A fixed annuity has many advantages, like tax-deferred growth and the option of guaranteed income for life, but how do you know if a fixed annuity is right for you? Consider the following scenarios:
- Are you currently planning your retirement, nearing retirement, or already retired?
- Are you looking for a way to round out your investment strategy?
- Are you looking for a higher return on your money?
An Additional Source of Income for Retirement
However you plan on funding your retirement — through investments, selling a home, pensions, IRAs, Social Security, payouts from employer-sponsored plans, such as 401(k)s — a fixed annuity could be a wise choice. Think of a fixed annuity as a way to protect yourself if you happen to outlive your other assets. Besides lifetime income options, other key features include family protection through death benefits and nursing home riders. Guarantees are based upon the claims-paying ability of the insurer.
The Advantage of Unlimited Contributions
Perhaps the most attractive feature of a flexible premium fixed annuity is the lack of annual contribution limits such as those applying to IRAs and 401(k) plans. Although a tax deduction is unavailable for the money deposited in a traditional fixed annuity, all of the earnings accumulate tax deferred until they are withdrawn. (There is a 10 percent IRS tax penalty for withdrawals prior to age 59½.)
You can purchase a fixed annuity with a single lump sum, with periodic fixed sums, or for variable sums at irregular intervals. This flexibility allows you to tailor purchases to the availability of funds for investment.
Rounding Out Your Investment Strategy
A fixed annuity generally provides a predictable income stream. Because you earn a rate of return that's fixed for a particular period, there's no need to worry about the day-to-day fluctuations of the investment markets. Fixed annuities are not FDIC-insured, so it is wise to get to know the insurance company's financial position. A fixed annuity may be more appropriate if you're a conservative investor with a low risk tolerance who requires safety of principal and predictable investment results.
Depending on your circumstances, a fixed annuity can be a tool to help supplement your retirement plan or round out your investment portfolio. The flexibility in plan options means that you have the potential to design a strategy that best suits your needs.
