The recent past months have seen a fair share of market volatility. Stock market investors have gone from worried to euphoric and back again as various industries recover and others languish. All the while, some of us keep thinking of Einstein’s quote about how the most powerful force in the universe is compound interest--which only works when you don’t lose money. That’s where equity-indexed annuities come into play, ensuring you don’t suffer losses when the market slides.
When folks are saving for retirement, they’ll often have an annuity in their portfolio: a contract issued by a financial institution or insurance company that allows for money to be invested and then distributed out to the individual in a guaranteed steady stream. This helps prevent people from outliving their savings. An fixed indexed annuity is a type of fixed annuity contract with an interest yield based on a stock index, such as the S&P 500. Fixed indexed annuities allow you to earn a potentially higher interest return than some other types of annuities while still having protection against market downturns by having a zero floor.
The kinds of steep market drops we’ve seen over the past 20 years have certainly alarmed investors. When you lose money in the market it is possible to recover the lost principal given enough time. However, the gain from compounding that you could have achieved during the time can never be recovered. For example, if your investments go down 40% and it takes 20 years to recover your principal, you have compounded at 0% rate of return. You clawed your principal back to where it was, but you did not get back the 20 years of investment returns you lost.
The “power of zero” coupled with positive compound interest completes the equation that Albert Einstein must have seen in his mind. Zero is truly your hero. If negative years result in no gain, yet no loss, and you remain with your principal intact and prior gains locked in and protected, you are ready to enjoy positive compounding gains when the market advances. You only go up, never down.
A Fixed indexed annuity does just that. You get upside gains and no losses due to market downturns and volatility. You work hard for your money. When your money is working hard for you in growing instead of recovering, you can increase your nest egg safer and faster. Defense truly is the best offense. Let zero be your hero!