Understanding Fixed Annuities

Nicholas J. Colantuono, CFP® joined the latest episode of Better Money Boston to discuss a topic that often raises questions among investors: fixed annuities.

What Are Fixed Annuities?

Fixed annuities are a type of investment vehicle that can be likened to a Certificate of Deposit (CD). They require a time commitment, typically ranging from two to five years, during which your principal investment earns a guaranteed interest rate. At the end of the term, you receive your initial investment back along with the accrued interest, which grows tax-deferred until withdrawal.

The Pros of Fixed Annuities

• Guaranteed Returns: One of the primary advantages of fixed annuities is the guaranteed interest rate. This feature can provide a sense of security, especially in volatile markets.
• Tax-Deferred Growth: The interest earned on fixed annuities is tax-deferred, meaning you won’t owe taxes on the earnings until you withdraw the funds. This can be particularly beneficial for long-term financial planning.
• Income Stream Options: Fixed annuities can also be transformed into income streams, similar to pensions, providing financial stability in retirement.

Cautions to Consider

While fixed annuities offer several benefits, it’s essential to be aware of some potential drawbacks:

• Limited Access to Funds: The time commitment associated with fixed annuities can limit your access to your money, which may not be ideal if unexpected expenses arise.
• Interest Rate Risk: The economic landscape is continually changing. If you lock into a fixed interest rate and rates increase, you might miss out on higher returns available in the market.
• Potential Fees: Be cautious of fees associated with early withdrawals. Understanding the terms of your annuity is critical to avoid penalties.

Conclusion

Fixed annuities can be a significant part of your financial strategy, but they demand thoughtful consideration and planning. To effectively navigate the complexities associated with annuities, it is crucial to regularly consult with your financial advisor to ensure they align with your retirement income plan.