Growth Annuities 101

An Alternative to the Trad Portfolio

Annuities are often touted for their guaranteed income benefits for your later years, but they also offer substantial growth opportunities that make them a compelling alternative to bonds, CDs, money market funds, providing a robust hedge as a part of a diversified portfolio.

This article explores how annuities can serve as a growth vehicle, offering potential for capital appreciation while mitigating risks.

Understanding Annuities

An annuity is a financial product that offers a pay-in, or accumulation phase, and later offers a pay-out or annuitization phase. In other words, a series of income payments made at equal intervals, typically used for retirement purposes. Many annuity owners do not utilize the product primarily for income purposes, and simply enjoy the protected growth.

The primary types are fixed, variable, and fixed indexed annuities. While fixed and variable annuities are well-known, fixed indexed annuities (FIA) are gaining popularity due to their unique blend of safety and potential for higher returns–that’s what we specialize in at Revise Financial.

Fixed Indexed Annuities: The Growth Engine

Fixed Indexed Annuities (FIAs) are designed to balance the growth potential of equity investments with the safety of fixed-income products. They offer returns based on the performance of a market index, such as the S&P 500, without directly investing in the stock market. Therefore, while you do not capture dividends, you benefit from index-linked interest earnings.

Example: A popular growth strategy, based upon the A+ rated Midland National RetireVantage 10 FIA illustrates how these products can be structured for growth. The annuity features a high participation rate and multiple indexing strategies, with options for enhanced participation rates subject to fees.

Over a 10-year period, the annual effective rate can reach up to 15.13%, with a net annual effective rate of 14.13% after deducting fees. This indicates significant growth potential compared to traditional fixed-income investments.

Advantages Over Traditional Investments

Principal Protection: Unlike stocks that can lose value, FIAs ensure that your principal investment remains intact, offering a safety net during market downturns.

Tax Deferral: Earnings within an annuity grow tax-deferred, meaning you don't pay taxes until you withdraw the money. This allows for more substantial growth over time compared to taxable accounts like CDs or money market funds.

Inflation Protection: While savings accounts and CDs are safe, they often fail to outpace inflation. FIAs, tied to market indices, offer a better chance of keeping up with or outpacing inflation without exposing your principal to market risk.

Higher Yield Potential: Traditional bonds and money market funds offer limited returns, often tied to prevailing interest rates. In contrast, FIAs can offer higher yields, especially with strategies that leverage market index performances.

Comparisons with Risky Stock Portfolios

Unhedged stock portfolios can generate high returns, but they also carry significant volatility and downside exposure.

At Revise, we use FIAs as part of a structured hedging strategy, providing reliable growth linked to market performance while actively insulating your portfolio from market downturns. Rather than a standalone solution, FIAs serve as a critical ballast, stabilizing returns and limiting risk in volatile markets.

Conclusion

Annuities, especially Fixed Indexed Annuities, present a robust growth option for individuals aiming to balance safety and growth. They provide principal protection, tax-deferred growth, and higher yield potential compared to traditional fixed-income investments.

For those wary of stock market volatility but seeking better returns than bonds or CDs, annuities present a compelling alternative.

By understanding the growth mechanisms and benefits of annuities, investors can make informed decisions to enhance their retirement portfolios, striking a balance between risk and reward.