web analytics

How Fixed Annuities Work

There are many tools you can use in your retirement to make sure you have a regular income and can live a happy and healthy life without the worries of not having enough money to make it through. One of the options you can choose to work with is a fixed annuity.

While this avenue may not work exactly like a traditional retirement account, fixed annuities are a great way to save up for your retirement and get a guaranteed income when you can no longer work. 

A fixed annuity is an insurance contract you can sign where the buyer is offered a fixed rate of return on their contributions for a specific period. They are a good investment for those who want to have premium protection, low risk, and an income for life. It does not offer inflation protection, though, which can make it a little risky for some people, especially if they sign up for this when they are young. 

How Does the Fixed Annuity Work?

A fixed annuity is a contract you sign with an insurance provider and is a safe place to have your cash accumulate interest without paying taxes on that additional amount. You will pay for a steady stream of income when you retire; in exchange, the insurance company is going to guarantee your principal and a minimum interest rate at the same time. 

The exact method that the money placed into the fixed annuity can grow will be spelled out in the contract, so take the time to read through the fine print. Sometimes it is through a set dollar amount, an interest rate, or some other formula specified in writing. You can shop around with more than one insurance company to find the annuity that has the best terms. 

The income that you will receive for your fixed annuity can be guaranteed for life, usually known as a life annuity or a single-life annuity, or you can choose to have that income for a set number of years, which is known as period certain annuities or term certain annuities. It is also possible to receive the income from the annuity in a lump sum. It will all depend on the type of annuity you decide to sign up for. 

Should I Get a Fixed Annuity?

Whether you should choose to get a fixed annuity depends on your risk tolerance level and your other plans during retirement. Risk tolerance, according to USBank, is the “amount of volatility or loss you may assume as an investor.” These products are considered safe, but they generate a small return for those who choose to use them – so there is very little risk involved. While they may not protect you very much from inflation and you won’t make a ton of it, they have low risk associated with them, which is why some people will choose to get them. 

Fixed annuities can be an attractive option for a conservative investor who is trying to plan out their future. It gives them a predictable stream of income that they can use to supplement expenses later in life and give them some peace of mind. They don’t have to worry about the market going up or down on them once they enter retirement; they will be able to get that income no matter what. 

A fixed annuity is also a good investment option for those investors who would like to preserve their principal but who would like a better rate than what they can get by putting the money into a CD or a savings account. This method is often used by retirees or late retirees who want to preserve their capital now that they have retired. However, it can be a risk-free way to grow money when you are younger too. 

Accumulation and the Payout

A fixed annuity is going to come in two phases: the accumulation and the payout. After you decide that the annuity is right for you, the insurance company will work with you to pay a minimum rate of interest while the account is growing. This happens during the accumulation phase. During this phase, the current interest rate is applied, and the annuity rate will be guaranteed for that period. 

Interest on the account will continue to grow tax-deferred while you are in the accumulation phase. At some point, you will start to receive regular income on the annuity: this is the payout phase of the annuity. Depending on the contract you signed with the insurance company, you can choose to receive payments for the rest of your life or just for a set number of years. 

Are Fixed Annuities Guaranteed?

The FDIC will not guarantee annuity funds like your money when you put it in a bank. However, they are regulated and guaranteed through the state insurance commissions, so your annuity will be as safe as the insurance company that sells it to you.

Most insurance companies are regulated, and in good financial standing, so they will likely avoid financial trouble. You should still research and select an insurer with an A rating from some of the major insurance rating agencies to ensure your money is safe. 

Take the time to read through the contract before choosing an annuity to make sure that you understand the terms and how much income you will make from that annuity. This will help you to understand the contract and to avoid surprises later on when you choose a fixed annuity. 

The Bottom Line

When planning for retirement, it is a good idea to look at all of the options out there to ensure that you choose one that is just right for you. While many people focus on traditional retirement accounts, these can vary quite a bit and can carry a good amount of risk.

When you choose a fixed annuity, you have the guarantee of a steady income when you reach retirement age. There are different types of annuities, and they all work in different ways, so do your research and pick the one that is right for you.