fixed annuities

The Advantages of Fixed Annuities for Retirement


Retirement planning is an essential task that ensures you have the funds you need to retire. Whether you plan to retire in the next year or have a few years left, it’s crucial to consider your retirement planning options now. A fixed annuity can be an excellent addition to your retirement planning portfolio, offering guaranteed income and tax-deferment benefits.

What Is a Fixed Annuity?

Image via Flickr by free pictures of money
Image via Flickr by free pictures of money

A fixed annuity is a contract you purchase from an insurance company. In exchange for funding the annuity, you’ll receive guaranteed income at a fixed rate at a later date. The specifics of a fixed annuity, including price, payout amount, and payment schedule, vary depending on the annuity.

You have a few annuity options available when it comes to retirement planning, with fixed and variable being two of the most common. A fixed annuity offers a fixed rate of return, whereas a variable annuity pays based on market performance. You can earn more through a variable annuity but at the risk of losing more.

4 Advantages of Fixed Annuities

Fixed annuities are a popular retirement planning tool because of their ability to generate guaranteed income and tax benefits. Here are a few of the biggest advantages of purchasing a fixed annuity for retirement:

1. Guaranteed Income

One of the biggest advantages of a fixed annuity is its ability to generate guaranteed income. You can purchase a fixed annuity to generate guaranteed income for a set period or, in some cases, your lifetime. A lifetime fixed annuity eases concerns you may have about outliving your savings. With a lifetime income fixed annuity, you may even be able to transfer your payments to a beneficiary if your payments outlive you.

The income from a fixed annuity is also flexible. Most annuity contracts allow you to choose a payment schedule and timeline that best suits your financial goals. You can begin receiving income payments right after retirement or wait a few years to help offset the increasing cost of goods due to inflation. Some annuities may even allow you to cash out a large sum of money during the payout phase rather than collecting monthly payments.

2. Growth Potential

Similar to other investments, a fixed annuity allows you to accumulate returns through compounding interest. The interest rate you receive from a fixed annuity varies depending on the insurance company and current rates. Historically, fixed annuities tend to offer better interest rates than certificates of deposits (CDs), another common retirement planning tool. Price shopping available fixed annuities allows you to choose one for your retirement planning portfolio that offers a competitive fixed rate of return.

In addition to the earnings you receive on a fixed annuity, you may also qualify for tax benefits. Fixed annuities are tax-deferred qualified, which means you won’t owe taxes on your earnings until you begin receiving payments. This allows you to leave more of your money in the annuity, thus accumulating faster. If you wait until retirement to collect payments, you may also be in a lower tax bracket since you’re no longer working.

3. Protected Principal

As you near retirement, you may be less willing to risk your savings. The risk versus reward makeup of your investment portfolio is referred to as asset allocation. As you get closer to retiring, your assets should primarily be safer options, like a fixed annuity.

The great thing about a fixed annuity is that your principal or initial investment isn’t at risk. When you purchase a fixed annuity, you don’t buy any stocks or shares of a company, meaning you can earn a fixed rate of return on your principal without the risk of losing it. The lower risk of a fixed annuity makes it an excellent choice to offset riskier investments or retirement planning tools.

4. Easy To Understand

Fixed annuities are typically easy to understand, especially compared to other investment tools. You purchase a fixed annuity through an insurance company using payments or premiums. This is known as the accumulation phase, which is also when you’ll begin earning interest on the annuity. 

You’ll continue earning through interest for the length of your annuity contract, and your earnings are tax-deferred. After your fixed annuity matures, you can request a lump sum or monthly income payments. Fixed annuity contracts are typically clear, straightforward, and simple, making them an ideal option for investors who just want to collect income and enjoy retirement.

Planning for retirement includes saving money, finding ways to supplement income, and preparing for taxes. A well-balanced portfolio can ensure you have the funds you need for a comfortable retirement. Fixed annuities can be a lower-risk strategy that offers guaranteed monthly income and tax benefits, making them a great addition to any retirement plan.