All You Need To Know About Fixed Annuities
There are many ways to invest in your future, and fixed annuities are one of them. An annuity is relatively simple. It is a contract with an insurance or similar company that offers income over an agreed period later for a specific immediate price. The payment period can be from 10 years or until the client’s death.
Annuities are appealing due to their general safety. Unlike other investments, such as stocks, they usually offer a guaranteed return on your investment or a fixed payment over time. They may also provide insurance-like benefits like payment to a spouse after death or life insurance-like benefits.
The type of annuity you will want depends solely on each person’s situation. A fixed annuity offers a fixed, predetermined payment over a period (hence the name). Some other annuities are variable, index, and immediate payment annuities.
All annuities share commonalities that make them appealing to investors. Fixed annuities have a few additional benefits as well.
Tax-deferred Returns & Unlimited Contributions
All annuities, including fixed annuities, put off taxes on capital gains until the time of claiming payments. Suppose you pay into the fixed annuity with post-tax income. In that case, the tax on that money may become tax-free when payments from the annuity begin. This is less important for fixed annuities than variable annuities, for example.
Unlike a traditional 401(k) or IRA, annuities are not limited by the amount of money they can add to the account. This means there is a greater possibility for tax-deferred growth. This is excellent for higher-income households with excess cash to put away after maxing out their 401(k) or IRA.
Fixed Monthly Income
The main appeal of a fixed annuity is the guarantee of income. Regardless of the market, the company will pay out the amount of money agreed on in the contract. This means that retirees do not need to worry about whether they will have enough money to live on when they retire.
While annuities may sound like an ideal way to guarantee your pre-retirement lifestyle after retirement, annuities come with their faults.
Complex Contracts And Conditions
Annuities are often signed with insurance companies, with buckets full of paperwork and complicated jargon. You must understand the fine print of these contracts, making obtaining one tedious. Annuity contracts can be as long as novels, with essential details lost in legal jargon deep within the pages.
Once you have signed a contract and begun paying into the account, it can be impossible to cancel the contract and get your money back. If you somehow manage to slosh through the legal process, the company can slap you with expensive cancellation fees. The money in the account is also no longer considered an asset. The money belongs to the company, regardless of whether they pay it out.
High Fees, Penalties, & Inflation Risk
Annuities aren’t just for you as a client but a way for companies to make money. They often tack on high percentage fees and steep annual payments to maintain an account. Early withdrawals can also incur penalties such as taxes on gains and losing tax-deferral benefits. These are always in the contract, making it crucial to know what you’re signing.
Fixed annuities are susceptible to inflation. Because the payment price is fixed and agreed on at the time of signing the contract, it may not account for inflation. Each dollar may be worth less after 10 years than it currently is.
Know Your Needs
The best way to secure a comfortable retirement is to be proactive now. The best way to do that is by knowing your needs. Talk with a financial advisor and do thorough research into investment opportunities like annuities to see what best fits your needs.