Will Your Gains Be Overwhelmed by Inflation and Taxes?
In an uncertain economic environment, many consumers are seeking fixed rate products like certificates of deposit (CDs) for security. While benefits such as short-term durations and a guaranteed interest rate can be appealing, two factors are often overlooked that can negatively impact a conservative fixed rate: taxes and inflation.
In case you wondered, I did write an article titled “Should We Worry About Inflation?”
The hypothetical chart shows what a “real rate” of return can be when adjusted for any applicable taxes and potential inflation rates. The CD return rates below are calculated using the six-month annualized average monthly CD rate as reported by the Federal Reserve. The tax rate used in the example is the highest marginal federal income-tax rate based on $100,000 of taxable income for a married couple filing jointly. The tax rate assumed will not apply to every consumer, and a lower tax rate may have a more favorable impact on the real return. The use of alternate assumptions will produce different results.
Fixed index annuities (FIAs) can play an important role in a consumer’s retirement accumulation strategy. Offering the balance of protection against downside market risk and growth potential has made FIAs an attractive addition to many accumulation plans. When you’re creating a financial plan, there is no one “best” product. But there are products that can be a better fit in order to help meet your retirement goals. The chart below shows certain investments as they relate to risk.
How Fixed Indexed Annuities perform in Up and Down Markets
A fixed index annuity (FIA) is a unique type of annuity that credits interest to your annuity’s value based upon the movement of an underlying market index. Growth of a FIA is calculated based on the index it is linked to, and how that index performs. Each FIA product generally credits a portion of the total index gain based on the crediting method chosen but does not lose value due to market downturns.
Annual Reset: The annual reset feature of many fixed index annuity designs means any interest credits are locked in and the gains cannot be lost due to market decreases. See the example below.
Let me be clear, not everyone needs an annuity.
Annuities are contracts that help transfer risk. There are 4 primary areas of risk that annuities are used for.
- Lifetime Income
- Principal Protection
- Wealth Transfer
- Long Term Care
If you do not need any protection with one or more of these risks, then guess what? You probably don’t need an annuity.
In summary, the one main question to ask yourself is “Do I even need an annuity?”. In a previous article titled “What’s the Deal with Annuities?”. I go into this in more detail.
We at least provided more education about FIAs so you can make sound financial decisions based on your needs, income and retirement goals.
If you would like to set up a no obligation strategy session for a review of your current investments please call our office at 630-799-8350 or schedule a call here https://go.oncehub.com/crosspointwealth
Thank you for reading and sharing.
Until Next Time….
