What is a fixed annuity? A fixed annuity allows you to turn a lump sum of money (your premium) into a stream of income. Fixed annuities guarantee you two things: a “fixed” interest rate that is applied to your premium and a minimum payment for a set period of time.
How does it work?
You can purchase a fixed annuity from an insurance company with one lump sum, or, with some flexible premium annuities, a series of payments. You will have multiple options to elect from when choosing the frequency and duration of your income payments. The specific terms of your fixed annuity will be outlined in the contract you choose based on your needs and objectives, but the important thing to remember is that fixed annuities give you a guaranteed minimum interest rate. Once you start collecting your annuity income, the amount of your check is guaranteed regardless of external factors such as how the stock market may fluctuate.
Benefits and risks of fixed annuities
One main benefit of a fixed annuity is the guarantee of your premium (the sum of money you put into the annuity). In today’s economy, many people don’t want to lose any of the money they’ve worked so hard for.
Another potential benefit is the guarantee of a steady income stream, if elected. Unlike investments, when you purchase a fixed annuity, there’s no uncertainty about how much you’ll be able to receive when you want to start taking income. You can even choose to turn your lump sum value into a series of payments for the rest of your life.
Fixed annuities are typically recommended to conservative consumers. With that said, some people may find them too conservative. If you’d rather take a more aggressive approach and go for higher possible returns, you may want to consider other types of annuities, such as a variable annuity.
Remember, when determining the amount of money you want to place in an annuity, make sure that you will not need to withdraw it during the contract period because annuity contracts have early withdrawal penalties. And, as stated above, fixed annuities are typically considered conservative products. As such, the expected returns can be lower than with other more aggressive retirement products. However, a fixed annuity can be one of the best ways to save for retirement with guarantees on the value of your money and a steady income in retirement.