Why You Shouldn’t Use Fixed Annuity Interest for Retirement Income

Shawn Plummer

CEO, The Annuity Expert

In a world brimming with financial advice, determining the best path for retirement can seem daunting. Yet, while we all dream of a comfortable retirement, making informed decisions about the financial tools we choose to achieve it is crucial. One such topic of debate is whether or not to use fixed annuity interest for retirement income. While it might sound promising initially, some compelling reasons exist to reconsider. Let’s delve deeper.

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Understanding the Multi-Year Guarantee Annuity

Before diving into the details, let’s clarify a multi-year guarantee annuity (MYGA). An MYGA is a fixed annuity that provides a guaranteed interest rate for a predetermined number of years. For instance, you might invest in a MYGA that offers a 3% interest rate for five years.

Example: Imagine Sarah invests $100,000 in a MYGA with a guaranteed interest rate of 3% for five years. At the end of that period, she will have earned $15,927 in interest.

Why You Shouldn'T Use Fixed Annuity Interest For Retirement Income

The Risk of Renewing at a Lower Interest Rate

One significant downside of relying solely on fixed annuity interest for retirement is the risk associated with the renewal phase. Once your initial MYGA term is up, you’re often presented with a renewal rate that might be substantially lower than your initial rate.

Example: Considering the above example, Sarah’s MYGA might renew at a 1.5% interest rate after five years instead of the initial 3%. This drastically impacts her future earnings.

The Best Way To Take Income From An Annuity

The Dangers of a Lower Interest Rate Environment

Our economy goes through periods of higher and lower interest rates. Unfortunately, in a lower interest rate environment, the interest earnings on new or renewing annuities tend to decrease, putting a damper on the growth of your retirement savings.

Example: John invested in an MYGA ten years ago when interest rates were high. Now that he’s looking to renew, he finds that the current economic scenario only offers a 1% interest rate on MYGAs, reducing his potential returns.

The Drawbacks Of Relying On Fixed Annuity Interest For Retirement Income

Lowering Your Retirement Income

Relying solely on the interest from fixed annuities can potentially decrease your retirement income, especially if the rates are not in your favor. This fluctuation can impact your retirement plans and budget.

Example: Emily planned her retirement based on an anticipated interest rate of 3%. However, due to unforeseen economic shifts, her actual earnings were based on a 1.5% interest rate, affecting her retirement income projections.

Embrace Stability and Consistency with Fixed Income Annuities

Instead of relying on interest from fixed annuities, consider using a fixed-income annuity for stability and consistency. This type of annuity provides regular income payments, ensuring that you receive consistent funds throughout your retirement.

Example: Mark opts for a fixed-income annuity that assures him a monthly payout of $500 for the rest of his life, giving him a predictable and steady income.

Optimizing Income Withdrawals From An Annuity

Do Not Annuitize Your Contract

An essential piece of advice: refrain from annuitizing your contract. Doing so, you lose control over the principal amount and are locked into a fixed payment structure. It’s essential to retain flexibility in retirement, adjusting to the ebb and flow of life’s uncertainties.

Example: Lucy annuitized her contract, receiving a fixed monthly payment. A few years later, faced with unexpected medical expenses, she found herself without the flexibility to access a lump sum from her annuity.

Next Steps

Making the right financial choices for retirement requires a blend of foresight, understanding, and adaptability. While the allure of fixed annuity interest might seem promising, the potential pitfalls can undermine your retirement income, especially in a lower interest rate environment. Understanding these risks and opting for more consistent options like fixed-income annuities can pave the way for a stable and comfortable retirement. Always remember, it’s not just about the numbers; it’s about ensuring peace of mind during those golden years.

Do Not Annuitize Your Contract

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Frequently Asked Questions

At what age should you buy a fixed annuity?

There’s no one-size-fits-all answer, but many financial advisors suggest considering a fixed annuity in your late 50s to early 60s. This timing allows for tax-deferred growth while preparing for a more secure retirement.

How do you avoid tax on annuity distribution?

Avoiding tax on annuity distributions is generally not possible, as they are usually subject to income tax.

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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