Indexed Annuity

Example

“Robert invested $100,000 in an indexed annuity tied to the S&P 500 with a 6% annual cap, knowing he would earn up to 6% in good market years while his principal remained protected during market downturns.”

Memory Tip

Indexed annuities are like a 'safety net trapeze' - you can reach higher (market gains) but won't fall below the net (principal protection).

Why It Matters

Indexed annuities can provide a balance between growth potential and safety for retirement planning, offering some market participation without the risk of losing your original investment. However, complex terms and limitations can significantly impact returns, making careful evaluation essential.

Common Misconception

Many investors believe indexed annuities provide the same returns as directly investing in the market index. In reality, participation rates, caps, and fees typically limit returns to significantly less than the actual index performance, even in strong market years.

In Practice

Susan invests $50,000 in an indexed annuity with a 5% annual cap and 80% participation rate. When the S&P 500 gains 10% in year one, her account grows by only 5% ($2,500) due to the cap. In year two, when the S&P 500 gains 3%, she earns 2.4% ($1,320) due to the 80% participation rate. When the market loses 8% in year three, her account value remains unchanged, preserving her gains from previous years.

Etymology

From 'index' meaning a statistical measure of market performance, combined with 'annuity' from Latin 'annuitas' meaning yearly payment or income.

Common Misspellings

Related Terms

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