Some believe acquiring an annuity is the most effective strategy to ensure a comfortable and secure retirement. These insurance products are aggressively marketed for appealing features such as guaranteed lifetime income and protection against market falls. Fixed annuities are gaining popularity as a viable option for protecting retirement assets even during economic or stock market downturns. However, annuities can be complicated. They can come with a variety of strings attached, as well as unexpected charges. That is why, before purchasing a fixed annuity, it is critical to evaluate the following factors. How Fixed Annuities Work Fixed annuities are insurance company-sold products that function similarly to certificates of deposit (CD). The insurer guarantees an agreed-upon rate of return and payout. Fixed annuities can either be paid immediately or later at a fixed rate. Your age and the amount of your annuity will decide how much you will get from an instant annuity each year during your retirement. A deferred fixed annuity accumulates value at a predetermined interest rate over time and then distributes that value later. Pros of Fixed Annuities Minimum guaranteed rates When the contract’s initial guarantee period expires, the insurer can adjust the rate based on a predefined formula or the yield on its investment portfolio. Fixed annuity contracts often feature a minimum rate guarantee to protect against falling interest rates. Tax-deferred growth Due to a fixed annuity’s status as a tax-qualified investment, its returns grow and compound tax-deferred; annuity owners are only taxed when they take money out of the account, occasionally or regularly. This tax delay can substantially impact how the account grows over time, especially for those in higher tax brackets. The same applies to tax-deferred qualified retirement funds, such as IRAs and 401(k) plans. Principal’s relative safety The life insurance company is responsible for securing the money invested in the annuity and fulfilling any contractual guarantees. Annuities, unlike most bank accounts, are not federally insured. As a result, buyers should only consider doing business with life insurance companies that receive excellent financial strength ratings from the major independent rating organizations. Guaranteed income payment Fixed annuities can be converted to immediate annuities at any moment by the owner. The annuity will, after that, deliver a guaranteed income payout for a set amount of time or the annuitant’s whole life. Predictable investment returns The yield generated by the investment portfolio of the life insurance company, which consists of high-quality corporate and government bonds, determines the rates for fixed annuities. The annuity contract specifies a rate of return, and the insurance company must pay that rate. This is in contrast to variable annuities, in which the annuity owner selects the underlying investments and thus bears much of the investment risk. Cons of a Fixed Annuity Payments from fixed annuities do not keep pace with inflation. Many choose fixed annuities to ensure a steady stream of fixed lifetime payments. What is sometimes overlooked is that those lifetime payouts are not inflation-adjusted. Inflation will considerably erode the purchasing power of those payments over time. A fixed annuity cannot compete with the possible inflation protection typical investment accounts such as an IRA provide. Rates may change, possibly for the worse. The rates of return may be fixed for a limited time. Following that, the rate may fall. If you don’t like the new rate and decide to cancel, you’ll almost certainly face steep surrender charges. Read the terms carefully to see if the insurance provider has the authority to alter premiums. Additional Information on Purchasing a Fixed Annuity Annuity sales generate commissions for insurance agents. As a result, keep any potential conflicts of interest in mind. A broker’s advice may be driven by self-interest, so get a second opinion before purchasing a fixed annuity. The annuity is subject to the solvency of the insurance company. Guarantees in an annuity are only as good as the insurance company’s capacity to meet them. If the insurer goes bankrupt, there is a risk that future contract obligations will not be honored. Unlike a bank account, your annuity is not insured by the FDIC. Examine the company’s bond ratings and financial stability and carefully read the annuity’s terms. Annuities can be costly. The most appealing annuity features, such as everlasting income and death benefits, are called “riders.” Each of these riders comes with additional fees, raising the total cost of the annuity and decreasing your return. Surrender Charges These are expenses charged when you withdraw money before a certain time (surrender term) after purchasing it, usually seven to nine years. Your principal is only protected if you keep the annuity until the surrender period ends. If you need money in an emergency, you may have to pay exorbitant fees. Furthermore, if you are under age 59 1/2, you may be subject to a 10% tax penalty. Before purchasing a fixed annuity, get a second opinion. Each person’s financial situation is different, so not every financial product is suitable for everyone. Annuities can be appealing but also have significant drawbacks that are easily ignored in the fine print. Other financial instruments more appropriate to investors’ financial needs and goals can provide the same benefits as an annuity. Given the complexities and costs involved, it’s critical to ask your broker and, preferably, an objective third party, such as your financial adviser, a slew of questions before deciding whether purchasing a fixed annuity is right for you.
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I have worked with Deloitte Partners, Directors and Principals for approximately 30 years, saving them considerable amounts of money on their Group Term Life Insurance Premiums. We have also addressed Long Term Care within Life Insurance and Fixed Index Annuities. The Annuities Guarantee fixed interest rates and Long Term Care doubling. Protected from any corrections in the stock market. Great for retirement planning.
