A fixed annuity is an investment vehicle that compares to a certificate of deposit (CD). You invest a lump sum into the annuity’s fund. In return, in the future the fund disburses a set payment each month until the initial investment and the interest earned are depleted at the end of the annuity’s term.
The difference between the fixed annuity and a CD is the issuing entity. In the case of a CD, banks sell them to you. Insurance companies sell fixed annuities. The fixed annuity often pays a higher interest than a CD. It’s easy to find an annuity rates calculator online. They can help interested investors find possible income levels for retirement planning.
Why Fixed Annuities Are Popular with Investors
The interest rates paid for fixed annuities are guaranteed, as opposed to the cyclical and risky nature of the stock market. Also attractive to retirement savers is that the investment minimums are affordable, generally between $1,000 and $10,000.
Finally, there are no taxes owed at the time the annuity is growing. Taxes are owed only on the payouts after retirement when tax rates are usually far lower than while the owner is working and earning wages.
Fixed annuities are an attractive choice for those to whom it is important to depend on a stable income stream after retirement without incurring expensive charges.
Payment Options for Fixed Annuities
There are two payout options you can choose when purchasing a fixed annuity. The first type is a deferred payment that earns regular rates of interest. The second is an immediate payment that makes fixed payments during retirement.
These immediate payments are figured according to the size of the annuity and your age. Fixed annuities are popular with those planning for retirement since they will be able to rely on income with a known value.
Cautions Before Buying a Fixed Annuity
Pay attention to how interest rates work during the life of the annuity. Many rates are fixed for a specific period and then may drop. If this happens in the first few years, you may not be able to withdraw your money early without paying significant surrender charges.
It is also possible that when you choose fixed lifetime payments, the interest rate you lock in may not be able to keep pace with future inflation. In this case, the purchasing power of your future payments will drop. This is a particular concern for those planning to retire younger and thus depend on these payments for a longer period.
Annuity Rate Calculators
There are several calculators you can find online that will allow you to input the following:
- Starting principal
- Growth rate (interest)
- Amount of periodic withdrawals
- Timing of withdrawals, i.e., monthly, quarterly, etc.
- Length in years of the annuity
By using an annuity rates calculator, you will be able to explore how this investment option can affect your retirements plans. By keeping in mind your age, ability to fund an annuity with one lump-sum payment and your best prediction of the inflation/deflation cycle in the future, you can quickly and directly explore this option for your family.