A fixed annuity is a low-risk investment option that will help provide regular income through your retirement. This is a simple option for those wanting to boost their retirement funds. Furthermore, taxes may be deferred on money invested in certain annuities.
What Is a Fixed Annuity?
Fixed annuities are investment vehicles commonly used for retirement income that provide tax deferred growth. During the accumulation phase, investors pay into the annuity via either a lump sum or a series of regular payments. The funds then grow at a predefined rate of interest until the annuity reaches its payout phase. During the payout phase, the investor receives payments at regular intervals.
Understanding Fixed Annuity Rates
Fixed annuities are not tied to the stock market, and instead deliver a set rate of return that doesn't fluctuate. There are many complexities that may enter into the contract, however, changing the annuity rate at certain times or under certain conditions. Many annuities adhere to the initial fixed rate for only a limited time. After this period, the interest rate may change. However, your contract will specify a minimum rate that it cannot fall below.
Fixed annuity rates are typically set in accordance with prevailing fixed rates for comparable investments. Fixed annuities often have a higher interest rate than savings accounts, government bonds, and CDs, making them one of the most desirable picks for low-risk saving.
Types of Fixed Annuities
Fixed annuities come in several forms, each with their own distinctive benefits. It's worth considering all three options before you invest in an annuity to make sure you've chosen an investment vehicle that aligns well with your retirement planning needs.
- Traditional Fixed: A traditional fixed annuity provides a set interest rate that does not vary with the stock market.
- Fixed Index: A fixed index annuity combines some of the stability of a fixed annuity rate with the earnings potential associated with the stock market. Some or all of this annuity's rate is based on the stock market index. The annuity provider will typically cap your returns at a certain percentage, but the fund is protected from loss of principal.
- Multi-Year Guaranteed Annuity (MYGA): An MYGA provides returns at a set rate for a predetermined period of time between three and ten years. When this is up, you can begin taking payments from your annuity or renew the contract at a new rate.
Annuities also vary by payout terms. There are three basic types of annuities in regard to how these investments pay out.
- Straight Life Annuity: This annuity pays out until the annuitant's death, even if the initial investment runs out. However, the annuity provider will keep any leftover money if the annuitant passes away before the full investment has paid out.
- Joint Life Annuity: This annuity covers both the annuitant and their spouse. The annuity will pay out throughout the life of both individuals.
- Term Certain Annuity: This annuity pays out over a set period. Depending on the terms, it may continue to pay out to a beneficiary or estate if there are funds left when the annuitant passes away. However, it is also possible for the annuitant to outlive this type of annuity.
Investing in a Fixed Annuity
If you're interested in investing in a fixed annuity, you can secure this type of investment easily. Many companies allow you to make online purchases in just a few clicks. Take care when you choose an annuity provider and consider the following criteria when looking at a fixed annuity. Look for a provider with a stable financial history, a variety of annuity options, and simple intuitive tools for comparing options and managing your investment.
Carefully review the terms of your contract before settling on a product. You should consider the guaranteed minimum interest rate, fees, payout structure, and early withdrawal terms. Once you've found a fixed annuity plan that you're happy with, purchase the contract to lock in those benefits. Finally, make the predetermined payments into your annuity to fulfill your end of the contract.
Investing in a fixed annuity will guarantee that you have regular income coming to you in your retirement years. When you take this stable, low-risk route, you won't have to worry about losing your investment.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
