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What is a Fixed Annuity and How Does it Work?

The best fixed annuities are a type of financial product that supports individuals entering or currently in retirement. The risks associated with these products are exceptionally low, and in some cases, the income that comes with the product is guaranteed. Unlike variable annuities, the income payments that come with this product don’t change and are never affected by the investments of the providing insurance company or institution. To get the best rates for your fixed product, you’ll want to speak with a reliable annuities provider who can educate you on the benefits of the annuities and the financial support they can provide for your future.

In this article, we’ll define what annuities are and why they’re a popular purchase for individuals entering retirement. We’ll also review the different types of annuities that are available to you and look at the advantages of fixed products relative to these other options. 

What is an Annuity?

An annuity is a contract between you (the purchaser) and an insurance company that guarantees you’ll receive all the money you put towards the purchase, plus an additional return, spread out over the term of the annuity. First, you’ll pay a set amount of money for the contract itself and receive information about the term (contract length), as well as the rate of return, upfront. Many annuity products offer the opportunity to build interest on your money without worrying about it being taxed. 

Over the product’s term, you’ll get all of your money back through regular “income” payments, which have an additional return attached. The additional rate of return you receive in your annuity income payments varies significantly depending on what type of contract you’re purchasing and the provider company’s terms. Annuity income payments should not act as your only financial means- you’ll typically need savings or other more liquid assets on hand to help manage unexpected expenses while the annuity’s term is still active. 

Fixed Annuities: The Basics

Fixed annuity products are the only type of annuity that offers guaranteed returns. While most annuities are generally a safer financial investment than stocks and bonds, the fixed annuity is the only product that ensures a return. Variable rate annuities shift the amount of income you receive based on the insurance company’s investments, which are typically indexes. For individuals looking to take a more conservative approach to build their finances while entering retirement, a fixed annuity can be particularly advantageous.

With a fixed annuity product, you’ll know exactly how much you’re going to get back every month, which makes it a dependable way to increase your assets without any risk in your portfolio. You’ll usually receive your annuity income back on an annual basis starting one year after purchase. However, deferred and immediate annuities offer some flexibility on these terms, often at the expense or benefit of your rate of return.

What Type of Returns Can I Expect?

Returns on your fixed annuity depend on the rate agreed upon at the time of purchase, as well as the period listed in the contract. MYGA (multi-year guaranteed annuity) products ensure that this rate is locked in for the entire duration of the contract. Traditional fixed annuities can see shifting rates later in the annuity’s life cycle, but this doesn’t put your money at risk in the way it might with a variable annuity. 

Rates for fixed annuities are typically low- usually between 2% and 5%- because they don’t technically offer the provider insurance company the opportunity to make money. Instead, the only benefit for the provider is the fact that they get money to work with upfront when you purchase the annuity. Your fixed annuity rates may also depend on the contract length, which can be up to 10 years at a time. To find out more about what rates are available right now, you’ll need to contact a reliable annuities provider or an insurance broker. 

Differences Between Fixed, Fixed Index, and Variable Annuities

Traditional fixed annuities offer a steady stream of income and are generally considered one of the safest ways to increase the amount of money you have during retirement. Fixed index annuities operate in a similar fashion to traditional fixed products, but the rate of return can shift over the specified period. This change in the annuity’s rate is tied to the success or failure of market indexes (such as the S&P 500 and Dow Jones). Variable annuity holders may also see changing rates of return based on the investments of the insurance company. While these products are technically riskier than fixed or MYGA products, they can also offer a significantly higher rate of return. 

Drawbacks of a Fixed Annuity

While fixed annuities are a fantastic choice for securing your finances at the start of retirement, they aren’t always the right purchase for everyone. The primary drawback of an annuity is that it is not affected by inflation. In some cases, the money you’re getting back in addition to the principal is only enough to match current inflation rates.  If you’re early in your career, an annuity usually isn’t the best choice because your earnings have the potential to increase, and you’re likely to make money with more traditional investment strategies. 

The other drawback of an annuity, whether it’s fixed or variable, is that it’s difficult to turn the purchase of the annuity into a liquid asset in the event that you need more money than your savings can provide. In other words, getting your money back before the term expires is both challenging and expensive. Your ability to do so may also depend on the terms of the annuity that you purchase.

Conclusion- What is a Fixed Annuity and How Does it Work?

Fixed annuities are a financial product that supports your retirement with guaranteed income payments and tax deferral benefits. If you’re looking for a new way to continue making money after retirement, a fixed annuity with AnnuityAdvantage might be the right choice for your financial needs.