What are the Benefits of a Fixed Annuity?

Fixed annuities offer many benefits, especially to those planning for retirement. Adding a fixed annuity to your portfolio can make it easier to plan for retirement because it offers guaranteed, reliable, and predictable income. Understanding what a fixed annuity is and its benefits can help you determine if this is the right financial planning tool for your goals.

What is a Fixed Annuity?

A fixed annuity is a financial and retirement planning tool that offers a guaranteed rate of return. Fixed annuities have the opportunity to generate guaranteed income, making them an excellent tool for supplementing retirement income. A fixed annuity differs from other annuity types, including a variable annuity.

Whereas a fixed annuity guarantees a set rate of return, a variable annuity pays based on how well the market performs. Other common annuity types include fixed period, single life, and joint and survivor annuities.

Benefits of a Fixed Annuity

You have a lot of retirement planning options available, and reviewing the benefits of a fixed annuity can help you decide if it’s right for your goals. Fixed annuities offer many benefits, including:

Growth Potential

Fixed annuities offer good growth potential with the opportunity to turn a large lump sum of money into consistent, regular payments in retirement. Competitive interest rates mean you can earn a good, guaranteed return on your initial investment, especially if you’re willing to choose a longer annuity period. Fixed annuities are usually between three to 10 years in length.

Simple Investment

A fixed annuity is often considered a simple investment because they’re easy to understand and guarantees a specific rate of return. This can make adding a fixed annuity to your investment portfolio an easy decision since it can offset the risk or complexity of other investment types.

Additionally, even as a simple investment, fixed annuities still offer their benefits. Many fixed-rate annuities come with death benefits, which allow your annuity payments to pass on to a beneficiary free of probate. It’s important to note that extra benefits may sometimes come at an added cost but may be worth it to protect your annuity payments.

Flexible Returns

The returns from a fixed annuity aren’t just guaranteed but also flexible. In addition to choosing a fixed annuity contract that works for your financial goals, you can also determine when you want to begin receiving income. You can time your fixed annuity payouts for when you plan to retire or even a few years into retirement when other funds may run low. The customizability of a fixed annuity makes it an excellent retirement planning tool.

Tax-Deferred Growth

Fixed annuities earnings are tax-deferred, which means you won’t owe taxes on them until you begin receiving payments. Because taxes aren’t taken out until later, you can also earn more on the money in your account through compounding interest.

The Internal Revenue Service (IRS) taxes fixed annuities as ordinary income, which means your tax rate depends on your income bracket. After retiring, you may pay less taxes if you’re in a lower tax bracket.

Predictable, Guaranteed Income

One of the biggest benefits of a fixed annuity is its ability to provide predictable, guaranteed income. The predictability of fixed annuities makes them an excellent option for retirement planning since you can calculate precisely how much you’ll earn before retiring. Ongoing monthly payments from a fixed annuity can also help supplement other sources of income during retirement. Some fixed annuities even offer lifetime payments, so you don’t have to worry about outliving your retirement funds.

Protected Principal

A fixed annuity also has minimal risk, especially compared to other investments, like stocks and bonds. With a fixed annuity, your initial principal is protected, even in a volatile market. Your rate of return on a fixed annuity is guaranteed, regardless of market performance. While fixed annuities may return slightly less than riskier investments, you don’t have to worry about the potential of losing the funds you need for retirement.

Emergency Options

Many investment products make your funds illiquid, making it difficult to deal with an emergency. Fixed annuities are semi-liquid and usually allow for withdrawing up to 10% of your funds without penalty. While you may be eligible to withdraw more than that, you’ll usually be subject to penalties and extra fees.

Fixed annuities come with many benefits when included in a retirement planning strategy. Minimal risk, guaranteed income, flexible payments, and tax advantages are all great reasons to consider a fixed annuity. A fixed annuity may also help you supplement your retirement income, ensuring you have the necessary funds.