As you look forward to a fulfilling retirement, you may have concerns about how long your savings will hold up after you stop working — and that's okay. This is a normal feeling to have, and you're not alone. In fact, in a 2020 survey by the Center for a Secure Retirement, more than 4 in 5 Americans (81%) report being concerned about their retirement amid the COVID-19 pandemic.

If you're exploring options for planning a reliable income stream throughout your retirement years, you might have come across indexed annuities. But what is an indexed annuity, exactly?

What Is an Indexed Annuity?

An annuity is a contract in which an insurance company agrees to make periodic payments to an annuitant (you) after the annuitant has made an initial investment, or lump sum payment. With an indexed annuity, the payments from the insurance company are structured to benefit from a combination of interest rates: a rate linked to the returns of at least one market tracking index, such as the S&P 500, and a minimum guaranteed rate. Some annuities track more than one index.

The indexed rate can help your portfolio gain some of the upside benefits of a strong market, while the promised minimum rate of return acts as a floor against market losses. This means your principal deposits won't decline if the index performs negatively. The tax-deferred status of the annuity allows your principal to grow more with compounding.

In your agreement with an insurance provider, you typically have the ability to choose:

• How payments will be made to you — as a lump sum or a series of payouts.
• Whether the payment starts right away or at a later date.
• The indices on which the returns will be based.
• Customized terms that may affect payment.

Variable vs. Fixed vs. Indexed Annuities

An indexed annuity combines features from other common annuity types — fixed and variable annuities — so it's important to distinguish between the options. Variable annuities offer an interest rate based on a portfolio of securities (tradable financial assets that hold monetary value, such as stocks or bonds) that you choose. Fixed annuities have a fixed interest rate, regardless of how financial markets perform.

In contrast, an indexed annuity promises a minimum rate and also captures some of the benefits of rising markets. For example, your return may increase if the index performs well. Indexed annuities also:

• Can present more risk (but more potential return) than a fixed annuity, and less risk (but less potential return) than a variable annuity.
• May become attractive during times of low interest rates and volatile markets.
• Can be used as an alternative to fixed-income investments in your portfolio, such as bond funds, potentially protecting your money from inflation.

Choosing an Indexed Annuity to Fit Your Needs

Indexed annuities have a variety of setup choices, and a financial advisor or insurance specialist can help you choose the best fit based on your financial and lifestyle goals. It's important to clarify the essential components of your indexed annuity that may affect your returns, including:

• Which indices are tracked and how this choice fits your goals.
• How the returns of the indices will be tracked and calculated — typically either the year-over-year gain in the index or its average monthly gain over 12 months.
• The participation rate, or how much of the index return will be credited to you.
• Applicable rate or yield caps, fees and bonuses.

The financial strength of the insurance company you choose is an integral factor in that company's ability to honor its promise to you. Check independent ratings from firms like Moody's or Standard & Poor's, and look up recent stock performance trends to see how the company is faring.

When you buy indexed annuities, you're not purchasing any stocks or shares of an index. As such, returns from an indexed annuity will not include dividend income. In addition, indexed annuities aren't considered securities by FINRA or the SEC and are regulated by state insurance departments.

Connect with an advisor to talk about your retirement lifestyle plans and determine how much you may need in savings. Discuss the advantages indexed annuities could grant to your portfolio strategy to further solidify your retirement income goals.