A fixed annuity is an insurance product designed to assist in the retirement planning process. It offers one of very few ways to guarantee an income that you can not outlive. Annuities have several important parts to them and have two distinct uses, accumulation and income.
A fixed annuity can be used to grow funds tax deferred. The interest rate on a fixed annuity is typically higher than bank products like CDs. Keep in mind that this is a retirement product and therefor there are penalties for withdrawing these funds prior to age 65 and a half.
A fixed annuity will offer guarantees for the rate of interest you will receive and and you will not pay taxes on this interest until you withdraw the money out of the annuity. Factoring in the tax deferral, the actual yield of a fixed annuity can be significantly higher than a bank CD.
These annuity products can either be a one time lump sum or can be accumulated in payments, allowing you to save money into an annuity over time. Whatever way you chose to save, a fixed annuity can help you make more money than other bank products of a similar risk tolerance.
Using a fixed annuity to generate an income will guarantee that your money will last as long as you do. An insurance company will determine your average life expectancy and through risk pooling will use a fixed annuity to pay you a specific sum for the rest of your life. You do have options, including a stepped up income amount that will grow over time.
As people are living longer and longer, a fixed annuity can insure that you will never run out of money when you need it the most. This addresses a very real fear for many people.
Fixed annuities also have several benefits, they are very safe, they have liquidity options through the accumulation phase, and they have estate planning benefits built right in.
Fixed annuities are not FDIC insured like bank products. They are offered by insurance companies and are therefore backed by the insurance company itself. The same insurance companies insure your house, car, health, and even life. They are further guaranteed by the states that the insurance companies do business in, and the states enforce a required reserve that these insurance companies must have to further protect your investment. This all makes a fixed annuity a very safe product to invest in.
While the money is growing in a fixed annuity there are typically liquidity options. These allow you to have access to your money in the event of need without a penalty. In many cases this is at least 10% per year, sometimes higher. Additionally, the interest can always be taken out of a fixed annuity without penalty. Many fixed annuities also offer penalty free withdrawals for several reasons, like a terminal illness, entering a nursing home, and sometimes even the loss of a job.
While not taking an income off of a fixed annuity the annuity is assigned a beneficiary. Upon the death of the owner of the annuity the funds pass directly to the beneficiary. This is not contestable in court, so the transfer happens quickly and without hindrance. Once in the income phase there are income options that provide benefits for a beneficiary, but these must be selected when the contract is signed.
A fixed annuity can be an important part of a retirement plan. Consult with a retirement professional to determine if a fixed annuity is right for you.