Fixed Annuities and Retirement

As retirement draws closer, having sources of guaranteed income becomes vital. A fixed annuity can prove to be a steady income stream that supplements other retirement resources. In this article, we will go over the basics of how fixed annuities work, and how you can incorporate one into your retirement plan.

Fixed Annuity Basics

A fixed annuity is a contract between you and an insurance company. You contribute money to the annuity in exchange for a guaranteed interest rate. After an accumulation period, you can begin to receive payouts. There are two types of payout methods you can use, immediate and deferred. With an immediate annuity you give the insurance company a lump sum and your income stream begins almost immediately. Deferred annuities offer you payouts at a set time in the future, usually 6-8 years. These types of annuities are typically best for those who are years away from retirement and do not need access to funds now.

Payouts

Once you are ready to receive income you will notify the insurance company. The amount you receive will be calculated by one of their actuaries. This amount will be based on the value of your account, your age, and life expectancy. When choosing your payout method, you can also choose to provide for your spouse, by choosing a method that will provide them with income for the remainder of their life if you pass.

Taxation

If you fund your annuity with qualified funds, meaning funds you have not yet paid taxes on, your funds will grow tax free until you withdrawal them. When you withdraw funds you will pay income taxes on them, not capital gains. This usually lessens your tax burden.

Benefits of Fixed Annuities and Retirement Planning

There are four benefits that fixed annuities provide for your retirement planning. These include:

1. Stable Income Stream: You will receive a steady and predictable income stream. This can help supplement other income sources like social security and pensions.
2. Security: With a fixed annuity, the insurance company assumes the risk. This can provide you with peace of mind during economic downturns.
3. Tax Deferral: Your earnings grow tax free until withdrawal.
4. Flexibility: Some annuities offer rider options like inflation protection; this can enhance their useability.

Considerations Before Investing

While fixed annuities come with many benefits, there are also some potential drawbacks you should take into consideration. These include:

1. Liquidity: During your accumulation period there may be restrictions for accessing principle. Ensure you understand the terms regarding withdrawals.
2. Fees and Expenses: Some annuities come with fees for management or early withdrawal. Review these carefully to understand their impact.

Is a Fixed Annuity Right for You?

Whether or not a fixed annuity will work for you will depend on your financial situation, goals, and risk tolerance. Consider consulting with a financial advisor to assess whether a fixed annuity aligns with your retirement plans.

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