Read time: 2-minute article

Indexed annuities versus mutual funds

This content is categorized as:

You’re in or approaching retirement and looking for ways to protect your retirement savings from stock market downturns. Should you consider a fixed indexed annuity? If you’re a mutual fund investor, there are some things you should know.

Understanding Their Fundamental Nature

A mutual fund is an investment vehicle whose value fluctuates depending on performance of its underlying securities. An investor who buys shares of a mutual fund is investing, albeit indirectly, in those securities. 

By comparison, an indexed annuity gives you the opportunity to earn interest credits based in part on the upward movement of a stock market index. But fixed indexed annuities are not stock market investments and do not directly participate in any stock or equity investments.

Participating in Gains

When you invest in an individual stock through a mutual fund, the returns generated by that stock directly impact the value of your mutual fund shares. In essence, the value of your share is tied directly to the combined returns of all of the fund’s underlying securities, minus any fund expenses.

With a fixed indexed annuity, you have the opportunity to allocate your annuity’s Accumulated Value to one or more indexed interest crediting strategies. Interest credits are determined by the performance of an underlying market index, modified by a mechanism that limits the interest credits, like a cap, spread or participation rate.

Avoiding Losses

A mutual fund participates fully in the gains and losses of its underlying investments. Generally, if those securities collectively gain or lose 20 percent of their value over the year, the value of your mutual fund shares will also gain or lose 20 percent. 

On the other hand, a fixed indexed annuity provides protection from loss due to stock market downturns. While it is possible to earn zero percent interest in any given crediting period, you cannot earn less than zero.

Accessing Funds

The two products also differ in terms of liquidity. Shares of mutual funds can be bought and sold daily, with some limitations on selling shares soon after they are first purchased as a way to deter short-term trading.

Fixed indexed annuities are designed to help you achieve long-term savings and income goals. If you withdraw more than the free withdrawal amount specified in your contract, the excess withdrawal will be subject to a withdrawal charge and Market Value Adjustment, if applicable. In addition, any withdrawals before age 59½ may result in an IRS-mandated early withdrawal penalty.

These two products are different, each with their respective strengths and weaknesses. Your financial professional can help construct a retirement savings plan that uses the best mix of solutions for your personal goals and circumstances.

Insights on Athene Connect. Tips, tools and resources to grow your business by helping clients retire with confidence.

© 2024 Athene. All rights reserved.

Although fixed indexed annuities offer principal protection from market downturns, the deduction of applicable charges could exceed any interest credited, resulting in the loss of principal.

Withdrawals and surrender of taxable amounts are subject to ordinary income tax, and except under certain circumstances, will be subject to an IRS penalty if taken prior to age 59½.

Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit.

Any information regarding taxation contained herein is based on our understanding of current tax law, which is subject to change and differing interpretations. This information should not be relied on as tax, legal or financial advice and cannot be used by any taxpayer for the purposes of avoiding penalties under the Internal Revenue Code. We recommend that taxpayers consult with their professional tax and legal advisors for applicability to their personal circumstances.

Guarantees provided by annuities are subject to the financial strength and claims paying ability of the issuing insurance company.

Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.