Having enough money
for the retirement lifestyle you want is usually best accomplished by
using all the financial tools at your disposal. Your retirement plan and
IRA can provide the foundation for that nest egg. Another tool you may
want to consider is a fixed annuity.
What is a Fixed
A fixed annuity is a contract issued by a life insurance company under
which you give the insurance company a sum of money and the insurance
company guarantees to pay you periodic fixed amounts over time. The earnings
within the annuity accumulate on a tax-deferred basis until you begin
to receive withdrawals. With a fixed annuity, the insurance company usually
guarantees a rate of return for some period with the rate being adjusted
after an initial period.
Most people use fixed
annuities to accumulate funds on a tax-deferred basis as part of their
retirement planning strategy. Depending on the policy, withdrawals of
interest, or in some cases up to 15% of the principal can be made without
penalty. Withdrawals are subject to regular income tax and the IRS imposes
a 10% penalty tax if funds are withdrawn before age 59 ½.
There are also annuities
that offer payouts beginning immediately. Variable annuities are somewhat
similar but offer no return guarantees.
Review the Details
- Initial rate guarantee.
Compare the initial rate guarantee to other investment options such
as government bonds and tax-exempt bonds. Be sure to understand how
long the initial rate will last. Some policies offer very attractive
rates that only last for a short time.
- Subsequent rate
re-setting. After the initial rate period, the insurance company will
reset the rate. Check to determine what their prior rate setting policy
has been. Usually, they adjust the rate based on interest rates at that
- Fees or commissions.
Most fixed annuities are sold without a commission charged to the buyer.
The insurance company pays the salesperson and recoups that cost out
of their earnings on managing your funds. Do not be afraid to ask the
salesperson what he or she will receive. In most cases, it should be
less than 5%. Remember, the commission the salesperson received will
ultimately reduce the return on your annuity.
- Surrender charges.
Fixed annuities should be thought of as long-term commitments. Even
though in most cases the insurance company is paying interest on your
whole investment, there are costs associated with the contract that
they plan to recover over time. The contract should spell out how long
any surrender charge will last for early withdrawals.
- Insurance company.
Be sure the insurance company is financially sound and that they have
a good customer service history. You want to make sure they will be
able to fulfill their guarantees. You should be able to get a ratings
report from the salesperson or at the public library.
Fixed annuities can be a valuable part of your total financial strategy,
but they are not for everyone. They offer the benefit of tax deferral
and come with the guarantee of the insurance company. Be sure to investigate
all of the details before signing up. Compare the rates, understand all
the charges and make sure the insurance company is financially sound.