Annuities Fixed Annuity
This premium or initial deposit can be any amount between 5000 to 1 million dollars.
Just like bank issued Cash Deposits (CD's), which are simple interest based investments, a fixed annuity is just that but with special IRA like tax considerations. Fixed annuities involve a lump sum cash deposit that is locked in at a pre-specified interest rate that ranges between 1 and 20 years. The initial deposit can be any amount between $5,000 to $1 Million dollars.
The interest rate is fixed and does not undergo any market fluctuations for the life of the contract. Fixed annuities also have higher liquidity than cash deposits (CDs) and offer higher returns or yields when compared to money market accounts, treasury bills and CD's. Fixed annuities have another advantage that works in their favor and this is that they are tax deferred.
Fixed Annuities are generally deferred contracts: Just as the name suggests, a deferred annuity does not pay out any amount right till the end of the annuity’s entire term. The interest for each period that it is not paid out is compounded like a retirement savings account till the time of the final payout.
Quite a few fixed annuities come with an additional ‘lifetime income’ option or feature. This option allows the accumulated savings to get converted into guaranteed monthly incomes that carry on as payouts for you throughout your life. This feature makes fixed annuities highly coveted as it appeals to retirees who want secure post-retirement incomes and gives them a distinct advantage over other retirement investment types.
Not all fixed annuities have the same annuity features but most of them have the following:
1. One Single Up-front Payment All fixed annuities have a single up-front premium or payment and any further investments in annuities require new annuity purchases as such new inputs cannot be put in as investments in already existing fixed annuities.
2. Fixed Interest Rate Fixed annuities pay interest at a guaranteed, fixed rate for the total number of contracted years, just like a typical cash deposit.
3. Low Risk This low risk feature does not just entail to the fact that interest payments are fixed and this negates volatility in incomes; but it actually entails to the fact that with fixed annuities, your money cannot be lost even if your insurance company goes insolvent. This remains the case even when your annuity investments is higher than the maximum amount stated as the Annuity State Guarantee Limits
4. Income for Retirement Fixed annuities give you the benefit of steady upscale growth and peace of mind when planning for retirement income. Fixed annuities provide safe and secure monthly income checks.
5. Good Return on Investment Fixed annuities give anywhere between 3 to 10 percent solid return and that too on an investment that has virtually zero risk. This rate of return is much higher than other similar investment instruments such as CDs, especially when the time horizon is longer.
6. Income for Life Some fixed annuities come with a provision to get guaranteed paychecks for life. This option ensures that there is no question of your retirement savings being outlived by you.
7. 1 to 10 Year Investment Terms Depending on what you want, you can choose between short-term maturities, fixed annuities for medium term and fixed annuities with long term investments. The longer the investment term, the higher your yield rates.
8. No Hassles Investments Fixed annuity contracts involve no hassles when it comes to unnecessary micro-management. There are three simple steps and you are sorted. One, just sign your contract; two, make your premium payment and three, receive your lifetime of paychecks. It is as simple as that.
9. Option for Life Insurance Coverage With certain fixed annuities there is a life insurance cover option that offers loved ones with death benefits. It gives a wonderful opportunity to save the money that you would otherwise have to put down for a separate life insurance policy.
10. No Limit on Contributions With fixed annuities there is no limit on how much money you can invest in them. You can buy, as many fixed annuities as you would like, as there are no limitations on investments, like there are for 401(k) or IRA.
11. Bequest Your fixed annuity can easily be bequeathed to a loved one and this inheritance is absolutely probate-free. No estate or death taxes are applicable in this transaction.
12. Hedge Against Inflation Risks Rest your inflation worries and beat inflation with fixed annuities where other money market instruments such as CDs barely cover CPI.
13. Completely Tax Free Gift With fixed annuities, you can give up to $10,000 in gifts, per year per individual and that too, completely tax-free. There is no limit on the number on individuals that such gifts can be given to.
When it comes to fixed annuities, you always get guaranteed growth and solid returns just so long as you do not prematurely terminate the contract. If you have a deferred fixed annuity, you have added benefits of compounded tax deferral. This means that you then earn substantially higher returns than money market accounts, CDs or even some mutual funds for that matter.
There are three main types of fixed annuities, namely fixed immediate annuities, fixed deferred annuities and CD types fixed annuities. The first two types of fixed annuities, namely the immediate and deferred annuities specifically mention how the payments need to be made. This can be as periodic installments or at the end of a particular period for example the end of contract term.
The CD type fixed annuities are hybrids between normal cash deposits and normal annuities. These annuities are just like normal fixed annuities except for that their guaranteed interest rate has a larger scope.
The timing of getting a fixed annuity is of utmost importance if you are to shop for the best possible fixed annuity for yourself. You can get the highest yields if you buy your annuity in times of high interest rates. You can get even better rates of you buy annuities for longer terms, especially annuities of longer than 10 years. It is also important to know that several factors and not just high yield come into play when deciding on the best fixed-annuity. The best fixed annuity for you is subjective to your personal parameters such as your financial position and the flexibility that you may require in your financial assets. There is always an economic trade-off between high rate of return and flexibility of terms because the longer the investment term the higher the return but lower the flexibility, and of course, vice versa.
Though fixed annuities have several benefits and retirement savings happens to be the best one of them, they also have certain disadvantages associated with them. Some fixed annuity pitfalls are as listed below:
- Some fixed annuity contracts may have very strict and restrictive rules with regards to withdrawals.
- Some contracts may have hidden costs that may not be apparent on first read.
- Some fixed annuity contracts may ‘limit’ the guaranteed rates and you should be alert enough to read the contract completely before agreeing to such clauses.
No well-planned investment plan is complete without some form of diversification. You can diversify your investment portfolio by exploring other substitute alternatives such as mutual fund units, 401 (k)s, bonds, CDs, money market treasuries and treasury bills. Other annuity types such as equity-linked annuities can also be considered.
People who are not in a position to play with market volatility may require secure investments or retirees, who are looking for regular retirement incomes, find fixed annuities to be the best investment solutions. Not only is the downward potential or risk limited in fixed annuities but also, the guaranteed rate of return is also ideal for people seeking a steady monthly income.