A Fixed Annuity can provide a very secure, tax-deferred investment. It can provide a guaranteed minimum interest rate, with no taxes due on any earnings until they are withdrawn from the account. Use this calculator to help you determine how a Fixed Annuity might fit into your retirement plan.

What is a Fixed Annuity?

Before delving into what a fixed annuity is, it helps to understand what annuities are in general. At its core, an annuity is a contract that is created between an investor and an insurance company. The investor gives the insurance company money; that money grows in a tax-deferred way. Later, the initial investment - plus any gains - can be distributed back to the investor in a number of different ways. The way in which the funds are redistributed generally defines which type of annuity is being used.

In the case of a fixed annuity, there is a guaranteed rate of return. In other words, investors will be able to rely on specific, consistent payments throughout the term of their fixed annuities. This is a stable way to receive a reliable source of income after retirement; there are no fluctuations and no surprises. Although the returns never increase, they never decrease, either. The vast majority of fixed annuities are designed to continue for the remainder of a person's life; the longer an individual lives, then, the greater the returns will ultimately be.

Like other annuity products, a fixed annuity unfolds in two basic phases: accumulation and annuitization.

Accumulation Phase - The accumulation phase of a fixed annuity refers to the period of time during which the annuitant builds up the value of the annuity. In some cases, people make regular contributions to their annuity accounts for several years. Other times, people make a single lump-sum payment that essentially qualifies as the entire accumulation phase or period. During the accumulation phase, an annuity's growth is tax-deferred; it is not subject to income tax. This allows investors to get the most "bang for their buck" and gives the annuity the greatest potential for growth.

Annuitization Phase - After the fixed annuity has been built up, the investor begins to collect his regular payments. This period is known as the annuitization phase. A series of regular payments, based on the initial investment that was made during the accumulation phase, begins. Once the annuitization period or phase begins, income taxes on the earnings that were made on that investment must be paid. However, a topnotch fixed annuity plan will ensure that the gains far outweigh the tax burdens that are typically involved, allowing the investor to enjoy a reliable stream of income.

Common Fixed Annuity Rates

One thing's for sure: You're not going to get rich off of a fixed annuity. This financial product is not designed to produce massive returns. However, the bright side is that these investments are very low-risk in nature. Since you are locked-in to a specific rate, you can rest assured that you will see a consistent return from month to month. Because fixed annuities are not aggressive investment tools, their rates tend to be relatively conservative. Depending on the length of the accumulation phase, the initial investment that is made and other factors, the rate that you'll receive may vary.

Fixed annuity rates tend to fall into the 1% to 4% range. It should be noted that many times, a higher rate is locked in for the first year of the accumulation phase. For instance, many popular fixed annuity products offer a 4.5% introductory rate for the first year; for years two through eight or ten, the rate may drop down to 3% or 3.5%. However, that rate is being applied to tax-deferred funds - that point should not be overlooked.

Compared with other investment products, fixed annuity rates tend to be middle-of-the-road. Compared with a typical savings account at a brick-and-mortar bank - which usually yields a paltry interest rate that is well below 1% - a fixed annuity is very attractive indeed. Fixed annuities are often compared to CDs for a number of reasons; both products offer interest rates that are in the same general ballpark. Fixed annuity rates are usually well above those of money market accounts, but they tend to be far lower than the rates offered by many mutual funds. Although mutual funds offer rates as high as 10%, they carry a much higher risk for the investor.

Three Popular Types of Fixed Annuities

Zeroing in on fixed annuities is only the first step in the process, since there are several different types of fixed annuities available. Although there are dozens of products available, three of them tend to get the majority of the attention: fixed immediate annuities, fixed deferred annuities and CD-type annuities. A brief overview of each type is outlined below.

Fixed Deferred Annuity - This is generally the most popular kind of fixed annuity, and it's the one that most people think of when the subject arises. A fixed deferred annuity refers to an annuity in which no taxes are owed until distribution of funds begins. Distribution of funds can occur via annual withdrawals of up to 10%, or it can begin upon annuitization through monthly payments. Essentially, a fixed deferred annuity is a savings account. Money is put into longer-term bonds, allowing it to grow. Although the rate of interest tends to be modest, it is applied to a longer period of time. The biggest plus associated with fixed deferred annuities is the postponement of income tax payments.

Fixed Immediate Annuity - As its name implies, a fixed immediate annuity is one in which annuitization commences immediately - there is no accumulation "period." A lump sum payment is made, typically upon retirement, and the annuitant begins receiving monthly payments right away. This is a way to earn some extra money while keeping a large sum of money in a safe place. A fixed immediate annuity is ideal for those who need to pay their expenses over a long period of time. Life-only fixed immediate annuities tend to involve larger monthly disbursements; however, no refund to survivors is given upon the annuitant's death. A life-income-with-lump-sum-refund fixed immediate annuity, however, involves more modest monthly payments with a refund for survivors.

CD-Type Fixed Annuities - The best way to describe a CD-type fixed annuity is that it is a cross between a fixed annuity and a CD. A fixed interest rate is usually guaranteed for a period of one to ten years; rates range between 3% and 10% during that period. Up to 10% of the funds can be withdrawn annually, although the money is then taxed as income. It should also be noted that an IRS penalty of 10% is imposed on withdrawals that are made before age 59-1/2.

Fixed Annuities versus Other Investment Products: The Pros and Cons

When weighing the benefits of fixed annuities versus other investment products, it helps to have a basic idea of the pros and cons that are associated with them. A few of the most important pros and cons of fixed annuities are outlined below for your convenience.

The Pros of Fixed Annuities

The Cons of Fixed Annuities

How do Fixed Annuities Compare with Variable Annuities?

The basic difference between fixed annuities and variable annuities concerns rates of interest. The defining characteristic of the fixed annuity, of course, is the fact that interest rates are "locked in." Investors can rely on a consistent amount of reimbursement per month. Variable annuities, however, are based on variable interest rates. Some months, payments will be relatively low; other months, though, they can be very sizable. People who have several other investment accounts and who use many different investment products tend to gravitate toward variable annuities, since they aren't relying on them as their sole source of income. If you plan on using an annuity as your sole source of income after retirement, though, it's almost always best to stick with a fixed annuity.

How Are Fixed Annuities Taxed?

Fixed annuities are attractive to many different investors due to their tax deferred natures. The funds that are deposited into a fixed annuity account are not taxable until they are withdrawn. This allows for a higher degree of tax control, a greater potential for growth and allows earnings to compound without income taxation throughout the accumulation phase.

Annuities are taxed at regular income tax rates. With that in mind, it is important to strategically plan for withdrawals. In the case of regular annuitization that occurs after retirement, a lower income tax rate will be assessed. When it comes to distribution, some annuities are paid out in lump sums while others are annuitized. In the case of a lump sum payment, your gains are taxed as ordinary income and no capital gains tax break is given. This can take a serious toll on a fixed annuity investment, so it is critical to plan accordingly.

With annuitized payments, income tax is levied against earnings. The untaxed portion of the monthly payment that you will receive falls under what is known as the exclusion ratio. Because your monthly payment will be the same throughout the annuitization phase - which will continue until your death - it should be very easy for you to see the breakdown on these tax payments. Variable annuities are notorious for their complexity when it comes to tax payments, since month-to-month earnings can vary considerably.

Annuity Guarantees: Are They Worth It?

Most of the time, annuity guarantees apply only to variable annuities. However, you're sure to run into them from time to time as you shop for a fixed annuity. Some people claim that annuity guarantees are essential if you want a truly risk-free retirement investing experience. Basically, these guarantees are forms of insurance that protect against various potential problems. For an annual fee, you can sign up for a Guaranteed Minimum Income Benefit (GMIB) policy. As the name implies, this guarantees a minimum amount of return for an annuity investor. Since fixed annuities inherently include standardized monthly payments, a GMIB policy is unnecessary.

A Lifetime Withdrawal Benefits (LWB) is another type of guarantee. For an annual fee, this policy allows you to make withdrawals of 5% to 7% on your annuity, no matter what its account value is. This may be a good option for someone who begins paying into an annuity at a fairly young age. However, the vast majority of people aren't going to realize any concrete benefits by paying for this sort of guarantee - or for most annuity guarantees, for that matter.

Who Are Ideal Candidates for Fixed Annuities?

The ideal candidate for a fixed annuity would be a single retiree who isn't going to have many other reliable sources of steady income. In other words, this person won't have a lot of other investment accounts, pensions or other regular income coming in. Because they are single, they only have to worry about their own expenses; the monthly amount that they will receive from a fixed annuity should more than suffice, in most cases. Additionally, the ideal candidate for a fixed annuity won't have aggressive investment goals and won't be looking to realize exceptional gains or profits. If they are, they will need to look into more aggressive investment products like mutual funds.

For the most part, a retired couple who has many other forms of investment income isn't going to get a whole lot out of a fixed annuity. They'll be needlessly tying up a significant chunk of money in something that isn't going to produce many concrete benefits for them. Although some financial advisors will try to promote the tax benefits of a fixed annuity to such folks, there are many other investment options that provide exceptional tax benefits in such scenarios.

Popular Fixed Annuity Brands and Products

Many of the most familiar investment companies offer fixed annuity products. Metlife, ING, Prudential, Mass Mutual, Pacific Life and John Hancock all offer fixed annuities. The nice thing about working with a reputable, well-known company is that your risk is reduced even further. The only real risk involved in a fixed annuity occurs when the insurance company shuts down. With a major name like ING or Prudential, the chances of that happening are slim to none. These companies tend to have exceptional ratings, too, which also improves the experience of investing with them.

One of the most popular fixed annuity offerings among the most popular brands today is John Hancock's JH Signature Fixed Annuity. This product offers a 10-year accumulation phase and a 4.50% introductory interest rate. ING's ING Guarantee Choice Annuity is another first-rate option. This product also offers a 10-year accumulation phase and a 4.50% interest rate for the first year. The remaining years yield an interest rate of 3.50%. John Hancock and ING are both highly reputable.

There are several other topnotch choices available out there when it comes to fixed annuities. It is essential to shop around, since rates can vary considerably from one company to the next. Since you're going to be in it for the long haul, it is crucial to find a product that makes you comfortable and happy. Be sure to look over all of the fine print, too, whether you choose a fixed deferred annuity, a fixed immediate annuity, a CD-type annuity or any other product.

The Fixed Annuity: Reliable Retirement Income

The bottom line on the fixed annuity is that it is a rock-solid choice for anyone who needs a reliable, steady source of income to pay for their expenses for the remainder of their life. While fixed annuities aren't right for everyone, they can provide a great deal of much-needed peace of mind for those who'd like to avoid uncertainty during their golden years. Be sure to speak with a financial advisor in order to find the fixed annuity that is right for you. Enjoying a stress-free retirement is a lot easier when day-to-day expenses are covered for the long term, and a fixed annuity can make that possible.



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