Fixed Annuities

How Do Fixed Annuities Compare?

Understanding Fixed Annuities

A fixed annuity is a contract with an insurance company that provides a guaranteed interest rate on your premium. Unlike variable annuities, which are tied to market investments, fixed annuities deliver steady, predictable growth. Many people choose fixed annuities for retirement because of their stability and reliability.

How Does a Fixed Annuity Work?

You can purchase a fixed annuity with either a lump sum or a series of payments. The insurance company credits your account with a fixed interest rate, typically locked in for a specific time. This guaranteed rate may be higher for an initial period, then reset according to contract terms and broader economic conditions.

Fixed annuities almost always include a minimum guaranteed rate—often 1% to 2%. In the current market, some contracts offer guaranteed rates of 5% or 6%. Actual rates can vary, but you are always protected from market downturns.

Types of Fixed Annuities

• Immediate Fixed Annuities: Begin income payments within one year of purchase.
• Deferred Fixed Annuities: Allow your money to accumulate before income payments start, typically during retirement.

Benefits of Fixed Annuities

Predictable Returns: Fixed annuities provide consistent interest, so you know exactly what to expect each year.

Lower Risk: With principal protection and guaranteed growth, fixed annuities help shield your retirement savings from market swings—ideal for conservative savers or those close to retirement.

Tax-Deferred Growth: Interest compounds tax-deferred until you make withdrawals, similar to IRAs and 401(k)s.

State Guarantees: Fixed annuities are backed by the issuing insurance company and often covered by state guaranty associations, providing additional peace of mind (subject to state limits and the insurer’s financial strength).

Guaranteed Income Options: You can turn your annuity value into a predictable stream of payments—including lifetime income if you choose that option.

Drawbacks of Fixed Annuities

Limited Liquidity: Fixed annuities are long-term products. Withdrawing more than your annual free withdrawal limit (usually 5–10%) may trigger surrender charges.

Lower Growth Potential: While returns often beat bank CDs, they may not keep up with inflation over decades—especially compared to other options like fixed index annuities.

• Surrender Charges: Early or excess withdrawals can result in fees, especially in the contract’s early years.
• IRS Penalties: Distributions before age 59½ are generally subject to a 10% IRS penalty in addition to ordinary income taxes.
• Issuer Risk: The long-term security of your annuity depends on the financial strength of the insurer. Always review ratings before you buy.
• Inflation Risk: Without inflation adjustments, fixed payments may lose purchasing power over time.
• Limited Upside: Fixed annuities offer reliable growth, but they do not participate in market gains the way fixed index annuities can.

Conclusion

Fixed annuities provide a steady, low-risk way to build or protect retirement income. They offer predictability and peace of mind but have tradeoffs, including liquidity limits and potential for lower long-term returns compared to alternatives. Carefully weigh these factors to decide if a fixed annuity fits your retirement plan.