Fixed Annuities

Fixed Annuities – A Safe, Guaranteed Way to Grow Your Retirement Savings

What Is a Fixed Annuity?

A fixed annuity is a financial product issued by an insurance company that offers a guaranteed interest rate for a specified period. Fixed annuities are designed to help individuals grow their savings over time with minimal risk. They are a popular choice for conservative investors who want the security of a guaranteed return without the risks associated with the stock market.

When you purchase a fixed annuity, you contribute a lump sum or make periodic payments to the insurance company. In return, the insurance company credits your annuity with a fixed interest rate over the contract’s term. At the end of the accumulation phase, you can either withdraw the funds or convert them into a guaranteed income stream for life or a specified number of years.

How Fixed Annuities Compare to Certificates of Deposit (CDs)

Fixed annuities and CDs share some similarities but also have key differences that make them suitable for different financial goals:

Guaranteed Returns: Both fixed annuities and CDs offer guaranteed interest rates for a specific term. This makes them both safe options for conservative savers who want predictable growth without the risk of losing money.
Length of Investment Term: CD terms typically range from a few months to five years, while fixed annuities can have terms that last anywhere from a few years to several decades. Fixed annuities are often designed to be long-term investments, making them ideal for retirement planning.
Interest Rates: While both offer fixed returns, fixed annuities tend to provide higher interest rates than CDs, particularly for longer terms. This makes them attractive for individuals looking for better growth on their savings over time.
Tax Advantages: One of the most significant advantages of fixed annuities over CDs is their tax treatment. Earnings from a CD are subject to annual income tax, even if you don’t withdraw the interest. With fixed annuities, your earnings grow tax-deferred, meaning you don’t owe taxes on the interest until you start taking withdrawals. This tax-deferred growth can help your savings compound more effectively over time.
Liquidity and Penalties: CDs typically have early withdrawal penalties if you access your money before the term ends. Similarly, fixed annuities may have surrender charges for withdrawing funds during the early years of the contract. However, fixed annuities often offer more flexibility, such as free withdrawal provisions that allow you to take out a certain percentage of your funds each year without penalty.
Income Stream: Unlike CDs, fixed annuities provide the option to convert your savings into a steady income stream for life or a set number of years. This feature makes fixed annuities particularly appealing for retirees who want to ensure they won’t outlive their savings.
Issuer: CDs are typically issued by banks or credit unions, while fixed annuities are issued by insurance companies. This difference is important when considering the safety of your investment. While CDs are FDIC-insured, fixed annuities are backed by the financial strength of the issuing insurance company. It’s essential to evaluate the insurer’s ratings when purchasing a fixed annuity to ensure your investment is secure.

How Fixed Annuities Benefit You

Fixed annuities offer a range of benefits that make them a valuable addition to your retirement strategy:

Guaranteed Income in Retirement: The ability to turn a fixed annuity into a guaranteed income stream is one of its most significant advantages. You can choose to receive regular payments for a specific period or for the rest of your life, providing peace of mind that you won’t outlive your savings.
Tax-Deferred Growth: Unlike CDs, where interest is taxed annually, fixed annuities allow your earnings to grow tax-deferred. This means you don’t pay taxes on your gains until you start withdrawing the money, allowing your savings to compound more efficiently over time. For individuals in higher tax brackets, this can result in significant tax savings.
Principal Protection: Fixed annuities offer the safety of principal protection. Regardless of market conditions, your initial investment and any credited interest are guaranteed by the insurance company. This makes fixed annuities a good choice for risk-averse investors seeking stability.
Higher Interest Rates: Fixed annuities typically offer higher interest rates than CDs, particularly for longer-term contracts. This makes them a better choice for individuals looking for higher returns while maintaining safety.
Flexibility for Retirement Planning: Many fixed annuities offer a range of payout options, allowing you to tailor the product to your specific retirement needs. You can choose between lump-sum withdrawals, lifetime income, or payments over a set period. Some fixed annuities also offer riders for additional features, such as inflation protection or death benefits for beneficiaries.
Avoiding Probate: Upon your death, the remaining balance of your fixed annuity can be passed directly to your beneficiaries without going through probate. This can help streamline the process for your loved ones and ensure they receive the funds quickly.

Who Is a Fixed Annuity For?

Fixed annuities are particularly beneficial for certain types of investors:

Retirees or Pre-Retirees: Fixed annuities are ideal for individuals nearing retirement who want to secure a guaranteed income stream. They offer a predictable source of income in retirement, making it easier to manage expenses and maintain your lifestyle.
Conservative Investors: If you’re risk-averse and prefer a safe, guaranteed return on your money, fixed annuities provide peace of mind. Your principal is protected, and you know exactly how much interest you’ll earn over the life of the contract.
Tax-Conscious Savers: For individuals in high tax brackets, the tax-deferred growth offered by fixed annuities is a significant advantage. You can postpone taxes on your earnings until you begin withdrawals, potentially reducing your tax burden in retirement when your income may be lower.
Long-Term Planners: If you have long-term financial goals, such as providing for a surviving spouse or ensuring your savings last throughout retirement, fixed annuities offer the security and predictability needed to achieve those goals.
Those Who Want to Avoid Market Volatility: Unlike variable annuities or investments in the stock market, fixed annuities are not subject to market fluctuations. This makes them a great choice for individuals who want to avoid the risk of losing money due to market downturns.

How to Learn More

Fixed annuities can provide a reliable, guaranteed way to grow your retirement savings and ensure a steady income in your later years. If you’re looking for a secure financial product that offers higher interest rates than traditional savings accounts or CDs, and that fits into your overall retirement strategy, contact us today. Our financial planners can help you explore the best fixed annuity options for your needs and guide you through the process of securing your financial future.

We want our clients to know we’re here to help them no matter what. If you want to know more about how we can help you, schedule an introductory call.

* Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Estate Planning services are provided working in conjunction with your Estate Planning Attorney, Tax Attorney and/or CPA. Consult them for specific advice on legal and tax matters.