FIXED ANNUITIES
Fixed annuities offer a guaranteed rate of return over the contract period.
Annuity contracts are typically positioned to be like bank CDs, and will offer a competitive rate of return. Fixed annuities are usually the most popular kind of annuity, because for many retirees, protecting their principal is their primary concern.
A fixed annuity guarantees your principal (based on the strength of the issuing insurance company), and also states the exact amount of growth the principal will earn for the contract period. For example, a $100,000 investment in a 10-year guaranteed fixed annuity rate with a 4% rate will return $48,021. This kind of certainty makes it a good option for retirees who need a source of reliable income. While other investments can also provide certainty, such as bonds, CDs, and treasuries, they often offer lower yields and do not have the tax benefits of a fixed annuity.
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TAX DEFERRAL
Interest earned on a fixed annuity is not taxed until it’s withdrawn from the contract. This allows for potentially greater growth than if taxes were due on accumulated interest as earned. It also means that the yield can be greater than with investments like CDs and bonds, in which tax is due on growth each year.
SECURITY OF PRINCIPAL
No other investment guarantees zero potential loss of principal other than CDs, money market accounts, and fixed annuities. This doesn’t mean than an annuity is a risk-free investment, but it does eliminate the most undesirable form of risk for a retiree. Retirees often should be more concerned about the return of their money than the return on their money, and fixed annuities offer the kind of protection that can make for a successful retirement savings strategy.
ANNUITY INVESTMENT PERIODS
Fixed annuities are typically offered in 3,4,5,6,7,8,9 and 10 year periods.
What Are The Disadvantages Of A Fixed Annuity?
In addition to the advantages of a fixed annuity, there are disadvantages. Both must be weighed by each retiree, who will have their own unique financial needs. Here are three main disadvantages.
Limited Liquidity
Fixed annuities can either be distributed over a determined number of payments or over a predetermined deferral period. Most fixed annuities offer an annual “free withdrawal” to the client, and most allow annual withdrawals of 7-10%. Withdrawals greater than the allotted percentage can incur fees and penalties, so know what the rules are before buying an annuity.
Income Taxes as Ordinary Income
While interest earned on a fixed annuity is tax-deferred, it is taxed as ordinary income once payments begin. It is not considered long-term capital gains and is not taxed as such.
Fixed Annuity Contracts Can Be Complicated
Not all fixed annuities are the same. There are many details that are different from product to product that can affect how the investment actually functions. Even small details can make a big difference, which is why understanding them is so important.
