2-minute article

Indexed annuities versus mutual funds

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.