Fixed Annuities: What to Know

What is an Annuity?

• An annuity is a financial instrument that provides fixed payments over a specified period of time. An annuity provides a distribution of finances, earned on an investment in a fixed schedule; the payments are allocated to the holder of the annuity in quarterly, monthly, biannually or annually installments.

• An annuity is typically used as part of a retirement plan; the instrument is a fixed-income investment that ensures stable income once the holder stops working. The most common form of an annuity is a pension fund; while the retiree was working, the individual paid a portion of his or her salary into a pension fund, which is invested. Once the holder retires, the return on the investment takes the form of an annuity and is disbursed periodically to the individual.


What are Annuity Rates?

• Annuity rates refer to the amount of payment provided by the annuity. When you purchase an annuity, an insurance company will offer annuity rates based on your income and specific variables associated with your retirement plan.

• Annuity rates are attached to all annuity plans, but will fluctuate in regards to their execution given the type of annuity they are attached to. For example, in a fixed annuity, the annuity rate will be locked in as a percentage. This percentage will signify your payment; the fixed annuity rates will not fluctuate and will be delivered, without fail, in a periodic fashion (the annuity payments may be distributed annually, biannually, quarterly or monthly).


What is a Fixed Annuity?

• A fixed annuity is an interest-based vehicle that holds a number of similarities with bank-issued CDs; however, a fixed annuity is geared specifically towards retirement savings. In the majority of formations, a fixed annuity, for a lump-sum cash offering, will lock in a fixed interest rate ranging from 3% to 10% for a period of 3 to 15 years. The initial deposit for a fixed annuity, known as the premium, will typically range between $5,000 and one million dollars.

• A fixed annuity features a single premium; to purchase a fixed annuity an individual must provide a lump sum up-front payment. Once the payment is delivered, the fixed annuity will lock in a fixed interest rate for a specified number of years (like a CD).

• A fixed annuity is available for short, medium or long terms—longer-term fixed annuities will yield higher rates. Additionally, an individual can invest as much as they want and unlike a 401(k) or Roth IRA may purchase additional fixed annuities.


Advantages:

• A fixed annuity is an extremely low risk investment vehicle. The insurance package is tax-deferred and provides more liquidity than a commercial deposit. Furthermore, the fixed annuity will offer a yield that is typically higher than money market accounts, bonds, Cds and treasuries.

• The majority of fixed annuities will feature a lifetime income option, which will allow the holder to convert accumulated savings into a guaranteed monthly payment. This option is enacted by a number of retirees who, without any substantial income, can better budget themselves.