Analyzing the Pros and Cons: Evaluating the Suitability of Fixed Annuities

Donna Nichols | Jan 24, 2024 | minute read

Fixed AnnuitiesFixed annuities are low-risk, making them a lucrative investment vehicle when interest rates are high, as stated U.S. News and World Report. A fixed annuity may or may not work well in your retirement portfolio depending on your life circumstances and how much you have to invest.  

To help you determine whether a fixed annuity is right for you, we’ll explain what they are and how they work. We’ll also review the pros and cons of fixed annuities to assist you as you develop your retirement strategy.


What Is a Fixed Annuity & How Does it Work?

Simply put, a fixed annuity is an investment vehicle that provides guaranteed payments of a specific amount that last for the rest of your life (or nearly the rest of your life).

The amount of the annuity payments depends on the type of annuity you choose and the amount you contributed to it over time.

If you opt for an immediate fixed annuity, you’ll usually start getting payments within a year. By contrast, with a deferred annuity, you’ll usually start getting payments closer to your retirement age.

We’ve sorted out the pros and cons of fixed annuities to give you a better understanding of how they work and whether they might be a good choice for you.


Pros of Fixed Annuities

The following pros of fixed annuities show why they are a popular choice for certain people:

  • With most annuities, the payments continue for your entire life which means you can’t outlive the money.
  • Fixed annuities have a guaranteed interest rate that remains stable for the life of the annuity, so the payments won’t fluctuate with the markets.
  • Fixed annuities are backed by an insurance company, bank, or other financial institution making them a relatively safe investment.
  • The earnings on fixed annuities are tax-deferred.
  • Payments are typically higher than what you can make with other low-risk investment vehicles such as money market accounts, bonds, or certificates of deposit.
  • Fixed annuities provide steady monthly income which supplements Social Security payments which could help cover your basic living expenses during retirement.
  • State guaranty associations may insure annuity holders for between $100,000 and $300,000 for each annuity owner.
  • Buyers of fixed annuities can have the flexibility to choose a single life annuity for themselves or a joint annuity that continues to be payable even after one spouse dies.

Perhaps one of the things annuity buyers appreciate the most is that fixed annuity statements are simple, straightforward, and easy to understand.

Fixed Annuities


Cons of Fixed Annuities

The following cons of fixed annuities should give you some food for thought and talking points to speak with your financial advisor about:

  • You can purchase an annuity when you are younger and make payments into it over the years, however, you’ll need a relatively large sum of money if you buy it later in life. For example, you may need to invest $100,000 or more upfront.
  • Unlike a permanent life insurance policy, you can’t borrow from the account and pay it back.
  • You can’t withdraw funds early without incurring a penalty.
  • Your payments will be lower if you purchase it when the interest rates are low, and you can’t change the payment after you’ve purchased it.
  • Your earnings are taxed at the ordinary income tax rate which may be higher than the long-term capital gains rate depending on your tax bracket.
  • You may be able to purchase a fixed annuity that has an inflation guard protector on it. The payments you receive will be lower in the beginning and increase steadily, however, the increases may not keep pace with inflation.
  • Depending on the type of annuity you purchase, it could terminate before you die and your beneficiaries may not receive a lump sum payment upon your death.


A Few Final Words on Fixed Annuities

Annuity payments are generally considered to be guaranteed. Nevertheless, it’s prudent to choose a financially strong insurance company or bank to make sure payments are truly guaranteed.

Many immediate annuities also offer some kind of inflation guard. This option tends to make the initial payment significantly smaller, although the checks will rise slightly over time.

As conservative as they are, fixed annuities aren’t the right choice for every individual. A financial advisor has the expertise to evaluate your circumstances and consider them in light of your other investments for retirement.

To learn more about the various types of fixed annuities you may want to consider, contact one of our financial advisors at the Leap Carpenter Kemps Insurance Agency. We are happy to review your investment portfolio, inform you of your options, and help you make the best choices for your circumstances. Call us today at 209-384-0727.

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About The Author

Since 2005, Donna has been a Life & Health Benefits Advisor with Leap | Carpenter | Kemps Insurance Agency, where she uses her three decades of insurance experience and knowledge to ensure her clients get the best policies for their budget.

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