Equity Index Annuity

Today we discuss a special kind of retirement saving: The equity index annuity (EIA). It's a type of deferred annuity. You buy it with money on which you've already paid taxes. The earnings accumulate tax deferred until you with draw the money, presumably in retirement. An EIA bases its returns on a securities market index. Principal plus a minimum return (typically 2.5%) are guaranteed, and the annuity adds a percentage of the index gains if any.

Some EIAs place a cap in how much you earn. When the stock index performs poorly, you get the minimum guaranteed rate; when the index does well you can get the allowed percentage increase or the capped rate.

EIAs fall midway between a fixed annuity (which pays a set interest rate) and a variable annuity, whose performance is as volatile as the underlying investment. EIAs are essentially a fixed annuity with potential gains ranging from a minimum guarentee to a set upper limit. This type of investment is popular when interest rates are low. So, in current situation, it may not look as attractive as it was 2 years back, but still the assurance of a guaranteed return is some shelter many may select as a better option for a retirement vehicle.