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The Pros & Cons of Fixed Annuities
Solid, unexciting, stodgy and in fact downright boring but…annuities are safe! Back in 2007, it might have been hard to get anyone to admit that they actually put money into a fixed annuity! However, today it is a different story as many individuals lost substantial amounts of money during the Great Recession. Back then millions of folks holding boring fixed annuities suddenly found themselves feeling proud about the fact that their fixed annuity did what a fixed annuity was supposed to do. It protected them from the financial crisis and saved all or at least kept that portion of their retirement plan intact.
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Fixed annuities offer competitive interest rates, typically 1-3% higher than bank CDs and money markets. They were never designed to give returns that are available in the stock market, however; over the last ten years or so they have actually outperformed the market and may do so for the next decade or two.
The insurance provider and the contract available will determine the actual rate. Longer terms of five to ten years offer higher rates than shorter term annuities, though a one to five-year annuity can still potentially outperform bank CDs. In addition to earning higher interest rates, fixed annuities have even greater growth potential with tax-deferral accelerating their growth.
When comparing fixed annuities to CDs, many factors are clearly in favor of annuities. Moreover, CDs and securities don’t offer much in the way of additional retirement benefits. CDs have early withdrawal penalties as do fixed annuities and they are both considered safe and secure.
However if you keep your money liquid and lose the opportunity to make an extra 2% per year for ten years, you will actually pay a lost opportunity penalty of 31% by default. That extra 2% compounded will increase your asset value by 31%. So if you plan properly, the fixed index annuity for retirement has the potential to make a significant difference over fixed investments and cash equivalents, and, at times, it actually does beat the stock market! So even a 10% early surrender penalty on an annuity can be small compared to a potential 31% penalty by default for liquidity. In fact, annuities have many additional benefits: For more information about fixed index annuities.
Fixed index annuities have many features that are unique in both the fixed rate safe money world and the securities investment world. Fixed index annuities are a modern, hybrid class of annuities that utilize a balanced approach to investing. They combine no risk to principal and accumulation with the inflation-hedging ability of stock returns. Their upside potential is limited to less than the full upside of the stock market, however, the positive of this is there is no loss of years – essentially, think of avoiding all losses, and only stacking gains. This potential makes fixed index annuities quite enticing to some, and you might consider investing in them for a portion of your retirement portfolio.
Fixed Annuity Benefits
- Safety: Backed by highly rated state regulated insurers
- Tax Deferral: Tax-deferred growth
- Higher Return: Better interest rates typically than CDs
- Life Insurance: Death payout guarantee options
- Liquidity: Flexible withdrawal privileges
- Unlimited Contributions, unlike IRAs and 401(k)s
- Inheritance: Pass money directly to heirs by passing probate
- Lifetime Option: Income you can’t outlive (Annuitization or a Living Benefit Rider)
Fixed Annuity Characteristics
- Lump-sum or periodic contributions
- Invested in mostly high quality A-AAA bonds
- No risk to client. Insurance company assumes all risk
- Guaranteed interest
- Modest growth
- 3% to 6% interest crediting possible
- 1 to 15-year term
- Predictable, simple
- Guaranteed retirement income
- No annual fees
Investors that need their money prior to retirement may prefer a CD, money market or a securities-oriented investment to avoid the potential of a 10% IRS tax penalty imposed for taking money out of an annuity prior to the age of 59.5. For individuals at or near retirement, fixed annuities may be better choice. If you’re looking to have a larger retirement nest egg, fixed annuities may help you meet that goal better than securities, CDs or a money market account.
Question: How do you avoid being scammed the way Bernie Madoff MADE-OFF with his client’s money?
Answer: Never make a check out directly to a broker, insurance salesman or planner! Always make the check out to a third-party such as the institution that will receive the funds, never to an individual or their company.