Picking Fixed Annuities
This does not mean that your annuity will only earn the bare minimum. Many fixed annuities state this minimum price but will also give you 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. This is how these annuities work. After the bonus period is up, it will go back to earning the stated fixed rate. 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. Be sure that you know what the annuity contract says regarding changing rates before you sign up for anything.
Who Benefits from a Fixed Annuity?
Everyone can benefit from a fixed annuity since there is a guarantee associated with them. But different demographics will benefit more than others. In other cases, there will be much better investment choices out there. It all depends on what your personal situation is and what your financial needs are.
As a general rule, the elderly are the group that has the most to gain from a fixed annuity. 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, reliable 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.
The stock market might be doing great now, but there’s no guarantee that it will stay that way. Recessions and bear markets do occur, and if you are currently retired, this can have a harmful impact upon your savings. This can be a great time to enter the market, but if you are living off of a fixed income, this can be incredibly harmful to your financial health. Having a fixed rate overrides the temporary ups and downs that the market faces and ensures that you will have a minimum income coming into your household each month, regardless of what happens in the stock market and to everyone else’s investments.
The biggest disadvantage of a fixed annuity is also it’s biggest strength—it has a fixed rate that lags 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. If the market does poorly, then the money that you make through your employment and long term compound interest of other investments will eventually cancel this out. For the vast majority of younger people, fixed annuities will not be the most beneficial investment choice.
Another disadvantage is that fixed annuities do change rates and that’s not always helpful. You will never lose money in a fixed annuity, but it is possible for the insurance company to set a new, lower, renewal rate. This is stated in the fine print of the contract that you will sign, but unless you are specifically looking for it, it’s a really easy part of a fixed annuity to overlook. 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. The timeframe for any changes to the rate that a fixed annuity will have must be stipulated in the contract. If it’s not readily apparent what these changes are and when they will go into effect, be sure to speak to an insurance rep to get a better idea of what this will be.
Can I Customize a Fixed Annuity?
Yes, but how you do so is up to the insurance company that you work with. Each insurance company has specific riders that they do and do not offer, so it is hard to tell for certain here just how you can customize your annuity.
The important things to keep in mind are that you will have some control over the payouts that you will receive. If you choose a deferred annuity and will not begin payouts right away, you have some time to think about this. Having a good idea of what you want before you agree to anything will help guide you here. Also, remember to keep your beneficiary in mind and how you want the annuity to impact them if something does happen to you.
Is a Fixed Annuity Right for Me?
Perhaps. If you are risk adverse, then a fixed annuity will be perfect. They are predictable, and if you pay attention to your paperwork, you will always know just how much 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 don’t mind the risk, a Variable Annuity, Structured Annuity, or one of the various Equity Indexed Annuities may be a better choice for you. Again, the best fixed annuity may or may not be for you. Just remember to do your research and get the right help.