A fixed annuity works to create income stability during retirement. These insurance contracts are designed to pay the owner a guaranteed interest rate, rather than being subject to changes in the market and interest rates. These insurance policies are purchased with a lump sum, or paid for overtime, with a guarantee from the insurance company that the account will earn an unvarying interest rate. The beauty of these policies is reduced risk, and predictable returns on retirement, along with tax-deferred savings.
When you become eligible to receive payments on a fixed annuity, the payments are taxable income. Similar to the investment accumulation phase, the money was saved without being taxed.
Types of Fixed Annuities
Fixed annuities vary in design. Each type offers specific benefits, and choosing the best type is part of planning for the future.
- Traditional fixed annuities: These insurance products accumulate value on a fixed interest rate. Each contract has specifics, and some traditional fixed annuities will increase the interest rate after a specific number of years. It makes sense when purchasing a traditional fixed annuity to shop for a policy that offers the highest interest rate possible. The “fixed” interest rates continue for a contracted number of years, set by contract.
- Indexed annuity: These fixed annuities are linked to an “index,” which could be the Dow Jones Industrial Average, or the S&P 500. They are designed so that you do not lose your investment, no matter what happens to the stock market. You will not lose money when the stock market goes down, but you will also not earn more interest when the market goes higher.
- Multi-year guaranteed annuity: The interest rate on these annuities is guaranteed for the term of the contract with the insurance company, with a locked-in interest rate that will not rise or fall. These fixed annuities have the advantage of the interest rate continuing through the entire term of the contract, rather than a limited number of years. These fixed annuities may be ideal for people who are closer to retirement age, as they defer taxes, and guarantee a return on investment.
Fixed Annuities and Retirement: Immediate and Deferred Annuities
The income you receive during your retirement years will reflect whether you purchased an immediate or deferred annuity. Some fixed annuities are purchased with a lump sum by a person who is retired or nearing retirement age, with the benefit of providing a guaranteed income stream to the policy owner. A deferred annuity is designed to provide an income stream to the policy owner at some specific future time, and most appropriate for people who are not close to retirement age and will not need the income stream until later in life.
Choosing the Best Fixed Annuity – For You
As there are several types of fixed annuities, and the companies offering these products may have higher or lower interest rates, you want to choose the right product for your individual needs. With the help of a local insurance agent, you can get guidance from a professional who understands each annuity product, can explain the differences in simple terms so you select the most appropriate fixed annuity for your unique situation.