Today, retirees have access to a vast array of investment products from dividend funds and real estate trusts to traditional stock and bond portfolios. Despite the increasing number of options, fixed annuities remain one of the most attractive investments on the market due to the potential to accumulate value over time.
Unlike other investments, fixed annuities can grow tax-deferred enabling your earnings to accumulate and compound without incurring federal, state, or local income taxes, until you start withdrawing money.
What is a Fixed Annuity?
An annuity is essentially a contract with an insurance company, whereby the investor makes a payment to the insurer in return for a salary or lump sum deposit at a later date. The earning potential of an annuity is influenced by the contract type, which can be broadly defined as fixed or variable.
Designed to protect investors against market risk, a fixed annuity offers a guaranteed interest rate regardless of the investment’s performance, while a variable annuity does not ensure an interest rate as its dependent on the peaks and troughs of the market. Retirees who are adverse to high-risk investments are therefore often attracted to fixed annuities due to their predictability.
Different Types of Fixed Annuities
There are two main types of fixed annuities—immediate and deferred.
Immediate Fixed Annuities
Immediate fixed annuities deliver guaranteed income payments straight after you have deposited your lump sum payment. These products are also known as Single Premium Immediate Annuities. Once payments begin, you can no longer access the principle you have invested, but instead, receive regular payments from the insurance company. These annuities can be set up to deliver income for the remainder of your life.
Who Are Immediate Fixed Annuities Suited For?
If you want to guarantee a steady stream of income that covers a decent portion of your monthly expenses for as long as you live, a fixed immediate annuity is a good idea, especially since you could potentially lock in a higher interest rate than what the banks are offering. However, as payments are received immediately, you’ll only want to consider this option if you’re already retired, or retiring very soon.
Deferred Fixed Annuities
Deferred fixed annuities are best described as the insurance industry’s version of a long-term savings account. Essentially, deferred annuities delay income installments or lump-sum payments until the investor chooses to receive it. These investment products begin with a saving phase, during which you deposit money into the investment account, followed by an income phase where the insurance company starts paying you, usually, once you retire to replace your income.
Who Are Deferred Fixed Annuities Suited For?
A deferred fixed annuity is a wise investment for those who are in the planning stages of retirement and still at least 10 years off leaving the workforce. However, choosing an annuity with a guaranteed income rider is recommended. An income rider ensures a minimum income throughout your retirement years. So even if the market takes a plummet just as you’re about to retire, you’ll still receive the agreed amount. This product is all about securing a guaranteed profit, which is great for individuals looking for a set-and-forget investment with minimal stress.
Investigate Before You Buy
Fixed annuities can be a safe and rewarding investment with an array of additional benefits, including tax-deferred growth, flexible terms, and death benefits. However, like all investments, fixed annuities must be handled with care. It’s essential your research the financial strength of the insurance company to protect against losing your principal and make sure you read all fine print, so you don’t find yourself trapped in an investment that delivers less and less interest year after year.
