How Does A Fixed Annuity Work?

Whether you’re looking into retirement, thinking about investing, or are just gathering information on financial options in general, questions may arise that leave many confused and stressed:

What is a Fixed Annuity? How does it work? If you are wondering which investment option will work best for you, the below information will help.

What Is A Fixed Annuity?

A Fixed Annuity is a commitment between you and your insurance provider and serves as a prudent way for your money to accrue interest. Unlike a Variable Annuity, the rate of which can fluctuate based on the market, a Fixed Annuity guarantees a set interest rate on the investor’s contribution. Just like with a 401k or an IRA, all contributions to a Fixed Annuity are tax-deferred.

This is a great option for those who don’t like to take much risk or gamble with their savings account. You will know exactly what your interest rate will be from start to finish, allowing you to plan for your future precisely and accurately, without playing guessing games about your monthly income.

The downside to a Fixed Annuity is that just like the rate won’t go down, it won’t go up either. There is always the chance that inflation will rear its angry head, and suddenly your money isn’t worth what it once was. The best way to handle this is to keep some of your money outside of your annuity liquid and ready to invest when the numbers are good.

Are There Different Types Of Fixed Annuities?

As is the case with most Annuities, you can choose between an immediate or a deferred payout. There are pros and cons to each option, so let’s consider the details.

Immediate Fixed Annuity

An Immediate Fixed Annuity can also be called a Single Premium Immediate Annuity. It is funded by one lump sum paid upfront, typically from a savings account or previously funded 401k or IRA. The payments are decided at signing and go for the length of the contract. Some of the benefits to an Immediate Fixed Annuity are:

• You begin to receive payments right away.
• They’re simple. No account monitoring is necessary.
• There is potential for lifetime payments, depending on when you retire.

There are also some potential downsides to an Immediate Fixed Annuity, so make sure you get all the information before deciding if it’s the right option for you. Some possible cons are:

• A high upfront cost.
• Funds are illiquid and hard to withdraw, if you can at all.
• Payments could lose value with inflation.

Deferred Fixed Annuity

A Deferred Fixed Annuity (or Term Deferred Annuity) is paid out over a certain period in the future. You can choose between Fixed-Period Deferred or Lifetime Deferred. Fixed-Period Deferred Annuities payout for a set amount of time, such as 10 years, whether to you or to a beneficiary after you die. This is especially helpful if you have little or no life insurance. A Lifetime Deferred Annuity will payout throughout your life, be it 5 years or 20 years. Some of the benefits that come with a Deferred Fixed Annuity are:

• More compound interest. The longer you wait before taking payouts, the more your money will grow.
• Greater flexibility, with the ability to choose lifetime or fixed period payments.
• It gives you more time to add to your principal amount.

Likewise, there are a few drawbacks with a Deferred Fixed Annuity as well, such as:

• Fees & expenses that may add up over time.
• Limited access to the money right away.
• Less opportunity for growth if you don’t have years to spare.

How Do Fixed Annuities Work?

If you’ve decided to go with a Fixed Annuity, you first have to decide if you are going to pay in one lump sum or with payments over time. A Fixed Annuity will have a guaranteed interest rate, so you won’t lose value even if the market drops. Your account will continue to grow based on the agreed-upon interest rate. The longer you wait to receive your payments, the more money you will have in the long run.

Contributions to a Fixed Annuity are tax-deferred, meaning you don’t have to pay taxes on the money until you withdraw the payments. Additionally, you get to choose how and when you receive your payments and if they will be strictly for you or if you wish to assign a beneficiary to receive them after you pass.

Need More Information?

Annuities and other investment accounts can be confusing, but you don’t have to do it alone. Matador Insurance has experienced agents ready to answer any questions you may have.

Contact our annuity providers online today to speak to a professional and make sure you’re making the best decision for yourself and your loved ones. You can also click here to request a consultation today!