As investors are flailing around looking for both security and growth, one of the first vehicles that comes to mind are fixed income annuities. Although the emphasis with a fixed annuity is preservation of capital, most boast some moderate growth due to the long investment horizon associated with annuities.
An annuity of any type is a contract between the investor and another entity, generally an insurance company. The guarantor provides an investment vehicle similar to a certificate of deposit. Fixed annuities pay a contractual fixed growth rate on the deposited funds. The critical advantages of fixed annuities versus other interest bearing accounts come from the core advantage of any type of annuity: the monies grow tax-free, and many have low investment minimums. A standard starting point for an annuity is between $1,000 and $10,000. They have very similar withdrawal rule to Individual Retirement Accounts and 401K plans with regards to withdrawal planning. An individual must be 59 ½ prior to starting to take the annuity or else pay a 10% tax penalty on the withdrawal.
As with any contract, it is critical to take the time to understand the fixed annuity details for the one you consider as an investment vehicle. All guaranteed annuities generally have a guaranteed minimum rate of 3% returns. Some have higher rates or bonus rate programs but it is absolutely critical to read the fine print on those type of interest rates. They are often not as advantageous to the investor in the long haul so much so as the near term. It is the exact opposite gimmick from a credit card introductory rate: for the annuity, the “catch” is a very high introductory rate and a lower than normal guaranteed rate in place of the credit card’s low introductory interest rate combined with a high post-new member rate.
The key to knowing whether annuities are right for you depends on your level of confidence that you will not need access to that money for at least the first five to ten years of the contract. Some annuities have significant early withdrawal fees, often in the range of 10%. As with any form of fund investing, it is critical to discover the fees upfront as those fees can quickly consume your returns on your investment. The best fixed income annuities have low cost ratios.
The difference between a fixed income annuity and a retirement account is that the annuity at some point will move from the accumulation phase to the payout phase, in which your capital reserve transitions into some form of income. A fixed annuity refers to its method of growth. All annuities can select either a fixed or variable payout. At the point in time when you annuitize the money, the insurance company receives a lump sum in return for a guaranteed payout, generally calculated off life span actuarial tables. Variable annuities work largely the same way, but may vary in actual amount based on market and investment performance.
Not all of the annuity must be annuitized at once. One way to hedge your bet with regards to current interest rates is to transition your annuity in stages, allowing you to try and make one last effort to leverage the most out of your money.