A fixed annuity is a form of agreement between the annuitant and the insurance company. Under this kind of arrangement, you give the insurance company authority to manage your money in return for a steady income and secured retirement. It also offers low investment risk exposure and provides tax-deferral to help your cash grow faster. Fixed annuities have become a popular investment alternative for many people who plan to retire. Despite the advantages, fixed annuities have some drawbacks that make them less ideal investment option.
Regardless of stock market fluctuations, fixed annuities guarantee that your initial capital will be given back to you. They also give secured rates of interest that makes them attractive to investors who are cautious about the lows and highs of the stock market. The annuities offer low investment minimums, which makes them appealing. In addition, the annuities grow tax-deferred. This means that you get to earn interest every year although you do not pay the taxes. However, this is beneficial since your savings grow quickly than they would when your profits are taxed each year. Usually, the longer your taxes are deferred, the better.
Safety of a Fixed Annuity
Purchasing a fixed annuity that has an MYG (multi-year guarantee) and retaining it for the whole term is a safe and convenient way of growing your money. This annuity is also safer than shares in a bond fund since the share prices can drop in response to increasing interest rates. Apart from being safer, the investment risk exposure is minimal.
Fixed annuities can be changed to a retirement income stream. It gives most retirees a sustaining income for the remaining part of their life. Generally, a fixed annuity is easy to comprehend, monitor and incorporate into your income plan.
Not only is the income meant to last an individual’s lifetime, it is also intended to sustain the rate of inflation. Fixed annuities also offer stable rates. For instance, when you purchase an MYG fixed annuity, you retain the exact value of your investment together with the annual interest rate at the end of the term. The result is completely predictable as long as no withdrawals are made.
The annuities offer death benefits to your beneficiaries. In case you pass away while having a fixed annuity, the money goes to the beneficiaries as indicated on your contract. Since the cash is not part of your estate, it therefore does not need to go through the legal process (probate).
The investment returns for fixed annuities are lower than other investments even though the principal is guaranteed. In addition, if you choose lifetime payments, then the payments will not increase to keep up with inflation. Therefore, the value of your money will decline eventually as inflation erodes a dollar’s purchasing power. For instance, if you retire when you are young and have plans of collecting fixed annuity payments for a longer period, then your money’s purchasing power could be a huge concern. The investment options for these annuities are also more limited than other retirement plans. This causes their returns to be lower. Mostly, lower returns are experienced when the bond-yield curve is flat.
There is a federal penalty when you withdraw money from the annuity early. For instance, you are likely to pay ten percent of the cash withdrawn to the IRS if you make withdrawals before you attain the age of 59 and-a-half. However, under specific circumstances such as illness, a penalty is not charged after withdrawing money before this age. Alternatively, take Substantially Equal Period Payments (SEPPs) if you want to withdraw your money penalty free.
Though many investors benefit from long-term results, those searching for short-term outcomes should look for other options other than fixed annuities. Mostly, these annuities are made up of corporate bonds as well as government securities. Generally, the payoff for mature annuities ranges from five to 15 years.