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Money Matters: Basics of Index Annuities

Updated: Dec. 22, 2020 at 2:47 PM EST
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COLUMBIA, S.C. (WIS) - Josh Bradley of Capital City Financial Partners answers questions covering the basics of index annuities.

What is an index annuity?

“An index annuity is very similar to a fixed-rate annuity that we talked about last week. It’s completely principally protected. The big difference is, instead of earning a fixed interest that’s pre-determined, an index annuity typically pays you in interest on how well a specific index performs ... the upside is based on a market index, however, because it’s fixed, you can never lose money with an index annuity.”

Why would someone choose an index annuity in their financial planning?

“First and foremost, your concern should be for principal protection, knowing that you can’t lose the money you put in. The second reason why you’d choose an index annuity over traditional bonds or a fixed rate annuity is that historically index annuities have done a little bit better than some of those fixed options ... you’re looking for a little more interest while still keeping your money principally protected.”

What are the risks?

“... you’re locking your money up for a set term and typically index annuities are on the longer side. Most of these annuities lock up your money for 5 to 10+ years so you have to be prepared to have other money to cover your expenses. The other thing we see is that these index annuities, while they do average out a decent return, it can be really choppy. You might have 0% one year followed by 8%. It’s usually not the best place to go for static income. The last reason is we see a lot of people sell these as a market alternative and they’re not. While their interest is based on the stock market, these are more of a replacement for your safe money in your retirement portfolio.”

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