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Using Fixed Annuities as a Retirement Tool

Using Fixed Annuities as a Retirement Tool

A fixed annuity is a contract between you and an insurance company, guaranteeing steady income payments. It’s ideal for anyone needing a stable, predictable income for retirement or achieving long-term financial goals. You invest by giving the insurance company a lump sum or a series of payments, known as an annuity, during a surrender period. In return, the insurer agrees to pay you a monthly fixed amount after the surrender period.

Your insurer determines where to invest your annuity funds to generate returns and provide you with an income stream during the annuity payout phase. The monthly amount you receive depends on your annuity contributions, age, and the insurer’s interest rate, which remains constant regardless of financial market fluctuations.

Benefits of Fixed Annuities

Guaranteed Income

Fixed annuities are more stable and predictable because distributions don’t depend on market gains or losses. The investment grows at a fixed rate determined by your insurer. You can also predict how your annuity balance will grow over time. Your contract also assures you of receiving a monthly minimum payment during the stipulated period.

Tax-Deferred Growth

Your earnings in fixed annuities are not subject to immediate taxation. Thus, your earnings accumulate without tax implications. Tax gets deferred to the distribution phase when you’re in a lower tax bracket.

Death Benefit

Your beneficiaries also benefit from your fixed annuities investment. If you die before you start receiving payments, your successors will receive a lump sum payment that is typically equal to the value of your annuity. Thus, the investment ensures your loved one’s financial security even after you’re gone.

Protection From Market Volatility

The guaranteed fixed interest rate covers your investment against market dynamics. Thus, your income stability is secure during the distribution phase.

Risks in Fixed Annuities

High Fees

Although fixed annuities have lower fees than other investment products, they can have unforeseen charges that can set you back by a few dollars. Sometimes the costs are hard to discern without scrutinizing your contract.

Typical fees in fixed annuities include:

  • Premiums: An initial lump sum or payment series to purchase your annuity.
  • Commissions: You may pay a ten-year fixed commission in the surrender period, ranging between 6% and 8% for most fixed index annuity investments.
  • Administration Fees: These can be a fixed annual fee or approximately 0.3% of your annuity contract’s value.
  • Surrender Charges: Get paid for early withdrawals beyond scheduled payments.
  • Mortality Expenses: May be charged as commission to compensate your insurer.
  • Riders: Extra fees included in your contract.

Limited Liquidity

Fixed annuities attract a hefty penalty or surrender charges when you access your funds before your contract matures. The incurred fees discourage early withdrawals to maintain the investment. However, in doing so, it limits the investment’s liquidity.

Lack of Flexibility

Although fixed annuities investors have guaranteed returns, they’re less flexible; the investment has:

  • Strict withdrawal options during the surrender period
  • No benefits from potential market interest rates because of the preset interest rates
  • Limited investment options determined by your insurer
  • Limited liquidity necessary to address immediate financial needs

Examples of Fixed Annuities

  • Single Premium Deferred Annuity (SPDA): Requires a lump sum payment upfront. The funds accumulate and earn a fixed interest rate until the annuitant decides to start receiving payouts.
  • Multi-Year Guarantee Annuity (MYGA): Offers a fixed interest rate for a predetermined period, ranging from 3 to 10 years. The annuitant can choose the length of the guarantee period based on their preferences.
  • Immediate Annuity: You receive regular income payments immediately or shortly after the purchase making a lump sum payment for the contract.
  • Fixed Index Annuity (FIA): Provides a fixed interest rate linked to the performance of a specific stock market index. The annuitant receives a minimum guaranteed interest rate and the potential to earn additional interest based on the index performance.

Conclusion

Fixed annuities are an excellent option if you’re looking for a guaranteed income stream in retirement. However, consider your circumstances and goals and weigh the pros and cons before investing. Speak with a financial professional about your options and understand the risks and benefits before making the decision to purchase a fixed annuity.

More Than One Type of Life Insurance

life insurance

The pandemic has influenced all our lives in different ways, some tragic, but also some that have made us rethink our needs and goals. Some of us have decided they want a new type of career; some have devoted more of their lives to helping others. One impact has been to protect loved ones in case something happens to us by purchasing a life insurance policy. But there’s more than one type of life insurance available.

Millennials

After climbing steadily for many years, life expectancy fell by 1.5 years from 2019 to 2020 – the largest one-year dip since World War II. A survey by Life Happens and LIMRA, a research organization, published in April 2021 found that about 31% of consumers said they are more likely to buy life insurance because of the pandemic. The survey also shows that 45% of millennials said they are more likely to buy life insurance because of COVID-19, possibly because they have more years of income to protect, are more likely to have children and may still have large balances on their mortgages or even student loans.

Whole Life Insurance

When most people think about life insurance, they focus on term life, which offers the lowest cost and covers the insured for a fixed period, say 20 or 30 years. Certainly, term insurance can play an important role, but it may not be enough on its own for extended retirement planning.

Enter whole life insurance and some of its offshoots, which fall into the category of permanent life insurance. With whole life, a portion of your premiums are invested alongside highly rated companies and will grow on a tax-deferred basis. Some believe that whole life is for wealthier people who are doing longer term planning and want to leave a legacy, when, in reality, there are many benefits to the average investor, including fast access to cash for expenses or opportunities (typically 1-2 days) and the benefit of knowing your equity is increasing annually every year.

Whole life insurance offers three kinds of guarantees:

  • Guaranteed minimum rate of return on the cash value, typically between 2% and 4%
  • The guarantee that your premiums won’t increase
  • A guaranteed death benefit that will never decrease

Universal Life

As noted, there are various offshoots of whole life insurance. One is universal life. Unlike traditional whole life, the cash-value component accumulates interest at rates tied to market interest rates. When rates are high, you pay lower premiums to get the same amount of cash value. However, if interest rates are low, premiums may need to increase. 

Prepaid life Insurance

Another alternative is single premium life insurance (SPLI), also known as prepaid life insurance. Instead of paying a premium in monthly or annual installments as you would with other kinds of life insurance, you pay for the policy up front to secure a death benefit when you die. As with other forms of permanent insurance, your premium funds both the death benefit and a cash value amount.

There are other vehicles which can be used to supplement your savings, such as variable life and variable-universal life. All these policies have their complexity and their value. It can be worthwhile to learn more about them from your financial professional today.

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