Weekend Reading: Confessions of an Indexed Annuity Purist

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Weekend Reading

As you create a confident retirement income stream, you will inevitably come across annuities. Indexed annuities in particular allow you to deposit a lump sum of money with an insurance company, which invests that money on your behalf. In return, the insurance company provides a guaranteed minimum interest rate and the potential for additional interest earnings based on the performance of a market index.


Changing annuity landscape: Here, author Scott Stolz explains his favoring of utilizing indexed annuities with one-year cap strategies based on the S&P 500. However, according to a recent report, in the third quarter of 2022, more than half of all indexed annuity sales were tied to indexes other than the S&P. Further, based on a 2021 report, only 16 percent of total sales were allocated solely to a cap rate strategy, while the remaining were tied to participation rates strategies or a combination of both.

Adding complexity: Interest rate increases throughout 2022 allowed insurance companies to allocate more funds to the “options budget” of indexed annuities and offer better rates. Additionally, “since these indexes are designed to manage volatility within the index”, hedging became less costly than hedging the S&P 500. As seen in a return comparison here, paying an annual 1.25 percent via a one-year point-to-point fixed indexed annuity resulted in a more than 4 percent greater annual average return. However, the tradeoff was that in 12.5 percent of the one-year indexed terms, a 1.25 percent loss ensued.

If you are focused more on outperforming in bear markets than bull markets, fixed indexed annuities might be the answer, especially given this interest rate environment.