Fixed Annuities

Yesterday, I discussed fixed income funds and fixed income basics.   Continuing with the same theme of preparing for retirement and considering how to create a sustainable fixed income stream, I am going to discuss fixed annuities today.  When used properly, fixed annuities can be a very useful tool to help meet  your current or future income needs.

As stated in Investopedia a fixed annuity

“An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.”

Fixed Annuity Overview
Fixed annuities are interest-based vehicles similar to bank-issued CDs, but geared specifically towards retirement savings.  A lump-sum of cash locks in an interest rate for 1-10 years. The initial deposit — otherwise called the premium — ranges anywhere from $5,000 to $1,000,000. Fixed annuities are considered low risk, have more liquidity than CDs, are tax-deferred, and typically offer higher yields than bonds, CDs, or treasuries.

Distribution Payout
A fixed annuity uses one of two distribution models: immediate or deferred. Immediate fixed annuities start issuing monthly payments right away.  Deferred annuities don’t pay out until the end of their term, compounding interest like any typical savings instrument.

The Guarantee of The Fixed Annuity
One of the most appealing feature of fixed annuities and why they represent the majority of all annuity sales is their stable return. While the markets are volatile and uncertain, a guaranteed rate of 3-9% can be very reassuring, especially if you are nearing retirement.

“100% Secure” Principle
I am quoting the term 100% Secure  mainly because nothing is entirely safe.  We have to factor the posssibility that our issuing annuity company may run into trouble.  With the exception of stable value accounts, CDs, money market funds, and fixed annuities, no other investment guarantees loss of principle.  But unlike CDs and money market accounts, fixed annuities typically offer higher rates of return and tax deferral.  Here are a list of other benefits fixed annuities provide:

Benefits
Guaranteed Rate – The Fixed Annuity locks in a fixed interest rate for a certain number of years.   The longer the time period, the higher the interest rate.
Retirement Income – Fixed Annuities are an ideal source of monthly retirement income. Remember one of our goals is to create a lifestyle where our monthly income exceeds our monthly expenses.  For these purposed fixed annuities can be an excellent source.
Lower Risk — Money can only be lost if the insurance company becomes insolvent and/or your investment exceeds Annuity State Guaranty Limits.
Flexible Year Terms – Fixed annuities are available for short, medium, or long terms. As mentioned earlier, longer terms yield higher rates.
Unlimited Contributions – Unlike a 401(k) or IRA, fixed income annities allow you to make unlimited contributions.
Inheritance – Pass on money to loved ones probate-free and  avoid estate/death taxes.
Tax-Free Gifts – Gift up to $10,000 per individual, per year, tax-free. Gift money to an unlimited number of individuals.

Types of Fixed Annuities
There are 3 types of Fixed Annuities

1) Immediate Fixed Annuity - With this type of anuity, you will begin to receive income checks the first month after your deposit is made.
2) Deferred Fixed Annuity – With this type of annuity, you save money during the  accumulation phase and savings grows tax deferred. Once the annuity expires, the accumulation phase ends and income or dispersal phase begins.  This can be in the form of a single large payout  or a longer term series payout
3) CD Annuity – A CD type annuity is a combination of a fixed annuity and CD. The CD portion of the annuity guarantees a fixed rate for the entire duration of the contract’s terms, whereas a fixed annuity only guarantees the annuity for a specified period of time.

For more information on Annuities, visit the Free Annuity Finder.

Related posts:

1. The Basics of Annuities
2. How To Increase Your Yield by 45% With Tax-Deferred Annuities
3. How to Guarantee Your Lifetime Income – Retirement Income
4. Fixed Income Funds
5. 7 Questions to Ask Before Buying An Annuity