Pros and Cons of Fixed Annuities

For retirees, the most attractive feature of fixed annuities is the assurance that it will provide a fixed income for life. But all investments have their good and bad points; and fixed annuities are no different. Let’s overview some of their advantages and disadvantages summarized in the table.

Advantages

The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income.[1] The tax-deferred accumulation – in comparison to a similar taxable investment – allows for greater accumulation since earnings are not taxed away annually.

Annuities have been conservative vehicles for investment. Of course you should always check out the strength of any insurance company you are considering buying from.

With the guaranteed life income payout option, you do not have to worry about market downturns that could rob you of income. Also if you can put off your payout until later, your monthly payout will increase not only from increased earnings but from your reduced life expectancy.

Fixed Annuities – Pros and Cons
Advantages·      Tax-deferred earnings

·      Assurance of lifetime income

·      Not subject to market downturns

·      Longer deferred gives greater payout per month

Disadvantages·      Early (before 59 ½) withdrawals are penalized at 10% of withdrawal

·      Withdraw too soon after contributing can bring high fees

·      Purchasing power of fixed payout can be degraded by inflation

·      Lack of benefits to heirs

Disadvantages

Because an annuity is a long-term investment with tax-deferred status, the IRS will levy a 10% excise tax penalty on any withdrawal before age 59½.

Annuity fees can significantly cut into any withdrawals taken early in the accumulation years. So plan on holding off for 10 years or so to let your earnings offset this effect.

Since your money is placed with an insurance company in an annuity contract, you have little control over the rate of return on your investment. When you buy, find a company that has a history of providing competitive returns.

[1] Annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income, and withdrawals prior to age 59½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims-paying ability of the insurance company. Annuities should be considered long-term investments. Annuities are insurance products and subject to insurance related fees and expenses.

Although with a fixed annuity you have eliminated the possibility of market risk on your investment you have created the risk of losing purchasing power. After beginning payments to you, you are not able to make any adjustments in case of higher inflation rates.

Choosing a lifetime income leaves generally leaves no residual investment for your heirs. You can choose options that remedy this, but at the cost of a lower monthly payout.

Give us a call to see an annuity illustration for your circumstances.


[1] Annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income, and withdrawals prior to age 59½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims-paying ability of the insurance company. Annuities should be considered long-term investments. Annuities are insurance products and subject to insurance related fees and expenses.

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