Since the recession hit, purchases of fixed annuities have gone through the roof relative to other investment options as investors look for safer options that still generates a return on their money. Contrary to popular belief, not all times are the best times to buy fixed annuities. It’s not the economic conditions, those tend to always suit fixed annuities, it’s your age that makes a difference. The younger you are, the more you need to consider products other than a fixed annuity for savings. The older you are, the more a fixed annuity makes sense.
If this sounds confusing, it shouldn’t. Fixed annuities are wonderful products for those averse to risk and people about to retire. The reason they work best for those in older age brackets as opposed to the very young is the factor that makes it a great investment, its tax-deferred status. It has this status since the government considers it a retirement product. Just like IRAs, pensions and 401Ks, you also have a penalty if you remove the funds before you are 59 1/2.
The closer you come to needing your funds, retirement age, the more you need fixed and secure products. A fixed annuity provides just that. Your funds are safe and you receive interest applied to your account on a periodic basis. Like a CD, often the alternate choice for many retirees and those close to retirement, your principal is safe from market fluctuations.
However, there are other advantages to fixed annuities over CDs. The tax status, already mentioned, gives the owner the benefit to control the amount of taxable income they receive. For those on Social Security this is a huge advantage. You have to pay taxes on your Social Security if you have a total income over $25,000 if you’re a single taxpayer. So, if one year you happen to find part time work, and leave the interest in your annuity, you can save hundred of dollars in taxes. You can’t do that with a CD. You never have to take the funds out, unlike an IRA, so you have even more control of your taxable income.
You also have more access to the part of the funds in fixed annuities in most cases, than you do in a comparable long term CD. CDs allow for the removal of the interest but seldom allow you to take any of the principal. When you shop for a fixed annuity, look for ones that allow you to take as much as a 10 percent amount every year. This amount is best if it’s cumulative, so it builds each year. You no longer have to accept the low rates of a short term CD to have access to emergency funds when you use the penalty free accessibility of the fixed annuity.
Fixed annuities often offer more attractive rates than many CDs do. Just like CDs and other fixed products, you have rate renewals. Unlike other renewable interest-bearing instruments, a fixed annuity offers a guaranteed minimum interest rate. Even if the prevailing interest rates drop well below the guarantee, the insurance company pays you what it promised as your rock bottom return.
While a fixed annuity isn’t for everyone, particularly not the very young, it’s a great financial tool for those that fit. You have more control, often higher interest rates and a stable product that offers excessively attractive returns.
Since the recession hit, purchases of fixed annuities have gone through the roof relative to other investment options as investors look for safer options that still generates a return on their money. Contrary to popular belief, not all times are the best times to buy fixed annuities. It’s not the economic conditions, those tend to always suit fixed annuities, it’s your age that makes a difference. The younger you are, the more you need to consider products other than a fixed annuity for savings. The older you are, the more a fixed annuity makes sense.
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