How Fixed Deferred Annuities Round Out Your Retirement Savings Plan.

Shawn Plummer

CEO, The Annuity Expert

What Are Fixed Deferred Annuities?

Fixed deferred annuities are insurance-based products that protect your assets and income for retirement. They provide stable financial markets, as well as tax advantages, during market collapses of either short or long durations.

Annuities are financial products that are purchased and guaranteed by insurance companies. They’re divided into two categories: accumulation annuities and income annuities.

  • You may take advantage of investment contracts that allow you to invest your money tax-deferred in an annuity with a cash value, allowing your funds to grow tax-deferred.
  • Such annuities are popular among millionaires who want to stretch their retirement dollars further by buying a non-cash earnings stream that is guaranteed to return at least as much money as they paid in over the life of the contract.

Questions To Ask

How can you determine whether an annuity is appropriate for you? And if it is, which kinds are the best option? Here are some questions to consider and answers to help you decide.

  • What will your future expenditures be, especially in the early years of retirement?
    • What portion of them would you expect to be covered by Social Security and other assured pensions if you have any?
    • If they don’t cover everything, how will you use your savings to fill the gap, especially if you (and/or your spouse if you’re married) live a long time?
  • Are you investing in assets that are appropriate for your risk tolerance and objectives?
  • Are you too concentrated or diversified in equities?
  • Is it possible to get a better return on your safe, fixed-income investments?
  • Are your savings and investments tax-effective, or do they need enhancing?
  • Do you want to cede some of your assets now in exchange for a promise of future guaranteed income? The only financial product that can provide a lifetime stream of revenue is a lifelong income annuity.

Once you’ve obtained answers to these preliminary inquiries, you can start developing your investing and income plan and see how an annuity or annuities fit in.

Unfortunately, some financial advisors have an anti-annuity prejudice. Their aversion to annuities might be due to a lack of understanding about how they operate. While the majority of annuities are excellent investments, there are a few that aren’t, and they’ve received a lot of press.

It might be based on the awareness that they won’t make money as a manager on assets in annuities with lower commissions.

With that said, avoid annuity agents who make exaggerated claims about annuities or quote abnormally high-interest rates.

Annuity Advantages

Deferred Annuity Options

If you’re not yet ready for lifetime income, accumulation annuities are a good option. They provide tax-deferred growth and may be converted into an income annuity in the future. Because they’re tax-deferred, they’re also known as deferred annuities.

Deferred annuities are financial products designed to help individuals save more for retirement by deferring taxes on their income. You may lower your federal and state income tax and see money compound faster if you put some of your cash into a deferred annuity. The interest earned from an annuity is not taxed until it is taken out. You have the option of when to take out and pay taxes on the interest accrued.

If you withdraw funds from your annuity before age 59½, you’ll typically be subject to a 10% penalty on the accrued interest earnings plus regular income tax on the amount. As a result, deferred annuities are frequently most useful for individuals in their 40s or older who are certain they will not require the money after 59½.

When it comes to annuities, the distinction between a variable and a fixed annuity is whether or not the stock market risk is included. Variable annuities, which include market risk, have their advantages; however, because I do not deal with them, I will not address them in this post. Instead, we’ll concentrate on fixed annuities.

Sweeping The Interest With Multi-Year Guarantee Annuities

If you’re already heavily invested in equities because of the stock market’s rise or for other reasons, you should increase your fixed-income allocation. A fixed-rate annuity might be ideal if you can afford to invest some of your money for a few years.

The most common form is a multi-year guarantee annuity, often known as a CD-type annuity. It pays a guaranteed interest rate for a set duration, usually two to ten years, and like a bank certificate of deposit, it accumulates tax-free interest. When the money in the annuity has grown enough to produce income, you can withdraw it without penalty and get your principal back with interest. This method is called “sweeping the interest”.

Annuities are generally paying far higher rates than CDs and other fixed-rate investments with the same term. There is no charge for making a withdrawal.

Multi-Year Guarantee Annuities

Shop and compare MYGA products with terms ranging from 2-20 years in length.

Bond Alternatives

The market value of a bond fluctuates with changes in interest rates. You’ll lose money if interest rates go up and you sell a bond before it matures. Individual bonds (except Treasuries) are subject to default risk, as are individual bonds.

Fixed annuities are a form of life insurance that protects investors from market volatility and default risk by insuring both interest payments and principal. It assumes the underlying investment risk, protecting annuity holders from bond-market fluctuations and default danger.

It’s a good idea to review an insurer’s A.M. Best score on a regular basis, especially if you’re considering investing in fixed annuities. While state insurance authorities regularly check an insurer’s financial stability, it’s a good idea to double-check the A.M. Best rating. State guarantee agencies offer an additional layer of security for annuity owners, even though annuities aren’t FDIC insured.

Because they enable you to withdraw up to 10% of the total value without penalty each year, some fixed-rate annuities provide some liquidity. (Any interest taken out will be subject to income taxes.)

Stock market growth potential without downside risk

Fixed indexed annuities are a type of fixed annuity. Instead of guaranteeing a fixed interest rate, they pay a varying rate of interest depending on the performance of a market index such as the S&P 500 but never post an annual loss. In exchange for this guarantee, you usually get only a portion of the index’s gain during up years.

Fixed Index Annuities

Shop and compare the best fixed index annuity products to help grow your retirement savings safely.

Guarantee Your Retirement Income

An indexed annuity can provide a certain level of future income, usually via an income rider. You may be less focused on account value development as long as the maximum future income target is met.

The amount of guaranteed future income is critical, but you should also consider the financial stability of the insurance provider.

Fixed Index Annuities with Income Riders

Find the best income riders that generate the highest lifetime income in retirement.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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