Fixed Annuity Basics

Retirement planning can be a difficult and confusing process. There are many products designed to help you with the retirement planning process and choosing the right ones can be difficult without help. One of the products that an adviser might suggest to supplement your retirement plan is a fixed annuity.

A fixed annuity is an insurance product designed to grow your money until you require the retirement income, then to turn your money into an income that will last as long as you do. A fixed annuity provides safety and security while guaranteeing an income that you will never outlive.

A fixed annuity is fixed, that is, it provides a predetermined rate of interest for a specified amount of time and offers a rate guarantee for when that set rate expires. For example, a seven-year fixed annuity may offer a 5% interest rate for the first 3 years, then guarantee that for the following four years the rate will never be below 3%.

As an annuity, a fixed annuity can be turned into a stream of income that will last for the rest of the policy holder’s life. With the average life expectancy growing almost every year people are living a full third of their lives in retirement these days. Knowing that you will never outlive your income is a welcome relief.

Fixed annuities are tax deferred during the accumulation phase, when you are adding money or letting the money grow before taking an income. This means that the money you are earning is not taxable as income every year like other bank products. Particularly if you expect your tax liability will be lower in retirement, this could save you a lot of money.

Fixed annuities can not be attached in lawsuits, meaning that whoever you designate as the beneficiary of the annuity will receive it. It can not be contested in court. If you are ever sued for anything, no one can come after the money that you have in an annuity.

These products are not FDIC insured, only bank products like CD’s are FDIC insured. Fixed annuities are backed by the insurance companies that offer them and further backed by the state guarantee association of the state in which the insurance company is based. Fixed annuities are very low risk products.

When planning for retirement there are many products available to you. Carefully consider your needs and goals. A fixed annuity is an excellent solution for many people, but does not fit in every retirement plan. Consulting an adviser for a comprehensive retirement and estate planning strategy can help you determine what products to include in your plan.