What is a Fixed Annuity?
Fixed Annuities are interest based products designed for retirement savings. They are somewhat similar to CDs, but unlike CDs, they are issued by insurance companies, not banks. Fixed Annuities typically ask for a lump sum initial deposit that locks in an interest rate ranging from 3% to 10% for a term of 3 to 15 years. This initial deposit is called a “premium” and can be as little as $5,000 or as much as $3,000,000.
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Fixed Annuities are considered to be a very low risk product, are tax deferred, can have good liquidity options, and can offer higher yields than other “safe” investments such as money market accounts, bonds, treasuries, and CDs.
Fixed annuities most commonly offer two payout scenarios. The first is an immediate fixed annuity and the second is deferred fixed annuity. An immediate fixed annuity will start providing you monthly payments immediately, and continue until you die. It designed to provide income that you cannot outlive. A deferred fixed annuity holds your initial deposit and compounded interest until the agreed upon term of the annuity ends. Deferred fixed annuities generally pay more because the entire initial principle and all interest has time to grow and compound.
A very popular feature of fixed annuities is the lifetime income rider option. This feature allows you to receive guaranteed monthly income payments for the rest of your life. The ability to convert your savings into a guarantee lifetime payment makes fixed annuities a very desirable choice versus other retirement investments.
Typical Features of a Fixed Annuity
- Extremely Low Risk – Your money is not subject to market losses and can only be loss if the insurance company becomes insolvent AND your investment is above the Annuity State Guarantee limits. Note: Insolvent insurance companies are extremely rare and there has never been a single occurrence of an annuitant losing their money in a fixed or fixed index annuity.
- Guaranteed Rate – You interest rate is locked in and guaranteed for the agreed on term of the annuity.
- Lifetime Income – Adding an income rider to your fixed annuity will provide you guaranteed monthly payments for the rest of your retirement. This is an essential feature to help plan your retirement and ensure you do not run out of money.
- High Interest Rate – 3% to 10% returns on a very low risk investment.
- Single Premium Option – The initial investment funds the fixed annuity, you do not make additional deposits into the annuity.
- Flexible Premium Option – The initial investment funds the fixed annuity and you have the option of making additional deposits into the annuity.
- Flexible Terms – Fixed Annuities are available for short-term, mid-term, and long-term savings. Fixed Annuities are typically 2-15 years in length. The longer the term will normally offer a higher interest rate.
- No day-to-day worry – Once your initial deposit in the annuity is made, you begin receiving your monthly payments (immediate fixed annuities). You do not have to manage the day-to-day performance of your annuity, nor worry about market losses reducing your initial deposit.
- Optional Life Insurance – Life Insurance can be added to a fixed annuity to provide a death benefit to your heirs.
- Unlimited Contributions – Fixed annuities do not limit your contribution amount like 401Ks and IRAs.
- Estate Planning – Fixed Annuities can be passed on to your heirs and avoid probate.
Multi-Year Guaranteed Fixed Annuity
A Multi-Year Guaranteed fixed annuity is similar to a CD in that it guarantees your interest rate for the entire term of the annuity, as opposed to a standard Fixed Annuity that may only guarantee your rate for a portion of your term. (For example, a standard fixed annuity may guarantee a 7% rate over the first 7 years of a 10 year term, and then be subject to current interest rates)
Fixed Annuity Growth
Fixed annuities provide guaranteed growth as long as you keep your deposit in the annuity and do not terminate the annuity early. A fixed annuity is tax deferred, so it will compound interest without being subject to annual taxes and will constantly out grow other annually taxed safe investments such as money market accounts and CDs. In many cases, a fixed annuity will out perform a mutual fund, but do so without the downside risk.
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Find The Best Fixed Annuity For Your Needs
The key to finding the best product in any category is shopping around and comparing products, fixed annuities are no different. By comparing multiple insurance company offerings, you can find the best interest rate offers at that time. Never limit your choices to just one insurance company. No one company offers the best fixed annuity products all the time. Chose an experienced and independent licensed annuity advisor who can show you fixed annuity products from multiple insurance companies. Also, keep in mind that the longer fixed annuity term you choose, the better interest rate you will be offered.
Since purchasing any retirement product is a serious decision, we suggest you speak to a licensed annuity expert. They can help you make an informed decision and show you how a fixed annuity can fit into your overall retirement plan. AnnuitySeeker can help connect you with a licensed annuity advisor in your area. We work with a nationwide network of independent annuity advisors who are not tied to one insurance company and will give you a no obligation look at various fixed annuity products from the nation’s top-rated insurance companies.
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How Do Fixed Annuities Fit Into My Overall Retirement Strategy
Smart investing at any age includes a strategy of diversification. A safe option like fixed annuities, mixed with high risk reward investments like stocks, and rounded out with CDs, mutual funds, IRAs, and the like, will put you on a path to a successful retirement.
Fixed Annuity Shortfalls
As with all investment choices, fixed annuities are not for every situation. For example, if you require immediate liquidity of your deposit without being subject to withdrawal fees, a fixed annuity may not be right for you. Click here to learn more about the shortfalls of a fixed annuity.
Beware Before You Buy a Fixed Annuity
When selecting a fixed annuity, it is important that you shop multiple insurance companies and compare products. You will want to look out for any hidden fees, strict withdrawal schedules, and how long your rate is actually guaranteed (full term or partial term). You should also feel comfortable with your licensed annuity advisor. Never hesitate to ask for your advisor’s license number and feel free to contact your state insurance licensing board to check the status of his or her license.
Is a Fixed Annuity Right For Me?
A fixed annuity is a strong investment choice for those looking for steady guaranteed growth. Fixed annuities may not have the large upside growth potential compared to investments tied to the stock market, but they provide a great investment option for those individuals who require interest rates better than standard savings accounts and CDs, but want to avoid the risk associated with market investments. Fixed annuities are also a perfect retirement product for those individuals who have at least 5-10 years to allow their money to work for them untouched. Finally, the fixed annuity income rider is an excellent option for those individuals looking to receive guaranteed monthly income payments for the rest of their life.
To find out exactly how fixed annuities fit into your overall retirement strategy, allow AnnuitySeeker to connect you to a licensed annuity specialist in your area.