Fixed annuities are stable, long-term investment products that offer guaranteed returns and predictable payouts. As amazing as those advantages sound, fixed annuities don’t offer as much earning potential as other annuity types, like fixed index annuities. It’s worth exploring whether a fixed contract is the right long-term savings strategy for you.
What is a fixed annuity?
A fixed annuity is an insurance contract that offers a guaranteed rate of return for a fixed time — or until the policyholder passes away. Some fixed annuities even pay out to a chosen beneficiary after the main policyholder passes.
Here's how it works:
- You give the insurance company a lump sum of money, or regular payments.
- The insurance company credits a guaranteed interest amount every year, regardless of market performance.
- You don't have to pay taxes on the money until you start taking it out.
Unlike variable annuities — which are influenced by market performance — fixed annuities offer a set earning rate unaffected by market volatility, providing more reliability and security. But you can’t always fully leverage market highs, since your gains are fixed at a set percentage.
The pros and cons of fixed annuities
Fixed annuities offer stable, predictable income later in life, but they’re not for everyone. Here are the advantages and disadvantages of this annuity type.
Pros of fixed annuities
- Guaranteed returns: Fixed annuities typically include a minimum-rate guarantee to protect against declining interest rates. This is the lowest amount you’ll be credited on the money you deposit and accumulate.
- Predictable income: Your guaranteed interest rate remain the same no matter what market conditions look like, making this one of the least risky annuity types.
- Tax-deferred growth: Most fixed annuities are tax-deferred, meaning you’re only taxed on your earnings at the time of withdrawal. Some non-tax-deferred products exist, like Gainbridge®’s FastBreak™.
- Lifetime income option: Many fixed annuities can be converted into a guaranteed stream of income for life, helping ensure you don’t outlive your savings.
- No annual contribution limits: Unlike IRAs or 401(k)s, fixed annuities generally don’t have contribution caps, letting you invest more for tax-deferred growth.
FastBreakTM is issued by Gainbridge Life Insurance Company (Zionsville, Indiana).
Cons of fixed annuities
- Limited liquidity: Fixed annuities are often illiquid, meaning you can’t take money out whenever you want. But some insurers let you withdraw 10% yearly penalty-free. And you can sometimes add riders to your contract that allow for greater liquidity in certain circumstances, such as terminal illness or long-term care needs.
- Surrender charges: Annuities have a surrender period — the period of time you must wait before withdrawing money. This can be up to 15 years from the contract’s start date. But most insurers let you take out 10% each year penalty-free.
- Lack of inflation protection: Inflation means the cost of goods and services goes up. Because this annuity type’s rate is fixed, your yearly payments don’t increase to match inflation. But you often can add riders that provide some level of inflation protection, like a cost of living adjustment rider.
- Lower long-term returns: Fixed annuities typically yield less than variable or indexed annuities — or long-term stock market investments — since you’re trading potential upside for stability.
- Potential insurer risk: Guarantees are only as strong as the issuing insurance company’s financial stability. It’s important to check AM Best or similar ratings.
How fixed annuities work: Rates
Insurance providers set annuity rates, and with fixed annuities, they remain the same throughout your contract’s term. Here are two rate-related factors to keep in mind when considering this annuity type:
- The annual percentage yield (APY) is the annual rate you’ll earn for the entirety of your contract’s term.
- Annuity rates are determined by a number of factors, such as current interest rates, market factors, and — in some cases — premium amounts.
Research various providers’ rates to determine which is the best — you can review our rates on our website. But as an example, our SteadyPace™ APY rate is 5.50% with a contract length of five years. The minimum deposit is $1,000, and its AM Best rating is A- (excellent).
FAQs
What are the downsides of a fixed annuity?
Here are the three main downsides of fixed annuities:
- The illiquidity, meaning you can’t usually make withdrawals whenever you like.
- You can’t leverage potential market growth.
- No inflation protection unless you add riders, in turn reducing your yearly earnings.
Is a fixed annuity a good investment?
This depends on your retirement goals. If you want a steady income stream later in life, a fixed annuity could be a good choice. It’s a relatively safe investment risk, and you’ll earn a predetermined minimum amount of interest.
What happens to my fixed annuity if I die?
It depends how you set it up. Some annuities end upon the policyholder's death, while others pass to a selected beneficiary. Importantly, you can only decide on what will happen during the accumulation phase — once it begins paying out, you can’t adjust this.
How do fixed annuity rates compare to other investment options?
Unlike investments such as stocks and bonds, which may fluctuate in value over time, fixed annuities provide guaranteed income for a specified period (or for life).
Here's how fixed annuities compare to other popular investment options:
- Savings accounts: Fixed annuities offer a higher rate of return compared to traditional savings accounts, ensuring your money grows at a steady pace.
- Certificates of deposit (CDs): Both fixed annuities and CDs provide fixed interest rates for a specified period. But fixed annuities offer more flexibility and tax advantages.
- Bonds: Fixed annuities and bonds offer a steady stream of income. But fixed annuities provide guaranteed payments, while bonds can be subject to market fluctuations.
- Mutual funds and stocks: Mutual funds and stocks have the potential for higher returns but also carry a higher level of risk.
When choosing an investment option, consider your individual financial goals, risk tolerance, and time horizon. Fixed annuities are a suitable option for those seeking a guaranteed income stream and stability in their retirement portfolio.
All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.
SteadyPaceTM is issued by Gainbridge Life Insurance Company (Zionsville, Indiana).
Withdrawals are taxed as ordinary income and, if taken prior to age 59½, there may be a 10% federal tax penalty. Early withdrawals from an annuity may result in a surrender charge or market value adjustment. Annuities are long-term investment vehicles and have termination provisions for keeping them in force.
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