Many American are diligently saving for retirement by contributing to their work-sponsored 401(k), setting up traditional or Roth IRAs, or keeping close tabs on their mutual fund accounts. Most Americans also keep rainy-day savings funds available as well, liquid assets that can be withdrawn at a moment’s notice. With retirement savings on the forefront of everybody’s minds, some may be looking for new ways to save, but want to avoid the ups and downs of the stock market. Indexed annuities, a newer annuity product introduced in the 1990s, allow you to participate in the stock market’s gains without any fear from the market’s downturns.

Like its relatives, traditional fixed and multi-year guaranteed deferred annuities, indexed annuities offer principal protection, tax deferral and are not subject to probate once the owner dies. However, the way indexed annuities boost savings is different than these other types of annuity products. Indexed annuities, rather than having a fixed, stated upfront interest rate instead tie their gains to an index in the stock market. Some of the more common indices are the S&P 500, the DJIA and the NASDAQ 100. The money used to purchase the indexed annuity is never invested directly in the market; instead the market index is used to establish a baseline and barometer to determine interest earnings.

One common method used to calculate interest earnings is the point-to-point method. Simply put, the market index is noted on one date (usually the contract issue date) and compared to another date (an example is the anniversary of the issue date). The percentage change between these two snapshot points is what the indexed annuity pays in interest. If the difference is negative, or extremely low, indexed annuities usually pay a minimum guaranteed interest rate (typically between 1-3%). A downside to this method is that indexed annuities most often have a cap on the interest percentage they will pay for any given period. If the market has a banner year, and grows by 20%, you may only be paid 12%. All these features depend on which indexed annuity is being purchased, so it’s important to fully understand indexed annuities before buying.

BuyAnnuitiesOnline.com’s Annuity Specialists are available to explain the details of indexed annuities, free of charge. They can be reached at 1-800-994-3023.