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Understanding Fixed Annuities

There are a various types of annuities that exist. Fixed annuities are one type that provides a “fixed-rate” of return to the investor, offering greater predictability and a sense of certainty, which is often lacking in other similar investments. An annuity is a financial vehicle and contract that promises to make periodic payments to the investor, for a determined period of time, and is often sold or backed by an insurance company. Annuities which are “fixed” are similar investment instruments to Certificates of Deposits or CDs, which provide specified and predetermined interest rate payments for the life of the annuity.

Often, these annuities can deliver a high rate of return to their owner when compared against the rates of CDs or similar savings vehicles, which makes them appealing to investors, both large and small. With annuities, the investor receives his funds entirely at his discretion and can either elect to be paid out all at once or in installments for a determined period of time. Within “fixed annuities” we find other important subgroups that need consideration when understanding these investment vehicles. Immediate or deferred fixed annuities are viable options here as well. The “immediate” subgroup provides a fixed payout which is established on the actual amount of the initial investment and the age of the investor.

As its name would define, the fixed immediate annuity can be immediately drawn upon, after you purchase this investment and thereby generating an instant income stream. Say for example a 60 year old, just inherited $100,000 from a relative, he or she could begin an immediate fixed annuity that would generate a growing income stream with immediate monthly payments. An Immediate fixed annuity also provides fixed payouts as long as you live or for a specified period of time you choose. With the predictable fluctuations in the market, fixed annuities have garnered the attention of both conservative and frugal investors who prefer a steady rate of return as a way to complement other savings vehicles in their portfolio.

Fixed deferred annuities are dependable “tax shelters” as they defer any federal income tax until an actual withdrawal is made during the payout period. As with any retirement account, it is wise to reconsider any early withdrawals before you retire or before turning 59.5 years of age, as penalties can deliver significant penalty fees. Yet, if you are willing to invest your money until you retire or reinvest your funds while you are in the middle of your retirement years, a fixed deferred annuity can help calm any fears of potential loss when the market is down. The predictability of performance and their ability to protect against taxation make fixed annuities a solid part of anyone retirement income portfolio.

Though risk is always a factor to be considered, fixed annuities are backed by gathering the money from many investors into a pool and delivering payouts from that pool. Due to their structure, they offer safer returns on their initial investment and are particularly beneficial to those retired or near-retirement, as they have less room for wide market fluctuations. When the stock market goes down, as it often does from time to time, those investments in fixed annuities issuers will maintain their obligation and minimize any financial loss in comparison to traditional stocks.