Have you been looking for a way to invest your money with relatively low risk, but with a higher return than the interest rates of CDs offered by banks and credit unions?
Look no further than fixed annuities. For decades, fixed annuities have provided a secure form of savings for millions of conservative investors on a tax-deferred basis. They are by far the simplest type of annuity contract and offer all of the benefits provided by any type of annuity except for the opportunity for market participation.
Let’s look at the details of a fixed annuity and how to decide if it’s the right investment for you.
History of Fixed Annuities
Fixed income annuities are the oldest type of annuity contracts that governments have offered to
the public. Caesar sold annuities, requiring a lump sum payment and promising yearly returns for
citizens. European governments funded most of the wars of the 17th and 18th centuries with annuity contributions. In the United States, fixed annuities appeared in the 18th century as a way to support church pastors. After a Pennsylvania life insurance company got the commercial ball rolling in 1912, the contracts quickly became popular, and now they’re used by millions of conservative investors.
Basic Terms for Fixed Annuities
In addition to the benefits of tax deferral, your choice of payment options, and exemption from probate and creditors, fixed annuities usually pay higher rates of interest than CDs or other traditional guaranteed instruments. As a result, savvy investors look to these contracts to achieve a slightly superior rate of growth.
As with all other types of annuities, fixed annuities usually contain a schedule of declining surrender charges, usually between 7% and 15% – above and beyond the 10% early distribution penalty levied by the IRS. This charge gradually decreases by a percent or two each year until it is gone.
Fixed annuities can be deferred or immediate. The deferred variety accumulate regular rates of interest and the immediate kind make fixed payments - determined by your age and size of your annuity - during retirement.
Fixed annuities pay guaranteed rates of interest, which makes them appealing to investors wary of the stock market's ups and downs. What also makes them appealing are their low investment minimums - usually $1,000 to $10,000 - and the fact that the interest they pay escapes taxation until you pull it out.
If you're worried about coming up short, a fixed annuity can help you sleep at night. Because of their stability, fixed annuities might be well suited to those who want to make sure their money will be enough to carry them through retirement, and at least cover the bare minimum of fixed expenses.
Fixed annuities are a powerful vehicle for saving for retirement and guaranteeing regular streams of income upon retirement. They are often used for tax deferral and savings.
Fixed annuities usually mature after anywhere from one year to ten years.
In most cases, they will automatically renew at a revised interest rate unless you
withdraw or move the money.
Rates of return will depend on current interest rates and reset when the annuity
In some contracts, you’ll get a “teaser rate,” a higher rate that’s only valid for the first
year of the contract term.
In other fixed annuities, you’ll start with a lower rate but watch it rise by a set amount
every year until maturity.
Fixed annuities provide a safe means of saving for retirement as well as guaranteed income. Conservative investors who look to banks and CDs should seriously consider these contracts as a more competitive alternative to taxable instruments.
The convenience and predictability of a set payout makes a fixed annuity a popular option for retirees who want a known income stream to supplement their other retirement income.