What is a Fixed Annuity?

by Jeff Rose on June 25, 2012

If you’ve decided to invest in an annuity, you’re likely asking yourself, “What is a fixed annuity? How can it help me?”

The answers to those questions are rather simple.

A fixed annuity is a lot like a certificate of deposit, it is an investment that pays a guaranteed rate of interest for every year it is maturing, and often with a higher interest rate than CDs offered by banks.

A fixed annuity is great for those who want a supplemental income in addition to what they’ll receive in retirement.

Whether deferred or immediate a fixed annuity is exactly the security and protection your retirement nest egg needs.

Is a Fixed Annuity Right For You?

Now that you have an idea of what is a fixed annuity, you can learn a little more and decide if one is the right choice for you. A deferred fixed annuity is one that you start years before retirement, making regular payments to help it grow as it earns interest before maturing and you start receiving payments. An immediate fixed annuity works opposite of a deferred annuity, usually the client will pay one large sum and begin receiving payments immediately; meanwhile the initial sum earns interest.

Fixed Annuity Offers Tax Deferral

As stated before, a fixed annuity will have a guaranteed interest rate that is earned every year, but another benefit is that the interest is also tax-deferred. For all the years it takes to mature, you won’t have to pay one cent on the gains, not until you begin to withdraw from it and even then the tax rate is much lower compared to what it would be if you were still working.

Liquidity Might Be an Issue

Unfortunately a lack of liquidity keeps annuities from being useful in a situation where you need money quickly. If something happens before the annuity is mature, you need to withdraw money from it; you’ll wind up paying heavy fines. Interest rates can also drop after the annuity is implemented for a few years, and there’s very little that can cause it to increase again. These drawbacks are something to seriously consider before getting an annuity.

If you want to be sure your money will carry you through retirement, a fixed annuity is just the thing to provide security and peace of mind for those years to come. At the beginning of this articles you were likely asking, “What is a fixed annuity?” and now you can confidently state that you know.

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