THE CASE FOR Indexed Annuities

These products may offer better returns than traditional fixed-income investments. But there are trade-offs.

- SANDRA BLOCK

One of the many drawbacks of record-low interest rates is that they have made creating an income stream in retirement significantly more complicated. Retirees and near-retirees can no longer rely on certificates of deposit and U.S. Treasuries to provide reliable, risk-free income. Interest rates are so low that these investments no longer keep up with inflation, which means investors effectively lose money over time. Likewise, the traditional 60-40 portfolio—60% stocks and mutual funds and 40% government bonds—has fallen out of favor with some analysts because of the abysmal returns from the bond portion. // That creates a conundrum for older investors who are reluctant to increase their exposure to an uncertain and volatile stock market. But the financial services industry—specifically, the insurance industry—has an antidote: annuities that provide higher returns than you’ll earn from CDs or government bonds, with limits on how much you can lose in a market downturn.

Annuities have a checkered reputation. Insurers have created a seemingly endless variety, with a seemingly endless list of bells and whistles, and the products are often poorly understood (see the glossary on page 60 for a list of the main types). And annuities are sometimes loaded with high upfront commissions that can motivate some insurance brokers to sell them to investors who don’t understand the terms and restrictions. Worse, the commissions limit investors’ returns because insurance companies adjust caps and other features to recoup the cost of the commissions.