Fixed annuities are investment vehicles that are structured much like a bank CD. As with a CD, fixed annuities offer an interest rate over time, but also include tax benefits geared specifically towards retirement savings. Once the initial deposit is made, an interest rate is guaranteed for a specific length of time (typically 1-10 years).
Other benefits of fixed annuities are safety of principal, more liquidity than CDs and typically offer higher rate of return than bonds, CDs, or treasuries.
Immediate vs Deferred
Fixed annuities are typically split into two categories: immediate and deferred. With deferred annuities, pay outs will not begin until the end of the contract term (1-10 years), compounding interest much like any typical savings investment. Immediate fixed annuities start issuing monthly payments right away, and can be structured to pay out over a set amount of time or the investor’s life expectancy.
What type of rate of return can you expect?
Fixed annuities give a solid, guaranteed growth, as long as they are not prematurely terminated. Premature termination leaves you worse off, as compared to when it is allowed to reach maturity. Deferred fixed annuities earn substantially more than other money market instruments, like mutual funds and CDs, because of a compounded and totaled tax deferral.
All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life. More specific reasons to invest in fixed and immediate annuities:
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