Like any investment, there are pros and cons to fixed annuities. While they are very simple to understand at first, fixed annuities need to be analyzed in the context of the individual investors personal situation to truly understand if they are appropriate.
Benefits of Fixed Annuities:
The primary benefit of the fixed annuity is guaranteed interest. This relies on the minimum guaranteed rate of the fixed annuity contract, and therefore on the credit quality of the issuing company. But having a locked in, guaranteed rate of appreciation is a peace of mind investment.
Another benefit to a fixed annuity is the tax-deferred appreciation. Letting your money grow tax-deferred and compounding is a powerful tool to increasing wealth. There are other vehicles that allow for tax-deferred appreciation, such as 401(k)s and IRAs, however investments in these sorts of vehicles do not carry the guarantee that an annuity does. This chart shows the power of tax deferred appreciation.
Safety is the number one reason most people choose fixed annuities and annuities in general. Aligning your interests with the performance of a very strong, well capitalized, high credit insurance company is a very safe bet.
Finally, fixed annuities also offer some liquidity in the form of free withdrawals. While not specifically a benefit, this feature of the fixed annuity makes it preferable to a CD that may be locked up and your interest could be forfeit if you withdraw early.
Drawbacks To Fixed Annuities
Fixed annuities are designed for capital preservation. They are not dynamic investments with high rates of return. While this is not specifically a negative factor a fixed annuities if safety is what you’re looking for, it is a decision factor. Don’t buy a fixed annuity if you are expecting high rates of return.
Furthermore, fixed annuities do have a surrender schedule. They do require that you keep your money invested during the term of the contract. Much like in the CD where you would forfeit interest if you cash the CD in early, if you cancel a fixed annuity contract before the term is up, you may face surrender charges. Don’t buy a fixed annuity if you think you would need access to all of your money at some time during the length of the contract.
Pros and Cons of Fixed Annuities- Summary
The fixed annuity is most appropriate for the safest portion of your retirement assets that you are looking to grow over a specified period of time leading up to retirement. They are also appropriate during retirement in a laddered manner much like CDs when they can grow safely in be cashed out upon maturity when needed or through free withdrawals. Fixed annuities are an important planning tool and should not be disregarded.