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Fixed Annuities: Facts vs Fears


In an effort to secure the financial resources to maintain a comfortable retirement lifestyle, many consumers are looking at fixed annuity products to compliment their 401(k), IRA and/or Social Security.  A fixed annuity offers a guaranteed interest rate and can be structured to pay out a lifetime income stream. 

But there is still a lot of confusion about investing in an annuity, and with so much negativity about the products in media, it’s easy to understand why some are still hesitant to sign on the dotted line. 

InsuranceNewsNet recently published an article addressing some of the most common misconceptions about fixed annuities. Will you look to add one to your portfolio? 

“I won’t be able to touch any of my money if I need some of it before I retire.” 

It’s true. Before you retire, some annuity contracts are in what’s called the “accumulation phase,” and if you want to make a significant withdrawal at this time, you’ll likely face a steep surrender charge as well as a 10% federal tax penalty. Sometimes withdrawals are also subject to a market value adjustment. That being said, if you want to access a small percentage of your funds, there is a possibility that you will not encounter any fees. And some annuity contracts allow a 10% withdrawal with no penalty. 

“Annuities cost too much.”

It is always recommended that you shop around for the best annuity rates because, in fact, some products are actually quite low in cost. When making comparisons, be sure to look at the cost against the value of each additional guarantee, feature, and benefit. Only pay for what you need. 

“A deferred annuity isn’t worth the wait.” 

You will not immediately start receiving income if you purchase a deferred annuity, but for those who are comforted by knowing what to expect from future payments in retirement, a deferred annuity is a good choice. 

“When I die, the insurance company keeps my money.” 

This completely depends on the terms and conditions of the annuity contract you purchase. If your payout plan includes a beneficiary agreement, your beneficiaries will receive any remaining amount. 

Other concerns: 

  • The safety of your lifetime income stream and guarantees are only as solid as the insurer that issued the annuity. Be sure to choose a company that has demonstrated financial strength and stability. 
  • Fixed annuity products typically don’t carry a cost of living adjustment, like Social Security does. Some annuity contracts do offer inflation protection, but this feature can significantly reduce payments. 

A fixed annuity can be a valuable addition to your retirement portfolio, however it is always recommended that before purchasing one, you thoroughly investigate the contract. Weigh all potential benefits and concerns without the concerns of common misconceptions. This decision should always be made based on facts.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Facebook

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