Annuities have great benefits as well as great drawbacks. For some physicians, an annuity is an ideal investment vehicle because it basically puts their financial planning on autopilot—they agree to what they will put in and what they will get back in return. This type of fiscal security comes with a cost and the fees can be steep. Annuities can also be cumbersome because of the various options and riders available. Variety is a good thing for the most part—until it becomes overwhelming.
To simplify your options, start with the basic categories. According to Annuity.org, annuities can be categorized into three broad groups: fixed, variable, and indexed. Each of these options has their advantages and should be considered based on the level of risk you are able to handle.
Fixed annuities. As their name suggests, fixed annuities are built to remain static and, therefore, have the least amount of risk associated with them. When you put your money into a fixed annuity the interest rate is set and will not change beyond the terms of the contract. The upside of this arrangement is that you will have predictability, and even if the stock market tanks, you will be funded as promised. The downside of this arrangement is that if the stock market increases, you will not benefit from any of these gains.
Variable annuities. For those with a greater tolerance for risk, variable annuities may be a good choice. The rate of return provided by a variable annuity is based on the performance of a managed portfolio; this means it can fluctuate based on the state of the stock market. You can, therefore, reap the benefits of a booming economy. But on the flip side, rates can decrease if the market does poorly.
Indexed annuities. In some ways, this annuity option can be described as the best of both worlds. Also known as equity-indexed annuities and fixed-indexed insurance products, an indexed annuity will allow a physician investor to experience the benefit of some market exposure while tampering the risk by ensuring that the interest rate won’t dip below a certain preset amount. The rate of this annuity is tied to an index such as the S&P 500 and can, therefore, potentially pay out higher than a fixed annuity. As simple as this seems, experts warn that the methods for calculating interest rates in this product are complicated—so make sure to speak to a financial advisor who can guide you through the ins and outs of this option.