Fixed rate annuities are an excellent tool for building a reliable source of long-term income. With fixed rate annuities, one knows in advance the exact amounts of interest income that the investment contract will pay along with a set schedule. One can structure fixed rate annuities to be an important part of retirement, and integrate it into an estate plan to provide for survivors and other named beneficiaries.
Appeal of Fixed Rate Annuity
The combination of high levels of stock market volatility and low bank interest rates make fixed annuity rates attractive to investors. Variable annuity contract rates offer higher potential rewards but also take in more of the risks associated with market trends and current economic conditions. Annuities offer tax advantages for investors fortunate enough to have reached maximums in other investments, such as IRAs and 401(k). A fixed rate annuity can improve their tax disadvantaged fund positions. It can shelter funds in certain high tax categories. Met Life, Pacific Life, and North American Life are among the leaders in fixed rates instruments
Advantages of Fixed Rates
Safety and low costs are the primary advantages of fixed rate annuities. With CD rates still quite low, fixed annuity rates offer an attractive, safe harbor. They provide the safety of a CD with an interest rate advantage when compared to prevailing CD rates. While the annuity may tie-up funds as interest rates begin to climb, there is far more uncertainty in that situation than a firm contract with defined payment terms. When investment strategies call for greater emphasis on certainty than in the possibility of higher returns, a fixed interest rate contract can be the centerpiece of a retirement or other fixed income approach. The greater advantage of fixed rate annuities may be low costs. Fees for variable rate instruments particularly those with options can easily exceed three percent.
Shop for Low Costs
Simple fixed rate annuities guarantee an interest rate for a period of years. The costs of these agreements are often in the range one-half to one percent. Adding features can raise the costs substantially. Variable rate contracts often come with active management fees of one percent, and a long menu of add-ons such as nursing home care, or specific survivor benefits, which also have costs. A typical variable annuity rate instrument can easily exceed three percent with a combination of insurance and management fees. Variable annuities offer a potential for higher payouts based on underlying market conditions and active investment strategies, the increased level of administrative and management activity have higher costs than the simple fixed rate annuity. Another set of cost considerations is sales through commissioned agents versus fee-based advisors. Commissioned sales add considerably more long-term costs than fee-based sellers.
Annuity Market Factors
The demand for annuities has risen in the face of persistent low CD and bank interest rates on savings. In growing numbers, investors consider fixed rates agreements as a logical alternative to market risk and high management fees in variable instruments Many providers vary payouts in response to higher demand. For example, in 2012 a $200,000 investment with Pacific Life for an immediate annuity yielded approximately $1,030. One year later, the highest competitor contract paid $1,000. In that same period, Pacific Life payout dropped even lower to $980 a month. Spread over 25 years the difference in Pacific Life’s yields is about $300,000. Since then, rates have improved. In 2013, the top rate on a fixed annuity with a five-year guaranteed rate was about two and one-half percent; in 2014, it was slightly above three percent.
Comparing Interest Rates and Annuities
The current yield trend is cyclical, and can move with interest rates as other forms of secure investment offer greater yields. Investors should carefully compare profits and costs from variable investments that have guarantees. Fixed simple annuities can offer some forms of customization. For example, investors can adjust simple annuities to provide laddered payments that increase over time to account for future rates of inflation and its effect on spending power. They can participate in stock market growth up to a cap, such as four percent annual growth. Overall, given the near-term prospects of low bank rates, fixed rate annuity contracts will likely remain popular with investors of all ages, but particularly with those in or near retirement.