Are Fixed Annuities A Good Investment?

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Are Fixed Annuities A Good Investment

When you do online research about saving for retirement, you will most likely encounter the word annuity. Since insurance companies offer life insurance and annuities, many people cannot differentiate one from the other. Life insurance ensures your spouse and beneficiaries will receive benefits after you are gone. On the other hand, you need an annuity if you are concerned about providing for yourself after your retirement. 

In simple terms, an annuity is an agreement you enter with your insurer to cover your lifetime income, financial protection, cost of care during retirement, or even legacy planning. There are many annuity types in the market. However, this article will focus on a fixed rate annuity option. Read on to know if fixed annuities are a good investment for you.

You Want A Stable Investment In Your Portfolio

Young people typically prefer high-risk, high-return investments. They invest in stock markets, bonds, and some may dip their toes in cryptocurrency. However, people who are just a few decades away from retirement are typically more concerned about how to prepare for retirement. This preparation usually entails paying off all their debts, determining how much retirement income they would need, and setting up a retirement savings plan that’s stable and guaranteed. 

Financial advisors often recommend a fixed-rate annuity to risk-averse soon-to-be retirees because this type of plan is predictable. Fixed annuities are not typically affected by the volatility of the bonds or stock markets. This investment type is also ideal for those who want to invest in something stable as part of their overall retirement portfolio. With a fixed annuity, you are guaranteed to receive, at the very least, the amount of money you invested plus some interest.

You Aim To Get Regular Payouts

Annuities are a suitable investment choice for people looking for insurance plans that offer regular and long-term income payouts to supplement their retirement savings and social security benefits. Although there are different annuity types, many retirement advisors recommend fixed annuities to those who want to have easy-to-understand and straightforward insurance contracts with lower fees. Many believe that low costs can compensate for relatively modest interests offered with a fixed annuity.

You Are Interested In Tax-Deferred Growth

Many people don’t want to be burdened with taxes while they are growing their retirement savings. If you are one of them, then investing in a fixed annuity is suitable for you because your contributions in this type of plan will only be taxed once you start receiving your payouts.

Thus, the potential for your savings to grow can be significant even during a short period. Because of tax deferral, your annuity fund can see the same kind of growth potential you see in 401(K) funds. So, with this option, you could reach your investment goals faster.

You Desire Financial Freedom

With fixed annuities, you can be assured of regular payments after retirement and typically for as long as you live. For some, this inflexibility can be overbearing. Even if you can withdraw money from annuities before your retirement, you’ll face substantial surrender fees if you go over the allotted amount of withdrawal per year.

Sometimes, however, this stern provision may be a blessing. Just imagine, if you cash in all your retirement savings out on a whim, there is a considerable risk of losing all your money years before you die. What will you do then?

Often, state pensions will not be enough for you to live a comfortable life during your sunset years. With a fixed annuity, you may not be able to withdraw considerable sums of money for unplanned luxury expenses easily. But at least, you will continue to receive regular payments that will somehow ensure your financial freedom during your retirement years.

You Want Protection For Your Loved Ones

If you choose your fixed annuity contract wisely, you will probably find one that offers death benefits for your loved ones. Typically, your beneficiaries will get the same amount of money you contributed minus your withdrawals if you die before you start receiving your annuity payments.

Some contracts offer riders to boost the death benefit amount for your beneficiaries. It’s an excellent option to ensure that your spouse and children will receive more money when you are gone.

Bottom Line

A fixed annuity may not be the perfect investment plan for everyone. If you are a billionaire like Elon Musk or Warren Buffet, you probably have enough investments and savings to cover for your retirement. Or, if you are suffering from a health condition and believe that you will not have a long and healthy life after retirement, then a fixed annuity may not be ideal for you.

But suppose you are like most people who expect to live 20 or more years after retirement and are looking for a stable retirement savings plan that will provide reliable regular payments to augment state pensions and 401(K) savings. In that case, fixed annuities might be a good investment for you.