If you have decided to invest in an annuity for retirement, it is important to understand the different types of annuities available in order for you to make the best decisions regarding your investment plan for the future.
Basics of a Fixed Annuity
A fixed annuity is one of the most common types of annuity available on the market from retirement plan providers. Like its name states, a fixed annuity is one with a specific rate of return, leading to a fixed payout either on a monthly, quarterly, or annual basis. Fixed annuities are usually low risk investments since the return is guaranteed over a period of time or for the entire life span of the investor depending on the terms in the contract. However, its interest rate is usually lower or more conservative than market averages.
There are three major types of fixed annuities namely:
• Fixed Deferred Annuity
• Fixed Immediate Annuity; and
• CD Type Fixed Annuities
Pros and Cons of Fixed Annuities
Like everything in life, fixed annuities have its good and bad sides. In our opinion, we feel the good outweighs the bad especially if you consider the fact that fixed annuities offer a guaranteed return on your invested principal and offers peace of mind. One of the greatest benefits of this type of annuity is the tax exemption, which investors enjoy as far as they keep investing it in such products. Taxes are only levied on the gains made on the principal during future withdrawals.
Also, with fixed annuities, a lifetime income and guarantee on the principal invested is secured, as retirees will usually receive a specific amount every month for the rest of their lives or for as long as was specified in the contract. However, it must be noted that the fixed amounts to be received will depend on a number of factors, including the total amount invested, agreed interest rate and length of payout period.
On the down side, the payouts received for fixed annuities are not adjusted for inflation, meaning that you will receive the payout amount specified in the contract for your lifetime, regardless of changes in the economy or benefits accruable to annuity plan provider from the pool of funds. There are a few more cons associated with fixed annuities. It is important that you read the terms of the contracts before signing the dotted lines.
Generally, fixed annuities are very viable for use as an annuity for retirement purposes. The risk involved is low and your principal and a specific interest amount is guaranteed regardless of the economic situation within the country. Usually, this type of annuity is very attractive for retirees that may not have any other source of stable income during retirement.
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