Fixed Income Annuity
Fixed Income Annuities—Certainty in Uncertain Times
Guaranteed income brings calm in a chaotic world. Retirement changes everything—at least when it comes to finances. Proper planning brings you peace of mind no matter the chaos of the surrounding world. And nothing brings more certainty than annuities. Annuities protect your retirement from the unknown days ahead because they aren’t tied to the stock market.
Retirement should be a time of excitement and rest, not despair and anxiety. Annuities, specifically fixed income annuities, guarantee a steady stream of income that can’t be lost. You worked hard for your retirement income—now it’s the time to protect it!
How Fixed Income Annuities Work—And Create Certainty
Insurance companies, generally known for selling life insurance, also provide protection for your retirement income in the form of annuities. Fixed annuities exist outside of the markets, unlike variable annuities and mutual funds. They don’t drop when the markets do. They never lose the principal you’ve invested. They’re safe. The rates on annuities are agreed upon by both parties when the annuity contract is signed. You’ll find no surprises here—no matter what surprises show up every day in the newspaper. Annuities rates don’t change as long as it’s a fixed annuity. Annuities mean income in retirement is guaranteed.
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What’s a Fixed Income Annuity?
If you haven’t heard of annuities, they’ve been sold by insurance companies for over 100 years. A fixed income annuity is an investment sold by an insurance company. The goal of fixed annuities is to provide lifetime income upon retirement. Many investors purchase fixed annuities because they can provide for life—even if you outlive the initial period of time the insurance company agreed to. A fixed annuity is different from variable rates annuity due to the fact that the interest rate doesn’t change over the life of the annuity. It’s set in stone.
A fixed annuity is an insurance company’s version of a Certificate of Deposit (CDs) that banks sell. The rate annuities grow is agreed upon by both parties and unchangeable. With an annuity, you give an insurance company some of your income, and after the agreed period of time, they return the income to you as fixed income. This repayment can come in the form of fixed monthly income to cover living expenses during retirement. Fixed annuities represent low-risk investments that can often provide income for life. It’s a hard deal to beat.
One attraction of income annuities is that they’re taxed deferred. The investment isn’t taxed until it’s withdrawn by the investor and counted as a source of income. You essentially pay your future self a part of your current income—with extra interest. Lifetime income sounds too good to be true, but it’s what fixed annuities were built to provide.
Two Phases, One Goal—Guaranteed ReturnsAccumulation Phase—Tax-Deferred
When income is paid into the annuity, whether lump sum or made in multiple payments, it isn’t taxed. If you’re already maxing your IRA, a fixed annuity can be an additional route to set aside income for later without paying taxes on it. Like most investments, the annuity contract will stipulate that the money cannot be withdrawn from the annuity ahead of schedule without a penalty.
Tax-deferred means that the income that’s put towards an annuity will not have tax paid on it before it enters. The money in income annuities has the ability to ‘hide’ temporarily from taxes. It’s deferred income. Tax-free income reduces your yearly total income to potentially put you in a lower tax bracket while also saving that income for the future. It’s a win-win.
After a fixed amount of time, the annuity is available for collection. Typically, income annuities sold by a life insurance company mature in 3-10 years. A mature annuity can be collected either in a lump sum or in monthly payments, depending on the contract. The payout of an annuity needs to be reported on taxes in the year in which they’re received. This is how it earns the name deferred income annuity—it’s your money paid back to you with extra, depending on the annuity rates.
If a fixed annuity is set up to payout as lifetime income, there are a few caveats. The amount paid out to women is usually 2-4% lower than men. That’s because women, on average, live longer than men and need to be paid over a longer duration.
Your Money, Your Choice —Payment Options
An annuity can payout in a single lump sum, or it can be handed out in small payments for the rest of your life. This second choice is what makes it attractive to many retirees—guaranteed, risk-free retirement income. Fixed annuities are a form of saving totally separate from the stock market which makes them an excellent choice in the volatility of our day and age. The chaos of the stock market shouldn’t be something else to worry about.
Additionally, a fixed annuity can be rolled into another annuity if you don’t desire to withdraw from the fund yet. They’re flexible because it’s your money—not a mutual fund manager’s money. Income annuities can be used to supplement Socia Security and IRA savings as a part of your retirement planning. No matter what you use your annuity for, you’ll have rights reserved for the terms of the agreement and payout. You control the payout schedule and know ahead of time the exact amounts found in each return payment. A life of worry-free finances in retirement!
By the Numbers —What Would a $100,000 Annuity Pay per Month?
Let’s say you want to invest $100,000 in an annuity, aiming at retirement income. You would contact a qualified agent by phone or email and inquire about their services. Good agents will ask questions about your goals to help you purchase an annuity that’s personal and matches your values. Are you looking for a specific return amount each month? Do you want to just watch your money grow free from the stock market? An agent can help you decide which annuity route best fits your circumstances.
For simplicity, let’s say you want a fixed income annuity as discussed. You put in $100,000 and wait ten years. What, realistically, could the monthly amount be? This depends on how long we let the annuity grow. The longer the growth the greater the monthly amount will be.
If the $100,000 is left alone to grow at 4% each year for 10 years before the first withdrawal the monthly amount you can expect to receive runs around $1,200. Not too shabby!
As all investment math shows, the earlier you can start the better! If you’re interested in starting a fixed annuity, call us today. Ask one of our skilled insurers for more information. They can get you the latest quotes based on current tax rates to ensure that you’ll get the best deal. If you’re looking to learn the right way to invest for longevity, one of our agents would love to talk with you. You’ll find what you’re looking for.
There are a few other things to consider when purchasing an annuity. Fixed annuities are merely one form of an annuity. A variety of annuities exist. Each of them comes with pros and cons to consider. A variable-rate annuity might produce higher interest rates, but will also be tied, at least partially, to stock values on the stock exchange. A fixed index annuity is another annuity that ties the return rate to a specific index number. Our agents will be able to talk to you about why you might consider some of the other annuity options.
Fixed Annuity FAQ1) Are Fixed Income Annuities a Good Investment?
Fixed income annuities take the burden of retirement off of the stock market. The stock market is a wild place these days. Annuities provide a safe place for your accounts to grow outside of market shudders. Fixed annuities can’t lose their principal. No matter what. They free you from worry. All of us could use less worry in our lives, especially when it comes to the future.
Annuities constitute a low-risk form of investment that beats bank Certificate of Deposits (CDs). Fixed annuities aren’t backed by the FDIC like a bank Certificate of Deposit would be, however, insurance companies must operate under state and federal regulations. Be sure to check the security ratings of us or anyone you’re interested in buy an annuity from. The higher the rating, the better.
No. The principal can’t be lost. This is what makes income annuities worth having. The only way to lose money is by violating the terms of the agreement by withdrawing early. You’ll face surrender charges if you decide to remove your income early from the annuity and you’ll still have to pay income taxes on the money as well. It’s a double whammy designed to keep you from dipping into the money ahead of time. But who wants to dig into their retirement savings unless it’s for an unforeseen emergency?
Guaranteed income means money for the rest of your life. However, if you pass away with money remaining in your annuity, what happens? Fixed annuities can include provisions that will transfer any unpaid amount to a beneficiary upon death. If this protection on your annuity is not taken and you pass away before full payment, the amount remaining will not transfer. Be sure when talking to an agent to include that you desire this protection on your annuity.
A simple fixed income annuity contains the fewest fees. The fees in a fixed annuity are the lowest because they don’t require management or oversight the way that other investments do. In general, the more complex the annuity, the higher the fees will run. The fees on a fixed annuity run around 2-4%, but be sure to ask an agent if you want more details on what fees are assessed and why.