By Mike Domme CLU, CSA, LUTCF
Boy have you changed!
I wrote my first annuity contract back in 1970. At that time an annuity was an insurance contract to accumulate money, or nest egg, that could be converted to an income that you could not outlive. That contract was for $5.00 a week or $20.00 a month. Back then you had the choice of single premium annuity, 0r you could contribute an amount monthly, quarterly, semiannually, or annually, or whenever you wanted to. At retirement, the contract was converted to give you an income that was paid, the same amount (usually monthly) to supplement your retirement income.
The first major change was the creation of IRA accounts. Great idea you got an income tax deduction when you put the money in and the income tax was deferred until you took it out. The next change was to use one or more mutual funds (sometimes you would have a choice of as many as 12 different funds to choose from) for the accumulation. Over time this concept has done very well. (During market corrections you lost money. Sometimes a lot) IRA’s can be either standard or ROTH IRA’s
All of these options are still available. Depending on your risk tolerance, one of these may be the best option for you.
Now we have the indexed annuity,(which is still evolving.) The basic concept is that you can’t lose money during a market correction. You choose one or more market indexes, and the amount to put into each index. The income is usually credited annually, on the same say of the year that you put the money in. You receive income of either the percentage of the gain in the index, or a cap of the gain, or only a percentage of the gain. If the index is lower than it was a year ago, you do not lose any money, you just don’t gain anything. There are two classes of index annuities. One is designed to make the accumulation grow as fast as possible. The other is designed to offer the best retirement income. Both of these have two different accounts, one tracts the accumulation and the other the amount that would be used to compute the income paid at retirement. Be aware that there are a dozen different riders, that can be added to the Index Annuity. The cost for each of the riders is taken from the accumulation account, as well as the retirement account. Get help when choosing the riders, the cost on a no gain year, could be expensive. Yet not as much loss as compared to a market correction.
I am a great believer in diversification of your investments. Not all in CD’s, mutual funds, or index annuities. (Notice that I used the plural not singular for annuities.)