Annuity Types Uncategorized

Fixed Annuity Pros & Cons

PART I: FIXED ANNUITIES

You already know that annuities can be an important cornerstone of your retirement investment strategy, but with all the options available, how do you choose which one is the best annuity for you?

There are pros and cons to just about every type of annuity and having all the facts will help you make a more informed decision as to what type of annuity is best for you.

In an effort to dive deeper into annuities, this is the first in a series of posts dedicated to the pros and cons of annuities.

Fixed annuity pros and cons

Fixed annuities are probably the surest bet of all types of annuities. You hand over your money, you know exactly what the return is going to be, and the insurance company pays it out when you specify.

The PROS

Guaranteed returns
The amount of interest you receive on your investment will not change. No matter what happens with the markets, there is no risk.

Guaranteed income
The amount of money you receive in income will remain the same for life. Of course, this could also be a bad thing—see the “cons” section below.

Low Minimums
It’s easy to get started with a fixed annuity. For as little as $1000, you can start building your retirement portfolio with a fixed annuity. This means simply that you can start paying into a fixed annuity earlier in life instead of waiting until you have amassed some earnings.

Tax-deferred
The money you contribute to the annuity will not be taxed until you begin to draw. This is helpful, especially if you have already hit your 401K or IRA maximums for the year.

Flexible payouts
You choose how and when you want to be paid out. You could choose to receive a lump sum payment, straight life (where you get set monthly payments for life), or joint life (set monthly payments to you or your spouse for life).


The CONS

Limited returns
A fixed annuity provides a fairly low payout compared to other types of investments. It’s safe, but in line with that safety, the returns are conservative.

Little flexibility
During the accumulation period (before you begin to withdraw the money) you have the option of surrendering your policy and taking your money (after paying a surrender fee). Once the withdrawal period begins, you won’t be able to do access any more than your monthly amount, no matter what happens.

Limited inflation protection
Your withdrawal amount might seem sufficient now, but once it starts to pay out it may not be worth as much. You can pay for inflation protection, but it’s costly and comes with its own limitations. In the end, it might not be worthwhile if, for instance, you plan on receiving $2000 per month but in 30 years when the withdrawal period begins it will only be worth about half that amount.

Possible tax consequences for your beneficiaries
Your beneficiaries will pay income tax on any gains earned from the annuity. With a fixed annuity, any gains are taxed at the standard income rate and are not eligible for long-term capital gains exemptions.

In conclusion, fixed annuities are a low-risk investment that you can’t outlive. Though it’s not going to make you rich, it’s an easy and low-cost way to guarantee security in retirement.

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