Pros and Cons of Fixed Annuities
For retirees, the most attractive feature of fixed annuities is the assurance that it’ll 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. 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’re considering buying from. A good source is to get the Comdex rating of 80 or better from Vital Signs (see a financial professional) or a Weiss rating of B or better.
With the guaranteed life income payout option, you don’t have to worry about market downturns that could rob you of income. Also if you can put off your payout until later, you’re monthly payout will increase not only from increased earnings but from your reduced life expectancy.
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 59 ½.
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 If you ask for the interest rate history, you will get it).
Although with a fixed annuity you’ve eliminated the possibility of market risk on your investment you have created the risk of losing purchasing power. After beginning payments to you you’re not able to make any adjustments in case of higher inflation rates. However, if the rate history looked good, the company may be more reactive to raising rates when possible.
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.
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Fixed Annuities – Pros and Cons |
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Advantages |
· Tax-deferred earnings · Assurance of lifetime income · Not subject to market downturns · Longer deferred gives greater payout per month |
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Disadvantages |
· Early (before 59 1/2) withdrawals are penalized at 10% of withdrawal · Withdraw too soon after contributing can bring high fees and · Purchasing power of fixed payout can be degraded by inflation · Lack of benefits to heirs |
Annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ 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.
More: annuity pros and cons
–Bob Richards
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Tags: fixed annuities
August 26th, 2009 at 4:11 am
Great post..A friend told me about this page. I’ve been looking Annuities for a while. It’s good to get a breakdown of all the pluses and minus’. I think they are important part of anyones portfolio. The only thing I don’t like is the penalty for withdrawing early. With the stock market looking unappealing whilst the financial crisis takes hold.. annuities are ideal for many I think.
August 26th, 2009 at 12:44 pm
Thank you for the presentation about annuities. This sounds like something to use when you are getting older, say 50+. For one thing you do not want to pay the 10% penalty, so this should be money that you do not intend to touch. Plus beyond 60, there is absolutely no need to be exposed to the vagaries of asset prices, better make what you have as safe as possible, so you can travel, see you grandchildren, and spend time with hobbies. This is a life.
August 31st, 2009 at 9:33 am
It is very encouraging that with the guaranteed life income payout option I don’t have to worry about market downturns, and I really like this fact! The only thing that I worry about is that I am 55 now, and I would like to retire earlier. I do not want to wait until I am 59 1/2. But in order to retire, I need my money. But, at the same time, I can’t get my money without losing a signifacant part of it. So - what is the solution?
September 1st, 2009 at 7:45 am
The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income. The tax-deferred accumulation – in comparison to a similar taxable investment - allows for greater accumulation since earnings are not taxed away annually.
October 8th, 2009 at 10:18 pm
I’ve already begun to save for my retirement. I’ve discussed some of these annuities with my financial adviser and he suggested I look into diversifying my portfolio to maximize my return. I know I am more than 20+ years away from retiring, but I it’s never too early to beign saving for your golden years.
November 27th, 2009 at 9:31 am
Even though there are quite a few negatives, I would definitely opt for a fixed annuity because it is less of a risk than investing in the stock market and I would go with a safer option rather than a risky one.
December 2nd, 2009 at 1:15 am
I agree, fixed annuity was my choice too due to the low risk factor. I once risked a large some of money in other options, lived to regret it.
December 11th, 2009 at 1:03 pm
It’s a nice overview it would help if you would have added typical annuity return rates.
December 18th, 2009 at 1:08 pm
A fixed annuity can be a great investment, especially in this economy. The interest rates on annuities have not depreciated as much as bank cd’s and other “low risk” investments.
January 4th, 2010 at 11:32 am
there are many pros and cons to an annuity but it really comes down to your specific situation. many people get an annuity with the plan of receiving payments throughout retirement. but things happen and if you ever need immediate cash, you can sell your annuity for a lump sum payment. it’s good to have options.
January 11th, 2010 at 1:08 am
Witht he state of the market as it is I think the benefits of a fixed annutity outweigh the negatives. Sure, it may be a conservative option but at least your money is safer.
January 22nd, 2010 at 4:26 am
Fixed annuities have their pros and cons but at the moment can they compete with a structured investment? Structured investments are insured by the FDIC and follow the stock market offering great returns. Whats your thoughts on the comparison?
January 25th, 2010 at 8:02 pm
Annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income fashion and withdrawals prior to age 59 ½ are subject to a 10% penalty.
January 26th, 2010 at 11:09 pm
Awesome article again. The best site I’ve come across to help me prepare for my retirement. Thanks a bunch. Cheers
February 2nd, 2010 at 8:26 pm
I did not know annuities once annuitized cannot be surrendered for value. Thank you for teaching me somthing new! Good post.
February 6th, 2010 at 8:12 am
Very helpful post. In my opinion the Pros of fixed annuities are stronger than the Cons.
February 8th, 2010 at 5:21 am
An important factor is that of tax liability. In case of tax deferred fixed annuities, the earnings within the annuity are not subjected to taxability until they are withdrawn. This may offer its own advantages, like tax control, along with a higher potential for growth
February 8th, 2010 at 9:14 pm
Thank you for a comprehensive overview of all PROs and CONs, it definitely inspired me to do more reading on annuities.
February 9th, 2010 at 11:24 pm
Many people get an annuity with the plan of receiving payments throughout retirement. Even though there are quite a few negatives, I would definitely opt for a fixed annuity
February 10th, 2010 at 1:09 pm
If one is worried about the risk of inflation, yet, wants the stability of a guaranteed return similar to a traditional fixed annuity, then an equity-indexed annuity may be a good option. It is tied into an index like the S&P 500, and provides rather exceptional returns compared to a traditional fixed annuity when there is a rising market. However, if the market were to fall, your annuity would not lose value. In fact, they have a no loss clause, stating that no matter what happens to the market, your money is guaranteed. A safe investment vehicle with a no loss clause that can pay a percentage of a climbing market, would be a good alternative to a fixed annuity, if inflation was a concern. This is why it is important to check the financial strength ratings of the carriers you are considering.
Jason Hawkins
Owner
The Koenig Group LLC
February 25th, 2010 at 6:34 am
In case of tax deferred fixed annuities, the earnings within the annuity are not subjected to taxability until they are withdrawn.
February 25th, 2010 at 2:46 pm
Thank you for a comprehensive overview of all PROs and CONs, it definitely inspired me to do more reading on annuities.
February 25th, 2010 at 2:53 pm
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal
February 25th, 2010 at 4:03 pm
The best site I’ve come across to help me prepare for my retirement. Thanks a lot..
February 25th, 2010 at 5:34 pm
Talk to an expert on annuities or structured settlements depending on your situation.
February 25th, 2010 at 6:43 pm
Even though there are quite a few negatives, I would definitely opt for a fixed annuity because it is less of a risk than investing in the stock market and I would go with a safer option rather than a risky one.
February 25th, 2010 at 6:52 pm
our annuity would not lose value. In fact, they have a no loss clause, stating that no matter what happens to the market, your money is guaranteed.
February 25th, 2010 at 7:08 pm
I did not know annuities once annuitized cannot be surrendered for value.
February 26th, 2010 at 3:07 am
Structured investments are insured by the FDIC and follow the stock market offering great returns. Whats your thoughts on the comparison?
February 26th, 2010 at 3:37 am
I did not know annuities once annuitized cannot be surrendered for value. Thank you for teaching me somthing new! Good post.
March 25th, 2010 at 7:45 am
I’d like to add some more advantages of fixed annuities:
-Low investment minimums ($1,000-$10,000 usually)
-Low risk (money can be lost only if insurance company is insolvent and investment exceeds annuity state guaranty limits)
-Unlimited contributions (unlike a 401(k) or IRA)
April 18th, 2010 at 6:53 pm
The safer option is always better, this is why i would go with fixed annuities rather than other options. Thanks for a clear list of advantages and disadvantages! G.
April 28th, 2010 at 7:53 am
“Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.”
is it me or does that 10% penalty seem pretty harsh?
April 30th, 2010 at 11:12 am
Should you own fixed annuities? Here’s a casual discussion of the pros and cons of a fixed annuity.
May 13th, 2010 at 4:12 pm
I would definitely opt for a fixed annuity because it is less of a risk
May 20th, 2010 at 12:38 pm
What a great article that makes fixed annuities a lot easier to understand. In this economic environment, this information will most likely be helpful to many different people.
May 27th, 2010 at 1:48 pm
helpful post. In my opinion the Pros of fixed annuities are stronger than the Cons
June 1st, 2010 at 10:22 pm
I am really confused about annuity..I have a problem. I am a Manulife Income Plus customer with PART of my portfolio invested with Income Plus. From what I am told:
My initial investment will attract a 5% bonus in the GWB each year I dont touch it until I am 65 when I can begin withdrawing 5% a year from GWB — so for simple math … an initial $100K left in for 15 years will have a GWB of $105K after year1, $110K after year 2, $115k after year 3 etc with an ultimate GWB of $175K after 15 year — I then can withdraw a guaranteed income for the rest of my life. This is if the markets go down and show no improvements. Manulife will RESET the GWB every 3 years if the market has improved the value of your original $100K. As I said at the outset, this is a PART of a retirement portfolio and provides what I like to think of as a “pension” that can be banked on. Am I wrong? Could you explain tome, please?
June 7th, 2010 at 3:42 pm
Definitlely a good tool for the retirement planner. I would like to read some tips on finding and evaluating companies that offer this vehicle.
June 21st, 2010 at 2:39 pm
Enjoying reading here even i don’t really understand about annuity till i reads here
July 13th, 2010 at 4:50 pm
This is great. I have ready quite a few blogs that discuss annuties and mainly the benefits, but this is probably the best one I have read that puts across both the pros and the cons in a way that a layman can understand it. Really good.
July 16th, 2010 at 5:40 pm
good post. good for newers who will start annuity soon. Hope to have some more
July 24th, 2010 at 5:53 am
Fixed annuities are the best source to invest money.The safety factor is the biggest pro but on the other hand it doesn’t offers much returns.
July 31st, 2010 at 8:36 pm
I stumble onto this page by accident and it is a good thing I did. This site goes in depth about Annuities but still explain it in a term that everyone can understand.
thanks for the great share…
August 3rd, 2010 at 4:09 am
good for newers who will start annuity soon. Hope to have some more
August 3rd, 2010 at 11:26 am
Anyone who is interested in a fixed annuity should read this post for it will help this decide if it is really what they want.
August 4th, 2010 at 12:38 am
Thank you informing us more about annuities. This is such a complicated topic but this article really shows the things that are involved.
August 7th, 2010 at 9:35 am
Thank You dear Admin
August 8th, 2010 at 8:05 am
In france Fixed Annuities are the most prefered investement, its what we call “assurance vie” ie: life insurrance (despite the fact this name is completly meanless).
So people dont suffer a lot about stock crysis and dont care a lot about what stock market does.
August 9th, 2010 at 12:48 am
good annuities….. good old day…
GOOD POST !!
August 15th, 2010 at 9:33 pm
I agree, Fixed annuities fixed my choice is also due to lower risk factors. which I never bet most of the money in other options, but none lived to regret it.
good post.