Is There Really Such a Thing as a Guaranteed Rate of Return?

Trent Bradshaw CFP®, AIF® & Brandon Rogers CFP®, AIF® |
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Guaranteed returns, you ask? Yes, but it's complicated – one simple word can make a big difference.

If you have a fixed annuity, you get a fixed rate of return. If you add one simple word "indexed" creating a fixed indexed annuity, you're tied to the market index rate in anticipation of greater returns. Both have a place in the market and understanding their differences will help determine which one is best for your retirement savings strategy.

 

FIXED ANNUITY: In exchange for a lump sum or a series of payments now, the insurance company provides a guaranteed set income amount at a future date. The money in the policy grows tax-deferred at a fixed rate during both the accumulation phase and the annuitization phases. It's an investment strategy with a guaranteed payout.

FIXED INDEXED ANNUITY: This type of annuity's returns are usually based on the performance of an underlying index like the S&P 500. Purchasing a fixed indexed annuity allows the investors the opportunity to diversify their portfolio. The payoff for the option to diversify means it comes with a higher risk level.

A KEY DIFFERENCE: A key difference between these annuities lies in how insurance providers calculate interest. A fixed annuity offers a guaranteed interest rate for a specific amount of time. If you find the rate of return is too low or the surrender period expires, you can exchange your annuity for another without any tax consequences. A fixed indexed annuity offers a guaranteed interest rate and additional returns if the stock market performs well. However, the trade-off is typically a larger surrender charge, and the formula for calculating returns can often be highly complex.1

IMPORTANT NOTE: It's important to note that annuities aren't liquid assets. If you choose to withdraw your funds before the term of the annuity is up, you may have to pay a surrender fee. If you're under 59½ years old, you could also be subject to a 10% penalty. Therefore, if you think you may need cash soon, tying up all your assets in either kind of annuity may not be the best decision.

 

If you're looking to invest now in exchange for a guaranteed return later, it sounds like it's time to consider adding an annuity to your portfolio. Annuities are complicated, so you'll need some professional guidance. Contact us today at (704) 216-2260.

 

Adapted from SmartAsset

This is meant for educational purposes only and should not be considered investment advice or a recommendation to take a particular course of action. Consult with a financial professional regarding your personal situation before making any financial decisions. A fixed index annuity earns interest based on changes in an external index with a guaranteed minimum rate set in the contract. The selected index varies from day to day and is not predictable. When you buy a fixed index annuity you own an insurance contract – you are not buying shares of any stock index. All guarantees are backed by the financial strength and claims-paying ability of the insurance company. Annuities are not FDIC insured.