuities and offer greater peace of mind for risk-averse individuals. It also only typically lasts for a pre-determined amount of time.

If that time runs up and you want a new contract, the terms might not be as good and inflation can make your investments less beneficial to you.

Ultimately, fixed annuities are better for short-term investments – including pension pay-outs.

Plan For Retirement

Indexed annuity vs fixed annuity both provide secure and favorable outcomes for retirees. They are safer investment options than variable annuities and can act as a great supplement of income with other retirement plans.

If you have an interest in setting up an annuity contract, then contact us today for a consultation and let us help you plan for retirement.

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