Senior Finances 101: Understanding Annuities #5

Oct 14th, 2010 | By Sharon Shaw Elrod MSW EdD | Category: Senior Moments Blog

The Index Annuity is the final in the series SCJ is publishing about annuities.  This is an attempt to distill the information about annuities for senior citizens so we all can understand what they are and whether or not they make investment sense for our individual circumstances.

In the mid-90s, insurance companies created still another kind of annuity that is based on index funds in the various stock markets.  Index funds are a small group of mutual funds that are purported to be a gauge of the entire stock market, and are considered ‘safer’ investments than the gamble taken with non-index funds.  Index Annuities start out just like others, a contract with an insurance company for a definitive time period.  Then, the index annuity is based on one of the Indexes (S & P 500, Dow Jones Industrial Average, etc) and your annuity produces a pre-determined percentage

of the annual return on the index; the annual time period is based on the date you purchase the annuity and extends from that day to one year following. 

Suze Orman advises this kind of annuity might be better for people who do not want to take any risk at all; the returns have a maximum percentage amount, and this may limit returns.  But the upside of this is that in most index funds, there is no downside risk.  Your investment can only increase; it cannot decrease.

Suze goes on to identify people who might want to buy Index Annuities:

  • Anyone who wants to invest in the market but is afraid of losing any money.

Another note… retirement plans for large organizations (teachers, medical care personnel, etc) may be offered a Tax Sheltered Annuity (TSA) within the company’s retirement plan.  The money is deposited monthly for each worker enrolled, and taxes have not yet been paid on the funds.  Each employee determines which funds are chosen to be included in her/his individual plan.  

SCJ will write more about annuities, but this post concludes the series on the kinds of annuities that are out there for consideration.  Be sure you talk with your investment advisor before you make any final decisions about whether or not to invest in an annuity.



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