When the market drops, everyone with investments panics a bit. Whether it's from the economic fallout thanks to COVID-19 or the various dips and corrections that happen every so often, having all of your retirement savings in the market is somewhat terrifying.
You go to bed each night wondering if your retirement will be still there when you wake in the morning.
This article was originally published on February 12, 2018. It was updated on September 18, 2020 to reflect updates since the COVID-19 pandemic as well as additional information to enhance the existing content.
For many retirees, a certificate of deposit (CD) is a way to earn some interest without any risk. However, CD rates are low, and they don't even protect your savings from inflation.
Thankfully, there is a better option that offers the safety you need in retirement with a higher interest rate than CD. They're called fixed annuities.
Need Medicare or retirement planning help? The Medicare Allies team specializes in Medicare health insurance as well as retirement planning. Call us today at 833-801-7999 for personalized help.
What Is a Fixed Annuity?
In short, a fixed annuity is a way to grow your savings without taking any hits from the market.
You earn a guaranteed interest rate over a period of time. The most common contract length is five years, but you can go as low as one year.
Read More: 5 Benefits of Having a Fixed Annuity After Age 65
What’s a MYGA?
The most popular type of fixed annuity we offer is called a MYGA. That stands for Multi-Year Guaranteed Annuity.
Multi-Year means that the annuity lasts for a set number of years – the most common is five years. Guaranteed means you are guaranteed a set interest rate for those five years. It’s usually a little better than 3%.
The best part is you know how much money you’ll have earned in five years. With the stock market, you could lose half your savings overnight! Granted, you could earn more, but there’s always that risk factor.
What’s a FIA?
FIA stands for Fixed Index Annuity.
The simple explanation is your money participates in the stock market. The gains are capped, but so are the losses. You can never lose your principal with a FIA. The worst you can do is stay the same.
A FIAoffers:
- Potential to earn more: your earnings are based on how the market performs. When the market is up, you can make more on your deposit.
- Zero risks: the worst you can do with a FIA is to stay the same – you can never lose on your deposit.
- Capped gains: to protect you from the losses of the stock market, the insurance company caps your gains. For example, if the S&P 500 goes up 10%, you may be capped at 6%. But if the S&P goes down 30%, you lose 0%.
- No fees: there can be fees with some FIAs, but the kind we offer to our clients have no fees and are the simplest to understand.
- Fluctuating interest rate: depending on the interest crediting strategy you choose, your interest rate will likely fluctuate with the market, but it can’t go below zero.
Let’s say the stock market goes up 9%. You might have a cap at 6%. So you still experience the gain, but you can only earn 6%.
Now, let’s say the stock market goes down 10%. You go down 0%. That’s right – you lose nothing.
A lot of people like this strategy, because you still have the thrill of stock market gains, but you can sleep tight at night knowing that your hard-earned cash isn’t going down the drain.
Fixed Annuities Can Protect You Can Stock Market Corrections (and Crashes)
Fixed annuities are the perfect way to grow your retirement savings without risking them to the volatility of the stock market.
There are a few strategies to consider here.
Aging into Medicare?
We work mainly with seniors who are aging into Medicare, so we most commonly advise that you get your money into a safe place. At the very least, put the majority of your money in a no-risk place.
Younger than 65?
If you’re younger than 65, you may not want all of your money in a fixed account. You might want to diversify a bit, because you have the time to take on risk and recover.
For example, when you’re 50, you still have about 15 years to work with before you need the security of your money for retirement.
In that case, you might put half of your money in a fixed annuity and half in riskier investments.
Have a 401(k)?
Many retirees end up with a 401(k) or other retirement account that’s not being serviced after they’re no longer working.
We often hear from new retirees that they’re getting a monthly statement, but they don’t understand what it is and no one is there to help explain it to them.
By converting that 401(k) into a guaranteed, interest-earning contract, you now have someone looking out for your savings, and your hard-earned savings are going to be more safe and secure.
Conclusion
With a fixed annuity, you can sleep well at night knowing your money is earning a guaranteed interest rate. When the economy faces hard times such as this coronavirus pandemic, you don't have to worry about losing your retirement savings.
If you have a bank CD, 401(k), IRA, or other savings account, we’d love to help you preserve it. Give us a call at 833-801-7999 to learn more about the options available in your state.
Our team of dedicated, licensed agents can help you as little or as much as you need. Whether it’s answering a few questions about Medicare or creating a comprehensive Medicare Planner with you, we are your Senior Allies.
