Retirement planning includes saving and investing throughout your career to ensure you have sufficient funds in retirement. You have a lot of options when it comes to saving for retirement, and one of these is a fixed annuity. Learn what a fixed annuity is and why purchasing one may benefit your retirement planning goals.
What Is A Fixed Annuity?
A fixed annuity is an insurance-backed contract many investors use for retirement planning. Fixed annuities issue guaranteed income payments in return for a lump sum investment. A fixed annuity differs from a variable annuity, an insurance-backed contract that issues payment based on market performance.
6 Reasons To Consider A Fixed Annuity For Retirement
Adding a fixed annuity to your retirement strategy offers many benefits. Here are a few great reasons to consider a fixed annuity for retirement:
1. Guaranteed Returns
Fixed annuities offer guaranteed returns. Few other investment or retirement planning tools provide a guaranteed rate of return. Purchasing an annuity with your savings could earn you a higher rate of return with minimal risk. While fixed annuities typically require leaving your funds in the annuity until a set date, the return is typically higher than if you used a savings account.
Fixed annuities don’t just guarantee a rate of return; they’re also flexible. For example, you can choose when you want to begin receiving payments. Some investors may choose to start payments immediately after retiring. Others may push back payments until a few years into retirement when other funds are low.
2. Predictable Earnings
Fixed annuities offer predictable income that can help with retirement planning. You can use the guaranteed monthly income payments from a fixed annuity to offset other retirement costs, like housing, health care, or travel expenses. The predictability of a fixed annuity can also help retirees outpace inflation and supplement other retirement planning tools. Many people use a fixed annuity and other retirement accounts to ensure they can afford their bills after retiring.
3. Easy To Understand
Unlike other investment types, fixed annuities are generally easy to understand. This is because they tend to be straightforward, with clear contract terms that outline exactly how much you can expect to receive in returns and when. This means you can focus on the freedom of retirement without spending hours reviewing your accounts or moving funds.
Additionally, many investors typically have a wide range of investments in their retirement planning strategy. The straightforward contract terms of a fixed annuity also allow you to focus on other methods that may be more complex.
4. Lifetime Income
One of the biggest perks of fixed annuities is that they’re available in lifetime income payments. This means you’ll receive monthly payments for life. If your lifetime benefits outlive you, some fixed annuity contracts allow you to transfer them to your beneficiary through a death benefit. This means you can use a fixed annuity to supplement your income during retirement and protect your loved ones.
5. Low-Risk Investment
Risk is present in most investments, making it essential to consider how much you’re willing to tolerate. Also known as risk tolerance, this is the balance of risk with reward that best fits your financial plans and goals. Whatever your investment strategy and risk tolerance is, many experts recommend choosing safer, less risky investments as you near retirement age. Because fixed annuities are safer than other investments, like stocks, they’re a great product to consider.
The lower risk of fixed annuities also makes them a great addition to a portfolio with riskier investments. You can secure your retirement and use a fixed annuity to offset and minimize potential losses in a riskier investment that may pay off more.
6. Lower Tax Liability
An essential part of retirement planning is accounting for taxes. Most investments are taxable, but the good thing about fixed annuities is that they’re tax-deferred and are taxed at ordinary income rates. Tax-deferred means you only owe taxes on your annuity earnings once you receive payments.
Once taxed, the Internal Revenue Service (IRS) taxes you at the ordinary income rate based on your current income. If you wait until you’re retired to collect, you may be in a lower tax bracket than when you worked full-time. This means you’ll pay less in taxes on your earnings.
Fixed annuities offer many benefits when it comes to retirement planning. Whether you’re looking for a safer strategy to offset riskier investments or want to ensure you won’t outlive your retirement savings, a fixed annuity may be the right option. Purchasing an insurance contract allows you to turn your savings into guaranteed monthly payments once you retire.