I believe that fixed, indexed annuities are a great addition to retirement planning because they can provide a lifetime income without taking any risk of market loss. If you have a Variable Annuity, pay close attention!
​
​
​
​
​
Unlike their counterparts (variable annuities), fixed indexed annuities have low fees. Their only risk is the stability of the insurance company. The chart below illustrates how an indexed annuity has no downside risk. When the market goes down, as shown below by the S&P 500 Index, the value of the annuity account remains constant. When the market increases, the value of the annuity account increases as well - just not as much because the increase in this particular example is limited to 5%.
But, I don't think an annuity should be compared to a stock market investment because in most cases its use differs. An annuity is ideal for guaranteeing an income, whereas the stock market is not because its value may go down.
For income purposes, a purchaser should calculate their known expenses in retirement, increase that amount for inflation, and only deposit as much money as is required to guarantee the needed income. So, the initial purchase might include 3-5 contracts, so that every 4-5 years a contract can be exercised to supply additional needed income.
Frequently multiple companies are used because it's smart to find the "sweet spots" for each company. For example, one company may offer the largest payout if the annuitant waits five years before beginning the income stream. A different company may pay more if the annuitant wants ten years. So, if the purpose of a second or third annuity was to add income to keep up with inflation, a deposit of a lesser amount would be required.
​
When evaluating the income a contract will produce it's important to recognize what's important - the amount of cash an income stream will produce. This can be confusing because a company may brag how large the account will become that is used to calculate the size of the payment. However, if the percentage of that amount that the annuitant is entitled is low, the actual payment is likely to be less. So, only compare the amount of income that will be paid to an annuitant after a certain amount of time.
