Equity Index Annuities: For the Pre-Retired and Retirees

Choosing equity index annuities can have many advantages as you approach your retirement.  You have two conflicting concerns: growth of principal and safety of principal and you know that more growth usually means less safety. For many people, equity indexed annuities provide the right balance of both.

As deferred annuities, equity index annuities are a tax-deferred investment contract. As your investment grows, not taxes are due.  The tax payment is deferred until you opt to cash-in on your investments. Therefore, as a savings vehicle, the tax deferral aspect allows your funds to grow faster unencumbered by taxation.

While you can invest in deferred annuities with a series of payments or with a one-time payment, equity indexed annuities are designed for single deposits (for subsequent deposits, you simply open another contract).

Rather than receiving a fixed rate for every 12 months as with traditional fixed annuities, your equity indexed annuity will pay you interest each year based on performance of a stock market index.  While you can lose money investing in stocks, your original investment in the annuity is guaranteed by the annuity company. Because your downside is guaranteed, you give up some of the upside.  Rather than receiving interest EQUAL to the gain in the stock market index, such as the S&P 500, you will receive, as an example, 50% of the gain.  So if the index appreciates 12%, you receive 6%.  If the index for the year declines, you receive nothing (nor do you lose anything).  You know have a basic overview of how equity indexed annuities work during the growth phase.  What about getting your money out?

There are also different options to taking your money away from equity index annuities:

• Surrendering the fixed annuity for a lump-sum of the entire account balance. Few people opt for this as you would incur the entire annuity tax at once.

• Receiving payments from the annuity for a term certain (e.g. 15 years) and if the investor dies ahead of the fixed period, the successor receives the remaining payments (any type of payment plan is called "annuitization."

• The investor receives lifetime annuity income, from the equity indexed annuity. There will be, however, be nothing left for heirs.

• Some insurance companies offer a combination of options mentioned above, such as partial annuitization.

You can see that the advantages to a pre-retiree are equal or even more compelling to a retiree who is faced with the objectives of staying ahead of inflation yet at the same time preserving principal.

Other points regarding equity indexed annuities

1. never close your account prior to the end of the term.  Not only will you incur surrender charges, you will forfeit (in most contracts) and index gains previously earned
2. check (varies by company), that your beneficiary can get the actual accumulated value if you pass away and the payout is not treated as in the previous sentence where equity indexed annuity gains are forfeited
3. like all annuities, you name the beneficiaries so any iof the annuity balance remaining at your demise goes to heirs without probate. Heirs will pay tax on any accumulated income they receive.

Most Annuity Owners Make This Mistake

To get wealthy, invest like the wealthy

Why the wealthy steer clear of mutual funds

How the rich systematically make money in the market

Key metrics that differentiate good and bad investments

A comparison of ETFs and separately managed accounts you have never seen

Stop making the same investing mistakes as everyone else who listens to CNBC and reads Money Magazine. Do what the rich do! Free guide explains how they think and make investment choices.