Fixed annuity

Definition

A fixed annuity is a type of insurance contract that provides guaranteed periodic payments to the annuitant in exchange for a lump sum investment. The main appeal of fixed annuities is their ability to provide steady income during retirement, making them a popular choice among individuals looking to ensure financial stability after they stop working.

5 Must Know Facts For Your Next Test

1. Fixed annuities typically offer a guaranteed interest rate for a specific period, which means the amount of money earned is predictable and stable.
2. The payouts from a fixed annuity can be structured to last for a certain number of years or for the lifetime of the annuitant, providing flexibility in how income is received.
3. Fixed annuities are often considered lower risk compared to variable annuities since they are less affected by market fluctuations.
4. These contracts can be funded with either a single premium or through multiple contributions, allowing for different investment strategies based on individual financial goals.
5. In many cases, earnings from fixed annuities are taxed as ordinary income when withdrawn, making it important for investors to consider their future tax situation.

Review Questions

• How does a fixed annuity differ from a variable annuity in terms of risk and income predictability?
  • A fixed annuity offers guaranteed returns and predictable payments, making it lower risk and more stable compared to a variable annuity, where payments can fluctuate based on investment performance. In a variable annuity, the income is tied to market conditions, which can lead to higher potential returns but also greater uncertainty. Thus, individuals seeking financial stability often prefer fixed annuities for their reliable income stream.
• Discuss the benefits of choosing a fixed annuity over an immediate annuity for retirement planning.
  • Choosing a fixed annuity can provide retirees with guaranteed growth over time before they begin receiving payments, which may result in larger payouts compared to an immediate annuity. While immediate annuities start payments right away, fixed annuities allow individuals to benefit from interest accumulation over several years. This can be advantageous for those who want to ensure they have enough savings set aside before entering retirement.
• Evaluate the implications of tax-deferred growth in fixed annuities on long-term retirement planning and cash flow management.
  • Tax-deferred growth in fixed annuities can significantly enhance long-term retirement planning by allowing investments to compound without immediate tax consequences. This feature means that retirees can potentially accumulate a larger retirement fund over time since earnings can grow unchecked by taxes until withdrawal. However, it's essential for individuals to plan their withdrawals strategically; as funds are taxed as ordinary income upon withdrawal, this could impact overall cash flow and tax liability during retirement.

Related terms

Variable Annuity: A variable annuity is an insurance product that allows the investor to allocate their contributions among various investment options, with payments that can fluctuate based on the performance of those investments.

Immediate Annuity: An immediate annuity begins paying out income right after a lump sum payment is made, offering instant cash flow for retirees.

Tax-Deferred Growth: Tax-deferred growth refers to the investment growth in an annuity that is not taxed until funds are withdrawn, allowing for compounding over time.