When planning for retirement, many pre-retirees become quickly overwhelmed with options. Influencers and ads all seem to know the magic solution for building retirement wealth, but many individuals are rightly unsure about which options will make the most of their hard-earned money. Fixed index annuities are an attractive option, but even within those annuities, choosing the best fund for each situation can be confusing.
This guide goes into detail about what makes one fixed index annuity better than another and how pre-retirees can meet their retirement goals using the benefits they provide.
What is a Fixed Index Annuity?
Fixed index annuities are contracts with insurance companies. Once purchased, the annuity accumulates value based on market performance. However, unlike the stock market, fixed annuities have caps on how much they can grow and participation rates that further reduce their output. The tradeoff is that while stock values grow and shrink depending on market performance, fixed index annuities never decrease with the market. The insurance company “fixes” the value, lowering the risk.
By prioritizing security over maximum growth, fixed index annuities are attractive options for pre-retirees with low risk tolerance. Rather than gamble that the market will be doing well when it’s time to withdraw the funds, those with fixed index annuities will always know what their fund will be worth. It just won’t grow as quickly or as much as a traditional market purchase.
Benefits of the Best Fixed Index Annuities
Even the best fixed index annuities are not assured to grow in value, but due to the insurance company’s protection, fixed index annuities can provide benefits over other market strategies. When considering fixed index annuities, consider these benefits:
1. Protected Principal
As mentioned, a fixed index annuity is insured against economic issues. In a negative year, the annuity would earn 0% interest, rather than decreasing in value. This safeguard can help plan for retirement with confidence compared to conventional market purchases, which may cause a delay in retirement to recoup market losses.
2. Tax-Deferred Growth
Interest gained by fixed index annuities is not taxable until the funds are withdrawn. This helps pre-retirees save as much as possible while continuing to pay their normal expenses, and it provides transparency since tax-deferred growth will allow them to plan their withdrawal to meet their retirement account goals after taxes.
3. Growth Potential
Fixed index annuities cannot grow as fast as a healthy market fund; however, they may offer faster growth than some conventional funds, such as CDs and traditional fixed annuities. They provide a more balanced approach to growth that takes advantage of market performance without paying for its volatility.
4. Inflation Protection
Fixed index annuities do not directly protect against inflation, but since they are linked to market growth, their value usually keeps pace with rising prices. If inflation rises too high, index performance may lag behind, eroding the value of the investment over time. This is something to consider when choosing these annuities, especially if they are intended to be the sole source of retirement income.
Why Pre-Retirees May Consider a Fixed Index Annuity
With market conditions as uncertain as they are in 2025, many pre-retirees can benefit from fixed index annuities. They can help meet retirement goals like covering living costs and housing expenses without taking undue risks against a volatile market. These funds balance risk and growth, which can be attractive for those with less risk tolerance, especially if they already have other retirement accounts, such as IRAs, Social Security, and 401(k)s.
The downside is that higher caps and participation rates can decrease the growth that retirees will ultimately see from fixed index annuities. Most of them also have a surrender period, which is the time when withdrawals above a set limit will drain the fund through penalties. Recognizing the period (normally 7-10 years) and the limit (often 10% of the fund’s value) can help pre-retirees recognize whether fixed index annuities are the right option for their retirement goals.
Consult with Insurance Professionals to Prepare for Retirement with Smart Strategies
Fixed index annuities can provide stable retirement income, provided that retirees recognize their risks and limitations. While insurance companies protect the annuity against market downturns, they also limit its growth. This tradeoff will make these annuities attractive in some retirement situations, such as those on a short timeline, and inadequate in others, such as those with a higher tolerance for risk and a longer roadmap to work with.
At Matador Insurance, our team of professionals helps pre-retirees make strategic financial decisions in their situations. Market conditions are constantly changing, so the best strategy from 2020 may no longer apply in 2025 and beyond. Consult with our team today to schedule an annuity consultation and meet your financial goals with only the amount of risk you can handle.