Fixed Annuities – the highest savings rate for retirement?
Many people use Fixed Annuities because they provide one of the highest Savings Rate available for conservative retirement savers. But is this the best option for you? How does it compare to other choices? Fixed Annuities can usually provide a higher return vs. a CD or investment grade Bond. But there are a few considerations to make before investing in a Fixed Rate Annuity.
Fixed Annuity Guarantees
A Fixed Annuity provides a guaranteed return for a specific period of time. A Deferred Fixed Annuity, is specifically used for conservative retirement savings. They provide a set interest rate much like a CD or Bond does. But historically, Fixed Annuities have provided the highest savings rate vs. other comparable options. This is why many people consider them an excellent Bond Alternative or CD Alternative.
Fixed Annuity Basics
We covered the fact that a Fixed Annuity gives you a set interest rate for a set period of time. During that time period (called the Surrender Period), early withdrawal charges may be applied. However, many Fixed Annuities allow you to withdraw up to 10% of the account value per year free of Early Surrender Charges.
Fixed Annuities are issued by Life Insurance Carriers. They are guaranteed by the “claims paying ability” of the issuing carrier. The good news is that Life Insurance Companies are highly regulated by the state and federal authorities. The majority of their holdings are required to be invested in US Treasury Bonds.
You can find Fixed Rate Annuities with Surrender Charges from as little as 3 years, all the way up to 10 years. I personally recommend the 5 year options the most. They are usually the best “value” with all things considered. However each person must evaluate their goals and needs to decide how long of a term they are comfortable with.
Obviously you want a strong company to get your Fixed Annuity from. Other than the interest rate given, the best way to judge an annuity carrier is their financial ratings. I only recommend carriers with a Rating of B++ or higher. This is considered “investment grade” in the Bond world, so I stick to that level in the Annuity world.
Fixed Annuities vs. other Guaranteed Retirement Savings Options
What is best for you comes down to what you want and need. A Fixed Annuity will provide a higher return most of the time. However, if you needed to cash out of the contract completely, a CD would be more liquid than a Fixed Annuity. But if you just needed to access 10% or less of the account value…. then a Fixed Annuity would likely be best.
Bonds require you to take a loss on principle if you sell the bond before it matures. It is a different calculation than Surrender Charges on a Fixed Rate Annuity, but it is a loss of principle nonetheless.
Fixed Annuities provide an excellent balance of guaranteed returns vs. access to your money.