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The Pros and Cons of Fixed Annuities

The Pros and Cons of Fixed Annuities

The precarious condition of the U.S. economy and stock market is causing many Americans to lose their confidence in being able to sufficiently fund their retirement years. According to the 2011 Employee Benefit Research Institute study, Americans’ confidence in their ability to afford a comfortable retirement has fallen to a new low. In fact, the percentage of workers who were not at all confident about their financial security in retirement grew from 22% in 2010 to 27% in 2011.

Generally speaking, a chaotic economy will have the largest affect on individuals that have small tolerances to risk and that have a limited time
horizon in front of them, such as individuals about to retire. Since fixed annuities offer stability and the potential for growth, but don’t involve the individual assuming a lot of the risks associated with the financial market, many individuals nearing retirement find them very attractive and valuable. Of course, soon-to-be-retirees aren’t the only investor group that will find the guaranteed stability and returns of a fixed annuity attractive in such an unstable economy.

Like any investment, fixed annuities have both pros and cons. Any consumer considering purchasing a fixed annuity should consider both sides very carefully:

1. Fixed annuities feature guaranteed returns. During the accumulation phase of an annuity contract, the insurer guarantees a minimum rate of return.

2. An unpredictable market is a moot issue for a fixed annuity owner. Market volatility has absolutely no bearing on the rate of return since the insurance company is obligated by contract to meet the minimum rate of returns.

3. An annuity owner will not be taxed on annuity gains until they actually withdraw the money. Other financial vehicles, such as CDs, are taxed based on the interest it earns during the year.

4. Just like with a CD, the consumer can lock a set rate of return in for a set number of years.


1. All of the above pros aren’t without sacrifices being made somewhere. The rate of return will be more conservative than gains from the financial market.

2. It’s more difficult to liquidate fixed annuity assets because they offer a locked-in rate of return. There may also be surrender charges during the surrender of an annuity. Any withdrawal from an annuity will be taxed like regular income. If the funds are withdrawn before the individual reaches 59 1/2-years-old , then the withdrawal could be subject to a federal income tax penalty of ten percent.

When all is said and done, a fixed annuity might not be the best option for those looking to make big money at a big risk. On the other hand, a fixed annuity could be the ideal option for those looking to add stability and modest guaranteed returns to their portfolio. An experienced financial planner or adviser can address any additional concerns or questions.

Call Brian Gruss 509-927-9200

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

CD vs. Tax deferred annuity

Let’s take a apples to apples approach at looking at some of the differences between a CD (Certificate of Deposit) and a annuity.

CD’s have immediate tax liabilities,; this creates the need for a higher rate of return

With a fixed annuities, you will eventually have to pay taxes on the money you withdraw.  However, as the numbers below shows, fixed annuities require a much lower interest rate to generate the same return as a CD.

For example, if your income places you in the 28% tax bracket and you purchase a tax-deferred fixed annuity with a guaranteed interest rate of 4.25 percern, you’d need a CD with an interest rate of more than 5.9 percent to outperform the annuity.

Now let’s say that your income places you in the 25 percent tax bracket and you purchased a fixed annuity with a guaranteed interest rate of 3.5 percent, you would need to purchase a CD with an interest rate of more than 4.67 percent to outperform the annuity.

If your CD’s are not performing like you would like them to, let’s talk about how annuity might be able to help you out.  I offer annuities through multiple carriers and ranging in years from 2-14.

Oh and with most annuities unlike most CD’s you can withdraw a portion of the annuity without any penalties from the carrier.

Retirement Planning: The Advantages of Fixed Annuities

Retirement Planning: The Advantages of Fixed Annuities

A fixed annuity is a contractual obligation rendered by an insurance company with a pledge to disburse income to a recipient based on a fixed return on investment. Therefore, they are ways for the holders of such instruments to be guaranteed future dividends or a source of income. That’s why, when selecting from the variety of annuities available, annuities are a logical choice to make for retirement planning.

Fixed annuities have a rate of return or ROI that is equal to the rate of return of the market. Therefore, they offer a lower risk to the consumer and, as a result, more financial security. Comparatively, variable annuities incur more risk for the consumer. Variable annuities typically glean a higher return rate although the holder of these types of instruments is also more vulnerable financially. Therefore a greater risk is supplied. Subject to market rates, you can possibly lose a portion of what you invest.

On the other hand, fixed annuities offer the convenience and comfort associated with a lower-risk instrument. The holder of the annuity simply opts for a lower rate of return. You might say a fixed annuity can be likened to a CD, except you realize a far greater return on your investment because your money is committed for a far longer period of time.

Investing in fixed annuities is financially sound from a tax standpoint as all deposited funds in such annuities are tax-deferred until which time you decide to receive income from the annuity. At that time, taxes are taken out only on the income growth, thereby making these types of annuities ideal for retirement planning.

Because of the tax advantage, these products are used primarily for long-term planning purposes. In other words, income cannot be collected from the annuity prematurely, which means before the age of 59 ½, as the holder can be assessed taxes, fees, and penalties. Also, surrender charges are imposed if you choose to cash in your annuity before the specified time. The charges can be excessive so one should consider them for long-term investment purposes only.

If you are truly serious about planning for retirement and are someone who needs a financial product that provides a minimal amount of risk, a fixed annuity may well be worth your consideration.

Take time out to contemplate all the pros and cons of owning such an instrument. For retirement planning purposes though, fixed annuities are ideal because, as previously stated, they offer a tax advantage for the consumer.

Additionally, the opportunity to invest in other enterprises is increased because of the annuity’s tax benefits. You can become prosperous with your short-term investments while investing in a solid financial product in order to secure your future income needs.

In summation, fixed annuities provide the kind of financial security you need now to realize monetary growth in other areas, and the assurance that you will be provided an adequate future return on your investment.