Fixed Annuities | Planning for Retirement

Fixed annuities are essentially CD-like investments issued by insurance companies. Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs. Fixed annuities can be deferred or immediate.

Declared Rate or Multi-Year Guaranteed Annuity (MYGA)
This fixed annuity provides you with a guaranteed interest rate for a specific period of time that you choose. Most multi-year guaranteed annuities provide you with a minimum one-year guaranteed interest rate option along with multiple year rate options. Multi-year guaranteed annuities may be the right choice when you want to know what you are going to earn each year you hold your fixed annuity.

Deferred Instead of an immediate annuity, you could also invest in a deferred annuity. This is a type of annuity people choose to purchase well in advance of retirement. People planning ahead for retirement may purchase this type of annuity, so they can draw the money out or receive income from the annuity in their retirement years.

Fixed Indexed (FIA) A fixed indexed annuity is an insurance product where you can store your money and have it grow at a guaranteed, fixed interest rate or at a potentially higher rate based upon a portion of the performance of an outside index, such as the S&P 500â index.

Immediate With an immediate fixed annuity, you will be starting to take income payments immediately. This is a popular type of annuity for people in retirement that want a reliable income stream for as long as they live or a specified number of years.


FREQUENTLY ASKED QUESTIONS

What makes fixed and fixed indexed annuities so popular? They offer a unique and attractive blend of safety, growth potential, tax advantages, lifetime income, liquidity, and estate advantages.

SAFETY The top priority for most people when they are saving their money, without question, is safety. No one puts their money in a place where they expect to lose it. They put their money in a place where they expect to get it back one day, hopefully with some nice growth. The great thing about fixed annuities is that they uniquely offer three levels of protection.

GROWTH POTENTIAL Once people are satisfied that their money is safe, the next objective is to have that money grow as fast as possible. Many carriers offer annuities with very attractive rates of interest. And, the annuity industry invented index annuities precisely so that they could offer even better rates of interest under certain conditions.

LIQUIDITY People want their money to grow as fast as possible, and besides having a high rate of growth, having some sort of tax advantage helps to accomplish that goal. Annuities have a tax advantage, and that is better than no tax advantage. Some people buy annuities for their tax deferral.

LIFETIME INCOME Annuities typically offer a variety of options to pay the value of the contract out over time as a guaranteed periodic amount of income. In fact, the dictionary definition of an annuity is often something like “a contract providing for an amount payable yearly or at other regular intervals.” Payment options often include income that is guaranteed to continue for the rest of your life, no matter how long you live. Thus, fixed annuities can help protect you from the risk of running out of money later in life.

LIFETIME INCOME Most people recognize that liquidity, safety, and growth do not co-exist very well. For example, with a checking account, you get excellent safety and total liquidity, but most checking accounts pay little or no interest. With stock market mutual funds, you get good liquidity and hopefully a good rate of growth, but you are sacrificing some safety.

So, if an annuity is going to give you guarantees of safety and the potential for a good rate of growth, there needs to be some sacrifice in liquidity. The good news is that most annuity products build in enough liquidity options to make many customers comfortable. Even retirees who need to withdraw money every year to supplement their incomes can find annuities that allow them to take such withdrawals.

ESTATE ADVANTAGES At some point in their lives, many people become motivated to consider what will happen to their money after their death. An estate advantage offered by annuities is speed. With an annuity, you get to name a beneficiary and typically avoid the probate process, so an annuity can be the quickest way to get money to a beneficiary after your death.

Fixed and fixed indexed annuities have an appropriate and valuable place in your financial planning for retirement. Let’s compare them to two other popular products – mutual funds and bank certificates of deposit – to see where they fit.

LIFETIME INCOME Most people recognize that liquidity, safety, and growth do not co-exist very well. For example, with a checking account, you get excellent safety and total liquidity, but most checking accounts pay little or no interest. With stock market mutual funds, you get good liquidity and hopefully a good rate of growth, but you are sacrificing some safety.

One common way to compare alternatives is to look at a spectrum of risk and reward, that is, a spectrum of risk and expected return. Financial vehicles that provide substantial protections against risk are able to attract money at relatively low returns, whereas risky financial vehicles must provide much higher potential and expected returns in order to attract money from investors.

BANK CERTIFICATES OF DEPOSIT Most people recognize that liquidity, safety, and growth do not co-exist very well. For example, with a checking account, you get excellent safety and total liquidity, but most checking accounts pay lThese are clearly very safe, as the principal is guaranteed first by the issuing bank and second, up to a limit, by the FDIC. The interest rate you will earn is also guaranteed for the duration you select. If you choose to take your money out early, the penalty is typically very modest, equal to only a few months of interest. As a result of their safety and predictability, interest rates on bank certificates of deposit are usually fairly low.

FIXED ANNUITIES These are also very safe, as the principal is guaranteed first by the issuing insurance company and second, up to a limit, by state insurance guaranty funds. Fixed annuities are available in a range of surrender charge durations, many with interest rates that are fully guaranteed for the duration selected. Surrender charges are higher and perhaps longer than on bank certificates of deposit, which allows issuing insurance carriers to typically provide higher interest rates than bank certificates of deposit.

    It is helpful to recognize that there is no such thing as a perfect financial product. All financial products have their benefits and limitations. Consumers typically purchase a variety of financial products so that the mix of what they have purchased provides the balance needed to accomplish their objectives.

    A few criticisms of Fixed Indexed Annuities

  • They are complex
  • Sellers earn “high” commissions
  • Surrender charges are too long
  • They don’t credit all of the index gains
  • They aren’t FDIC insured


So with these criticisms, why are people purchasing fixed indexed annuities at a higher rate than any other annuity?

Benefits to owners of Fixed Indexed Annuities

  • Safety of principal. If the underlying index declines or even crashes, fixed indexed annuity owners lose nothing. The money paid into the annuity (premium) plus all of the previously credited interest is protected.
  • Potential to earn a respectable interest rate. True, they don’t necessarily match the returns of direct market investments in a rising market but the downside protection is often a good tradeoff for those that are risk averse or don’t have time to recover losses.
  • The opportunity for a stable stream of income that is insured and guaranteed to continue for the remainder of the owner’s life, no matter when the owner takes it, how long the owner lives, or what economic conditions ensue.