What Is A 5-Year Fixed Annuity?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Financial security is a goal we all share, and finding the right strategies to safeguard our future can often seem overwhelming. Among these strategies, annuities – specifically, 5-year fixed annuities – have emerged as a reliable and increasingly popular option. But what exactly is a 5-year fixed annuity? How does it work, and how can it benefit you? Let’s investigate these questions, unpacking everything you need about today’s best 5-year fixed annuity options.

What is a 5-year Fixed Annuity?

A 5-year fixed annuity is an insurance product you purchase with a lump sum. This investment guarantees a specific, fixed rate of return over five years. A key attraction of 5-year annuities is their stability: regardless of market fluctuations, your returns are safe and predictable.

How Does A 5 Year Fixed Annuity Work

How Does a 5-Year Fixed Annuity Work?

Once you purchase a 5-year fixed annuity, the insurance company promises to pay you a predetermined interest rate for the next five years. This rate is typically higher than what traditional savings accounts offer. At the end of the term, you can either withdraw the entire amount or reinvest it into another annuity.

Example: If your 5-year fixed annuity matures and the total value, including interest, is $115,000, you can either take out this sum or you can choose to reinvest it, potentially in another 5-year deferred fixed annuity, to continue growing your investment.

How does a 5-year Fixed Annuity differ from other types of annuities?

One key difference between a 5-year Fixed Annuity and other annuity types is the deferral period length. With a 5-Year Deferred Fixed Annuity, your investment is locked in for five years, whereas other annuities may have deferral periods that are shorter or longer than this. Additionally, a fixed annuity earns a guaranteed fixed rate of interest. In contrast, other types of annuities, such as variable annuities, may earn a variable return rate based on the performance of the underlying investments.

What are the benefits of a 5-year Fixed Annuity?

One of the primary benefits of a 5-Year Deferred Fixed Annuity is the guaranteed fixed rate of return. This can give investors peace of mind, knowing their investment is secure and will earn a predictable interest rate. Additionally, because the interest earned is tax-deferred, investors may be able to avoid paying taxes on the interest until they withdraw the funds at the end of the deferral period.

What Is A 5 Year Fixed Annuity

Who is a 5-year Fixed Annuity suitable for?

A 5-year Deferred Fixed Annuity may suit investors looking for a low-risk, fixed-income investment option. It may also be appropriate for investors with a medium-term investment horizon and looking for an investment vehicle that can provide a predictable rate of return over five years. However, it is essential to note that a 5-year Deferred Fixed Annuity is unsuitable for all investors, particularly those requiring liquidity or having a shorter investment horizon.

What are the drawbacks of a 5-Year Fixed Annuity?

One potential drawback of a 5-year Deferred Fixed Annuity is the lack of liquidity. Because the investment is locked in for five years, investors may be unable to access their funds without incurring penalties or surrender charges. Additionally, the fixed rate of return may not keep up with inflation, meaning that investors may lose purchasing power over time.

What are some alternative investment options?

If a 5-year Deferred Fixed Annuity is unsuitable for your investment goals or risk tolerance, various alternative investment options are available. These may include stocks, bonds, mutual funds, or other types of annuities, such as variable annuities or indexed annuities. Again, it is essential to consult a financial advisor to determine which investment option best suits your needs and goals.

Related Reading: What is better than an annuity for retirement?

How Does A 5 Year Annuity Work

5 Year Annuity Calculator

Please use this calculator to calculate the amount of interest earned over five years in a fixed annuity.

What Happens at the End of a 5-Year Fixed Annuity?

Upon reaching the end of your 5-year term, you have several options. You could:

  • Withdraw all your money, including the accumulated interest.
  • Annuitize” your contract, which converts your lump sum into income payments over a specified period, such as the rest of your life or another fixed number of years.
  • Choose to reinvest in another annuity, thereby continuing your investment journey.
What Is A Fixed Annuity Account

Rates of Return: What are 5-Year Annuities Paying Now?

The interest rates for 5-year annuities fluctuate based on economic conditions. As of this writing, average rates for the best 5-year fixed annuities range between 4% and 5%. However, it’s always prudent to research and shop around, as offerings can differ significantly among various insurance companies.

Next Steps

A 5-Year Fixed Annuity can be an attractive investment option for investors looking for a low-risk, fixed-income investment that can provide a predictable rate of return over five years. However, it is essential to consider the drawbacks of this investment, such as the lack of liquidity and the potential for the fixed rate of return to not keep up with inflation.

Before investing in a 5-year Deferred Fixed Annuity or any other investment option, it is essential to consult with a financial advisor who can help you determine which investment option is best suited to your individual needs and goals. By taking a people-first approach to your investments and focusing on what will benefit you and your financial future, you can make informed decisions to help you achieve your financial goals.

5 Year Fixed Annuity

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Frequently Asked Questions

What is better than an annuity for retirement?

Based on your financial situation and objectives, alternative retirement options may be more suitable than annuities. These options include 401k plans, individual retirement accounts, dividend-paying stocks, variable life insurance, and retirement income funds.

Will fixed annuities go up in 2023?

The firm predicts that annuity sales will increase by 14% in 2023. This growth will be driven by a projected 25% increase in fixed-indexed annuity sales, a 20% rise in fixed-deferred, and no change in variable annuity sales. As a result, the firm anticipates that fixed-indexed annuities will lead to growth in sales in both 2023 and 2024.

Are fixed-term annuities a good idea?

A fixed-term annuity can provide you with a predictable income during your retirement while allowing you the flexibility to invest in another product later. So, if you’re seeking consistent income during your retirement but want the ability to make changes in the future, a fixed-term annuity may be a good option for you.

Who should not buy an annuity?

Suppose Social Security or pension benefits already cover your regular expenses. If you have below-average health or prefer high-risk investments, purchasing an annuity may not be advisable.

Do you pay taxes on annuities?

With annuities, you can defer paying taxes as they grow. However, once you withdraw or start receiving, you must pay income taxes based on the amount.

*Disclosure: Some of the links in this guide may be affiliate links. If you purchase a policy, I may receive a commission at no cost to you.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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