Fixed Annuities

Fixed Annuities:

What, When, and Why.

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What…The Basics: Fixed annuities are interest-based investments, such as an interest bearing account or a CD—but often geared specifically to retirement savings. One makes an initial deposit (the “premium”) as either a lump-sum payment OR invests over a period of years (for instance, while working) to get tax-deferred savings benefits, in a conservative investment, that will then pay out a guaranteed stream of money upon its maturity. A fixed annuity is low risk. It is fairly liquid. And (of course, depending on market conditions) it offers higher payouts than bonds or treasuries.

The investor can receive distributions from a fixed annuity through:

1. Immediate distributions: payments are made right away, until interest + premium is exhausted.

2. Deferred distributions: payments are made at the end of an agreed-upon term, with interest on invested amount compounded and tax-deferred.

Why…

Fixed annuities provide access to a fairly stable stream of income—the principal and interest are guaranteed, and if you are using them to plan for a stream of income during retirement, they can provide a solid basis to manage expenses and income. Investors will be penalized (tax-wise) for early withdrawals and may also face fees from the issuer (the insurance company). But if you are counting on the annuity solely as a source of income for post-retirement, in lieu of or in addition to a pension or IRA benefits, than a fixed annuity can be a concrete option to consider.

Who:

Fixed annuities do not offer as much “upside” potential as variable annuities (or other investment options). However, they provide a measure of safety and typically, higher yields than bank CD’s or other “safe” options. If you have a solid chunk of money to invest in the initial premium, or are paying in while working, a fixed annuity can be a revenue stream that a retiree can count on.