by Donn J. Sinclair, MBA – February 1, 2018
Fixed annuities are essentially fixed rate accounts issued by insurance companies. These accounts pay a guaranteed rate of interest for one or more specified term periods.
Fixed annuities can be deferred or immediate. The deferred variety accumulate regular rates of interest and the immediate kind make fixed payments – determined by your age and size of your annuity – often during retirement.
The convenience and predictability of a set payout makes a fixed annuity a popular option for retirees who want a known income stream to supplement their other retirement income.
What are It’s Advantages ?
Fixed annuities pay guaranteed rates of interest, which makes them appealing to investors wary of the stock market’s ups and downs. What also makes them appealing are their low investment minimums – usually $1,000 to $10,000 – and the fact that the interest they pay defers taxation until withdrawn from the fixed annuity. Also note that fixed deferred annuities are not necessarily a lifetime commitment. Some are available that can be redeemed in as little as one year !
What are its Disadvantages ?
Their rates can also be fixed for a limited period, and then drop say, after the first year. If you don’t like the new rates and want to withdraw your money early, heavy surrender charges could kick in and cut into your returns.
Plus, if you decide to opt for fixed lifetime payments, those payments most likely will not rise to keep pace with inflation. As a result, the value of the money you receive will decline over time as inflation erodes the purchasing power of each dollar. So for example, if you retire young and plan to keep collecting annuity payments for a longer period of time, the purchasing power of your money could be a big concern.
How do I Know if a Fixed Annuity is Right for Me ?
If you’re worried about coming up short, a fixed annuity can help you sleep at night. Because of their stability, fixed annuities might be well suited to those who want to make sure their money will be enough to carry them through retirement, and at least cover the bare minimum of fixed expenses. Please phone Donn today so we can review current rates and see if a fixed rate annuity may be right for you.
Updated by Donn J. Sinclair, MBA
in Charlotte NC and Rock Hill SC
January 25, 2018 (803)329-0609
DJS: More information is available at IRS.gov.
See Publication 590-A and Publication 590-B.