A great retirement planning tool!

Today I thought I'd mix it up and write about one of my favorite retirement savings products:



Fixed-Indexed Annuities (formerly called equity-indexed annuities)



Imagine sitting down at a blackjack table in Las Vegas with these rules:



You can never lose money when you lose a hand. You get to keep your bet. If you lose ten hands in a row, you still get to keep your original bet.



But it comes at price. The price is when you win, you only win a portion of the amount of the bet.



Would you like to play blackjack with those rules?





That's essentially the nuts and bolts of a fixed-indexed annuity.



What is a standard fixed (deferred) annuity?

A deferred-annuity is an insurance product that earns interest much like a certificate of deposit with one great exception; annuities earn interest tax-deferred. You don't actually pay taxes on your interest earnings until you withdraw the money.



Would you rather earn 5% interest in a taxable CD or in a tax-deferred annuity? That's not hard to figure out.

Now annuities are not short-term savings vehicles. They are to be held for retirement planning. Just to make sure you are using them for retirement the tax law states that if you take any money out of an annuity prior to age 59 1/2 you will incur a 10% tax penalty on the amount withdrawn.

But if you are saving money for retirement in a regular CD it would be a wise decision to look at annuities sold by insurance companies.

Right now regular annuity rates and CD rates are very similar. And I would bet in the next couple of years, annuity rates will actually be higher than CD rates. Add in the tax deferral and it seems like a no-brainer to me.

So what is a fixed-index annuity?

Instead of declaring an interest rate at the start of the term like a bank declares a CD's interest rate, some annuities base their interest rate on the movement of the stock market. These are called fixed-indexed annuities (FIA's for short). Based on a formula declared within the annuity contract itself, FIA's use the movement of one (or more) of the major stock market indices to determine an interest rate.

Primarily the FIA's use the S&P 500 as the index although many now use the Dow Jones and some even use Lehman Brother bond index.

The formulas vary from contract to contract. I don't have time to go into all of them or even some of them, that's for another post.

The truly amazing aspect of the FIA though is the fact you never lose interest. Now of course there are risks such as insurer default but you use insurance companies to insure your home and possessions, so it is no more of a risk than you have with your homeowners insurance.

Even if the stock market goes down, these FIA's guarantee you will earn some positive interest.

Now you will never earn as much interest as you would if you were invested directly in the S&P 500 for example but you can't lose money either if the index tanks.

I'm in my early 30's and a portion of my retirement program is in FIA's. In fact last year I earned over 6% in one contract and another contract earned 7%. Not too bad.

I love FIA's and I truly think everyone should take a good hard look at them.

If you would like more information, I can send you out a buyers guide to fixed annuities. Just drop me an e-mail at brad.j.baldwin@gmail.com.