Annuities have existed for a very long time, tracing their origin to the lifetime annual stipend or “annua” promised to soldiers loyal to the Roman Empire.
Contemporary versions include the fixed variety based upon a constant interest rate, and the variable annuity, which carries market risk.
However, a relatively new and nefarious innovation has gained increasing attention, particularly among retirees and those approaching retirement.
Known as Equity-Indexed Annuities, or EIAs, these instruments are costly, complex and illiquid financial contracts that should be avoided by most investors.
Often purported to provide “guaranteed retirement income”, equity-indexed annuities advertise a minimum threshold return combined with the potential to share in any gains in an underlying market index like the S&P 500 upon which the contract is based. Of course, something that sounds too good to be true usually isn’t.