For retirees, the best feature of fixed annuities is the confidence that it will provide a person with a fixed income for life. Nevertheless all investments have their bad and their good points; and fixed annuities are no different. Let's overview some of the fixed annuities summarized in the table.
Pros regarding fixed annuities
The three important features of a good annuity are tax-deferred accumulation, guaranteed principal, and guaranteed long term income. The tax-deferred accumulation - in comparison to the same taxable investment - allows for better accumulation since earnings aren't taxed away annually.
Fixed annuities happen to be conservative vehicles for investment. Needless to say you should always check out the strength associated with your insurance company you are considering buying through.
With the guaranteed life income option, you do not have to worry about market place downturns that could rob you of your income. Also if you can put off your current payout until later, the monthly payout will increase not just from increased earnings but from your reduced life expectancy as well.
Cons associated with fixed annuities
Because an annuity is a long-term investment, using tax-deferred status, the IRS will impose a 10% tax penalty on any withdrawal before age group 59½.
Annuity fees can significantly eat into any withdrawals obtained early in the accumulation years. Plan on holding your annuity towards the end of its term and you will never have any surrender costs (same as early withdrawal penalties).
Since your money is utilized by having an insurance company in an annuity contract, you've got little control over the annuity rates associated with return on your investment. When you purchase, find a company that has a history of offering competitive returns. One of the oft-mentioned in the list of fixed annuities is that the income can be fixed and will not increase. Of course, nether can it decrease below the confirmed rate and 'CD Type' annuities provide monthly interest guarantees that can span a few years.
Although with a fixed annuity you have taken away the possibility of market risk on your own investment you have created the risk of losing your purchasing power if inflation occurs. After the payments begin, you will not be able to make any adjustments in case of increased inflation rates.
If you decide to annuitize (a steam of income which is an option and not mandatory with a fixed annuity), picking a lifetime income generally leaves zero residual investment for your heirs. It is possible to choose options that address this, but at the cost of your lower monthly payout. Naturally, with fixed annuities you are always choose how to take your money out, based on your personal desires. Here's a summary:
|Fixed Annuities Pros and Cons|