Final answer:
Indexed annuities are financial products that offer income adjusted for inflation, combining potential market-related returns with fixed-income strategies. Similar to indexed bonds issued by the U.S. government, they offer protection against inflation by adjusting payments to maintain purchasing power.
Step-by-step explanation:
Annuity products that are linked to a market-related index are typically referred to as indexed annuities. These financial instruments offer a hybrid form of investment, combining the potential for higher returns based on stock market performance with the traditional fixed-income investment strategy commonly found in annuities. Indexed annuities aim to provide retirees and other investors with a level of income that adjusts for inflation. The indexing feature of these products ensures that payments are automatically adjusted to maintain purchasing power in the face of rising prices. Indexed bonds, like those offered by the U.S. government, promise to pay a real rate of interest that is above the inflation rate, making them an attractive vehicle for long-term investors concerned about inflation.
A closer comparison can be made with indexed bonds, which were introduced by the U.S. government in 1996. Just like indexed annuities, these indexed bonds provide a way to protect against inflation. The bonds are structured to pay a real rate of interest, which is the nominal rate minus the inflation rate, ensuring that the investor receives a consistent return above inflation. This type of bond could be particularly valuable for a retiree who needs to plan for the long term and is concerned about the decreasing purchasing power of their savings due to inflation.