Sunday, 12 November 2023 04:31

How Fixed Income Annuities Can Help Lead to More Diversification

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According to a study of retirement accounts by Fidelity, most older Americans are too heavily invested in the stock market. This is a potential risk especially in the event of a market downturn. 


One posssible solution is for investors to increase their allocation to fixed indexed annuities. These are annuities that guarantee the principal but offer more growth potential than traditional fixed-rate annuities. They are best suited for investors with a time horizon of longer than 5 years. They are less risky than equities but offer higher returns than most types of annuities.


Fixed indexed annuities follow a market index such as the S&P 500 or Dow Jones Industrial Average and interest is deposited based on annual gains of the underlying index. However when the index declines, there is no loss of principal or of previously accrued interest. 


Of course, there is no free lunch. The drawback is that most fixed indexed annuities have some sort of formula which limits the amount of gains that are captured. There is also a maximum rate of interest which limits the amount of total gains that can be captured. For instance, some have a maximum rate of interest of 12% which means that the annuity would only see a gain of 12% even if the underlying index was up 20%.  

Finsum: Fixed indexed annuities are one potential way that older investors can reduce portfolio risk and boost diversification. 


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