Fixed Annuities

Are fixed annuities a good investment for your retirement portfolio? Often times, retirement investors or folks doing retirement planning, consider them because advertisements claim they offer “guaranteed” income or “guaranteed” returns. Although these statements are alluring, the guarantees often come with big trade-offs, fees and nuances you should carefully consider before purchasing one.

What Is a Fixed Annuity?

At their core, fixed annuities provide investors a guaranteed income stream in exchange for insurance premiums. They are a contract where the owner deposits money with the insurance company to earn a flat (or fixed) rate of return. The money is liquid and accessible to the owner, but surrender penalties may apply early on in the contract. Think of fixed annuities like a bank CD. The insurance company reserves the right to change this rate each term, but the product typically comes with a guaranteed minimum rate.

In theory, these annuities aim to transfer the risk of you outliving your investments from you, to the insurer. The person selling you the annuity may tell you fixed annuities’ guaranteed return rates mean these contracts eliminate market risk—but, in reality, fixed annuities are never risk free and deserve some consideration before investing in one.

Determining if a Fixed Annuity Is Right for You

Fisher Investments believes investors should ask the following questions before purchasing a fixed annuity:

How does the annuity affect your ability to access your retirement funds?

A fixed annuity has two phases: growth (accumulation) and pay out (annuitization). In the first phase, there are usually limits on how much can be withdrawn from the account each year (such as 10% annually, for example). Beyond this, there can be major penalties for early or excessive withdrawals. In the payout phase. Understanding how your unique annuity contract is structured can help you determine if this provision creates additional risk for your retirement.