Q: Are fixed indexed annuities a good investment?
A: If you are considering buying a fixed indexed annuity, the applicable phrase is "buyer beware." That doesn't mean a fixed indexed annuity is necessarily a bad investment, but it does mean that buying them is a good deal trickier than choosing savings accounts and money market accounts.
Here are four issues to be aware of:
- Yield comparisons are difficult. Fixed indexed annuities offer a specified rate of interest plus some percentage of participation in the stock market's appreciation. This makes them neither fish nor fowl--i.e., they are neither purely fixed income instruments, nor are they equity instruments. Therefore, comparing different yields is complicated because equity participation may differ, and is of variable value in any case.
- Commissions can be high. Make sure you fully understand the commission structure, and how it will affect your net return.
- Past returns are not representative. Don't bother listening when someone talks about the returns these instruments have provided in the past, because most of those returns were earned in a much higher interest rate environment. What matters is the yield being offered going forward.
- Liquidity is limited. Annuities typically lock you in for a period of time, with penalties for early withdrawals. There may be a limited annual amount you can withdraw, but make sure this is sufficient to meet your needs. Also keep in mind that while the value of these instruments is not supposed to decline, that guarantee comes from the insurance company sponsoring the annuity - not from the federal government.
Along with "buyer beware," the other catchphrase you could associate with fixed indexed annuities is "the devil is in the details." If you feel comfortable that you can do the financial analysis to determine that one is a good deal, then it might be an option for you. Otherwise, when it comes to such investments: When in doubt, leave it out.
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