Are fixed annuities a good investment for your retirement portfolio? Often times, retirement investors or folks doing retirement planning, consider them because advertisements claim they offer “guaranteed” income or “guaranteed” returns. Although these statements are alluring, the guarantees often come with big trade-offs, fees and nuances you should carefully consider before purchasing one.
What Is a Fixed Annuity?
At their core, fixed annuities provide investors a guaranteed income stream in exchange for insurance premiums. They are a contract where the owner deposits money with the insurance company to earn a flat (or fixed) rate of return. The money is liquid and accessible to the owner, but surrender penalties may apply early on in the contract. Think of fixed annuities like a bank CD. The insurance company reserves the right to change this rate each term, but the product typically comes with a guaranteed minimum rate.
In theory, these annuities aim to transfer the risk of you outliving your investments from you, to the insurer. The person selling you the annuity may tell you fixed annuities’ guaranteed return rates mean these contracts eliminate market risk—but, in reality, fixed annuities are never risk free and deserve some consideration before investing in one.
Determining if a Fixed Annuity Is Right for You
Fisher Investments believes investors should ask the following questions before purchasing a fixed annuity:
How does the annuity affect your ability to access your retirement funds?
A fixed annuity has two phases: growth (accumulation) and pay out (annuitization). In the first phase, there are usually limits on how much can be withdrawn from the account each year (such as 10% annually, for example). Beyond this, there can be major penalties for early or excessive withdrawals. In the payout phase. Understanding how your unique annuity contract is structured can help you determine if this provision creates additional risk for your retirement.
See Our Investment Guides
The world of investing can seem like a giant maze. Fisher Investments has developed several informational and educational guides tackling a variety of investing topics.
How likely is there to be a shortfall in your retirement savings given your projected time horizon and cost of living?
Annuities are a form of longevity insurance. Their primary value comes from their ability to protect owners from outliving their assets. Consequently, if you believe you’re at little risk of outliving your assets, a fixed annuity is unlikely to provide much benefit. You may want to consult an experienced adviser who can analyze your portfolio relative to your goals and advise you on whether this trade-off is sensible.
How will inflation impact your annuity payments?
Most annuities are structured to make consistent periodic payments. Over time, inflation can erode the purchasing power of these payments. While some annuity options offer increasing payments over time, they generally begin by offering lower payments up front. Depending on your time horizon, the slower return up front could significantly reduce the likelihood of seeing the full promised benefit from your annuity.
How Fisher Investments Can Help
Still have more questions about fixed annuities or any other type of annuity? Fisher Investments has extensive experience helping those in, nearing or planning their retirement to develop investing strategies that are properly aligned with their goals. Having seen many clients locked into annuity contracts that simply didn’t meet their needs, we’ve developed our Annuity Evaluation service to help qualified investors better understand these products.1 Our Annuity Counselors can break down these complex contracts (or even discuss them directly with their providers) to provide clear feedback on what is actually being offered.
Contact us today to request an appointment with an Annuity Counselor to discuss your fixed annuity, and to determine if an alternative strategy may be better suited for your long term goals and objectives.
1Terms and conditions apply