A fixed annuity has a percentage of returns associated with it that will never disappear. Year after year, your fixed annuity will keep gaining interest at the rate originally stated upon in your annuity contract forms. This bare minimum interest rate is, as the name of the annuity type suggests, fixed in place. This is your most basic type of annuity. Regardless of what the outside market conditions are, a fixed annuity can be a great part of your investing portfolio because you know that you will be making money on it no matter what happens.
This does not mean that your annuity will only earn the bare minimum. Many fixed annuities state this minimum price, but will also give a signup bonus for the first year. If the minimum interest rate is 3 percent, they might offer an additional 3 percent for the first year of the annuities contract and help you double your earning that first year. Don’ t be surprised here, though. There is no guarantee that your annuity will earn more than the bare minimum after the first year is up. Many insurance companies will try to give you more than the minimum if market conditions allow it, but again, there is no way to predict this. This varying fixed rate is called the floating rate, and it is subject to the conditions of the individual insurance company offering the policy.
Everyone can benefit from a fixed annuity since there is a guarantee associated with them. But different demographics will benefit more than others. The elderly are the group that has the most to gain from a fixed annuity. This is because this age group doesn’t necessarily have the time to wait out the natural ups and downs of the stock market. Fixed annuities generally do not outperform the stock market, but they do offer a promise of small returns. When it comes down to it, over the short term, a fixed annuity can give you a return, albeit a tiny one, while there is no such guarantee from the stock market.
A fixed annuity has a distinct disadvantage that was mentioned above: they tend to lag behind the stock market’s growth over the long term. If you are younger, you can always earn more money, thus making stock-related investments much more attractive.
Another disadvantage is that fixed annuities do change rates. You will never lose money in a fixed annuity, but it is possible for the insurance company to set a new, lower, renewal rate. In most policies, the insurance company gives themselves the right to set a new renewal rate at the end of each year that the policy is active for. So while fixed annuity sellers might lure you in with a 6 or 7 percent rate of return for the first year after their applied bonus, you might be stuck with a 1 percent interest rate every year afterward.
Is a fixed annuity for me?
Perhaps. If you are risk adverse, then a fixed annuity will be perfect. There is no cost associated with fixed annuities, and no risk that your investment will lose money during a bad year. If you need to add stability to a growing portfolio, an annuity can help in a way similar to a certificate of deposit.
If you are already in retirement, a fixed annuity is almost definitely in your best interests. You can put a tiny portion of your Social Security benefits into the annuity each month and then start seeing the payouts a few years later. The guarantee associate with a fixed annuity can give you peace of mind since you will always have this safety net.
Other things to consider
If you are married, a fixed annuity can be a great way to protect your family. Getting a joint and 100 percent survivor clause within your annuity contract can make sure that your spouse keeps receiving annuity benefits even after you die. And because this is a fixed annuity, your spouse will be receiving something every month for the rest of their lives—this is a great way to keep your family financially sound.
Fixed annuities serve a great purpose. They act as a type of “old age insurance” and they can make sure you will have at least a small amount of money for the rest of your life. They protect your investment and will offer you a small rate of return, regardless of what happens to the stock market. Fixed annuities are not for everyone, especially the younger population that needs to account for inflation when they do their personal investing. But if you are nearing retirement, consider getting a fixed annuity in order to protect your lifestyle down the road. The returns you earn will not be glamorous necessarily, but they will be helpful. If you are seeking a bit more income and risk a Variable Annuity may be in store for you.