Annuities are a great way to hedge your funds for your retirement. There are various sorts of annuities available to choose from.
There are fixed annuities, deferred annuities, variable annuities, and much more that enable you to safeguard your retirement.
However, fixed annuities are more popular and a safer choice than other types of annuities.
A fixed annuity is a guaranteed contract between you and the insurance company wherein your funds accumulate interest over a period of time between the initial stage of accumulation and the distribution stage.
It is the safest way as, unlike other types, the rate of interest you acquire is fixed, and you earn the interest over a specified period of time.
This ensures you a steady flow of income while being less risky than other types of annuities.
The best fixed annuity is that which you can opt for by paying the lowest fees and assures you a constant income in the future.
Choosing the best annuity plan for your future is a challenging task that requires you to learn about all of the options.
So, here are some pros and cons of fixed annuity that might help you make a better and more informed decision.
Pros of Fixed Annuity
1. Guaranteed Minimum Interest Rate
This is why most people opt for a fixed annuity because the minimum interest rate is guaranteed.
No matter how the investment company is performing or how the market is performing, you will get a fixed interest rate on your investment.
2. Guaranteed Fixed Income Through a Regular Stream
Investing in such annuities offers you the stability of regular fixed income for the rest of your life.
This safeguards you from any fluctuation in the economy, interest rates, or stock markets. It is a reliable way of income that guarantees you a fixed amount.
Many people think they will rely on rental income in their retirement days, but such income is volatile. If your property is vacant for a month or two, you do not generate any income.
Whereas many decide to invest their investment fund directly into stock markets, but stock markets are dynamic and risky. You can lose all of your savings if the market crashes.
Thus, a fixed annuity serves as the safest bet for generating an income stream in your retirement.
3. Lower Minimum Investment
Earlier, one would have to pay huge sums of money to the banks to get their annuity funds started. But now you can begin your Fixed annuity fund from even $1000.
This makes it more favorable for younger people who do not have a lot of money saved up.
Cons of Fixed Annuity
1. Limited Returns
While the returns are guaranteed in a fixed annuity, they offer you a lesser interest rate. You have the safety net of a consistent income, but the returns on your fixed annuity are low.
Moreover, insurance companies tend to entice people with ‘teaser rates’ wherein companies offer a higher interest rate for a short time and then lower the rate after a few years.
3. Fees and Commissions
Every type of annuity has a plethora of fees built into your contract, and there is no escape from them.
However, unlike index annuity or variable annuities, fixed annuities have lesser charges. You will even have to pay a surrender charge if you want to opt-out of the annuity plan after a certain time.
Other than that, companies charge you M&E charges which translate to Mortality and Expense.
They are charged to compensate the insurance agency for your untimely death within the accumulation stage.
4. Limited Protection Against Inflation
Fixed annuities will generate a fixed income for you each month in the distribution stage. However, if you have been retired for more than 20 years, inflation might catch up with your expenses.
Your cost of living slowly and gradually increases due to inflation, but your fixed annuity income does not.
It is best to plan for your retirement from an early stage to save up and invest more money to build wealth for your future.
Choosing the best fixed annuity can be challenging, so it is best to seek advice from an industry expert who will be able to guide you through the various options.