Sorry for being late to this discussion - I hope it's not so old that people have stopped reading or adding to it.
As recent retirees, we are currently exploring our investment options and have attended various lunch/dinner seminars and had a few follow-up meetings. This is what I have found out:
Indexed Fixed Annuities - the concept is that you buy an annuity that is tied to some index (e.g., S&P 500). The annuity guarantees that your principal is never lost but yet allows you to profit from the upside in the stock market - hence is sold as a good hedge against inflation. The problem is that the rate that the index is allowed to go up is severely capped (perhaps 5-7%). That is, if the S&P goes up by 15% in a year (which is not uncommon in an up year, especially in a high-inflation period), the annuity only goes up by the capped amount - 6.75% in the case of the product that one agent is trying to sell us on.) Sure, the account value won't decrease, but the cap means that your annuity is a very poor hedge against inflation. So, if we get back to double-digit inflation rate as many are suggesting we are headed for because of our increased deficit spending, while stocks may keep up with inflation, the annuity will lose buying power each year. That's my take on it, but will welcome contradictory views.
Variable Annuities - Several companies (Prudential and Axxa are two that I know of) have products out that offer both an account value (that can go up AND down relative to the market) and another value (I call it an "annuity account" that is used to determine annual payments if you decide you want to annuitize your fund rather than take out the principal. This latter value is tied only to market gains. That is, if your portfolio value starts at $100K and goes up at some point during the year to $125K, the $125K becomes the new basis for which annuity payments are made. This value is locked in and will never go down, but can ratchet up even more if your underlying account value at some point goes even higher before you start taking money out of the account. The nice thing is that at whatever point your annuity account reaches a new high, from that point until the next high, your annuity account will grow at 7% per year. There are some attractive features added concerning death benefits and others. One downside to this is the higher fees that are charged to cover the profit and added risk that the insurance company is taking. The other negative as I understand it is that though this appears to offer reasonably good inflation protection while it is in its accumulation phase, once you start to take money out, I believe it is a fixed percent of the value of the annuity account. Hence any inflation from that point on will not be addressed. I am still evaluating this option to see if it makes sense.
Indexed CD As I understand them, they are like a CD in that the initial principal is guaranteed by the FDIC, but the interest rate is not fixed but rather can go up based on the increase of an index such as the S&P 500. I believe that annual increases in this CD are taxable, so it probably makes more sense to own it in an IRA or other tax sheltered vehicle. This also sounds intriguing to me but I need to learn more.
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