Fixed Rate Annuity: The Lowest Risk
The fixed rate annuity plan offers the lowest risk of any retirement savings option. With a fixed rate annuity plan, a guaranteed rate of return is locked in for a specific period of time, usually from one year to ten years. While the return rates may fluctuate over that period, they will never fall below the rate that has been guaranteed. Therefore, investors do not lose any money. However, fixed rate annuity plans will not provide the potential benefits associated with strong growth in stock or stock fund plans.
Fixed rate annuity plans are suitable for investors who have a low tolerance for risk and/or a short time frame for when they need to access the funds. Making an investment in a fixed rate annuity, which offers competitive interest rates and tax deferral, is also a good idea if a portion of an inheritance or other monetary windfall can be put aside until the heir is ready to retire.
What Investors Should Know About Fixed Rate Annuities
Fixed rate annuity plans are a traditional type of annuity arrangement. With these plans, a set amount is paid out on a regular basis over the lifetime of the contract's owner. They are similar to bank Certificates of Deposit (CDs), but rather than placing funds in a bank, they are given to an insurance firm in exchange for a fixed return rate and regular, lifelong payments.
Since interest rates can vary over time, and the relative payouts can differ from one insurer and other, it is critical to ensure than the insurance firm handling the annuity has a high rating and is very secure.
Fixed rate annuities come in two forms: immediate and deferred. The immediate annuity is a plan that starts its payouts right away, as soon as funds are deposited. In a deferred fixed rate annuity, investors may purchase the plan by making several payments over a period of years to receive an income in the future.
Pros and Cons of a Fixed Rate Annuity
The chief benefit of a fixed rate annuity plan involves security and low risk. Owners of these annuities can count on a continuous income stream over a lifetime from these plans, regardless of how the underlying investments may perform. They are the perfect solution for retirees who want a good rate of return without exposure to investment risk.
However, fixed rate annuities do not offer much room for growth. If the underlying investments of the plan experience high growth rates, the annuity owner will still receive the same fixed rate of return he or she started out with. Additionally, deciding to use a fixed rate annuity could eliminate the potential advantages related to tax deferral.
Who Should Buy A Fixed Rate Annuity
Fixed rate annuities are best for older investors who do not want to be bothered with investment strategies and who value a steady, safe return. Higher returns are usually obtained with investments in bonds or CDs, since the insurance components of an annuity result in higher fees. Fixed rate annuities also have higher penalties for early withdrawals than CDs or bond arrangements.
Buyers of annuities should ask their insurance professionals about any commissions they receive. It is important to keep such expenses as low as possible. Owners of annuities must also check the financial security and status of the insurance firm they are dealing with.
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