Thinking about buying a fixed annuity? Great.
But, careful, there are 773 life insurance companies in the U.S. that offer about 1,500 fixed annuity products. How on earth is anyone supposed to figure out which one to buy? Well, you've come to the right place. Here's a simple step by step buyer's guide for fixed annuities.
By the way, independent Insurance agents are annuity professionals. Their job is to simplify the process and help folks just like you make smart choices.
Step 1: Know What Your Goals Are
Yogi Berra is credited for saying "If you don't know where you are going you'll end up somewhere else". So, what do you want to accomplish?
Save For Retirement: If you are saving money for retirement make sure you are getting the most out of any employer sponsored plans. If you are eligible for IRA tax benefits consider that as well.
For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than:
- $6,000 ($7,000 if you're age 50 or older), or
- your taxable compensation for the year, if your compensation was less than this dollar limit.
If you are not covered by a plan at work you can take a full deduction for your contribution as long as your spouse is not covered. If your spouse is covered you can take a full deduction up to a modified adjusted gross income of $196,000.
If you are covered by a plan at work your deduction is limited according to the table below.
|If Your Filing Status Is...||And Your Modified AGI Is...||Then You Can Take...|
|single or |
head of household
|$6,500 or less||a full deduction up to the amount of your|
|more than $65,000 but less than $75,000||a partial deduction.|
|$75,000 or more||no deduction.|
|married filing jointly or |
|$104,000 or less||a full deduction up to the amount of your|
|more than $104,000 but less than $124,000||a partial deduction.|
|$124,000 or more||no deduction.|
|married filing separately||less than $10,000||a partial deduction.|
|$10,000 or more||no deduction.|
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "single" filing status.
Retirement Income: If you want to create retirement income, how much do you need beyond social security, pension, and any other stable income that you have? Do you need to guarantee lifetime income just for you, or for you and a spouse?
Tax Control: Are you looking to defer taxes on interest bearing accounts? Fixed annuities are tax deferred investments.
Step 2: Understand Your Concerns
- Inflation: The impact of inflation is the number one financial concern of pre retirees and retirees according to the society of actuaries 2017 retirement risk survey. Even modest inflation rates can eat away at purchasing power. If you retired in 2009 on $100,000 of income, you would need $119,000 today to buy the same things.
- Outliving Money: A closely related concern is running out of money. The average life expectancy for a 65 year old today is age 85. That means 50% of 65-year-olds will live longer than age 85. Long term care and other medical issues at advanced ages can strain financial resources.
- Safety: The safer your money is, the lower the rate of return that you can expect. Higher risk assets like stocks will generally do better over time, but the short term can be very painful. Think 2008 - 2009 when stocks lost 50% of their value.
- Time: When will you need the money? How long are you willing to keep the money in one place? Fixed annuities have surrender penalties for anywhere between 3 and 10 years. There is a 10% tax penalty for withdrawing money before age 59 1/2.
- Legacy: How much do you want to leave your heirs?
Step 3: Consider the Features
Fixed annuities have two main features, guarantees and tax deferral.
- Guarantees: The insurance company that issues the fixed annuity will guarantee interest rates and lifetime income. The guarantees, however, are only as strong as the insurance company. Insurance companies that have the highest financial ratings will often pay lower rates.
- Tax Deferral: No tax is on accumulated interest until the money is withdrawn or paid out under a lifetime income option. If you are in a high tax bracket this feature can be very attractive Vs. a CD or other interest bearing account. Fixed annuities can be part of an IRA, however they are already tax deferred, so there is no additional tax benefit.
Step 4: Learn About the Different Types Of Fixed Annuities
- Multi-Year Guaranteed Annuities (MYGAs) offer a rate of interest guaranteed for a set number of years. Typically, buyers can choose from a 1,3,5,7 or 10-year rate. Interest is credited annually. MYGAs will typically offer rates that are higher than CDs. At the end of the guarantee period, the insurance company will reset the rate. The renewal rate has to equal or exceed the renewal guarantee in the MYGA policy.
- Fixed indexed annuities also guarantee principal. Instead of offering a rate of interest the insurance company credits the account value based on the gains of a financial index, like the S&P 500. The gain cannot exceed the limit set by the insurance company called a cap. If the index loses value the account value remains the same. The advantage of a fixed indexed annuity is the owner can benefit from the performance of the stock market without investment risk. Many fixed indexed annuities offer a Guaranteed Lifetime Withdrawal Benefit. A GLWB creates lifetime income without giving up the principal.
- Immediate fixed annuities are also known as income annuities. That's because the insurance company begins to pay an income immediately after receiving a purchase payment, or premium. Immediate fixed annuities have several options for income:
- Life Only: A payment is guaranteed for the lifetime of the annuitant. No payments are made after the annuitants death. Life only options will pay out a higher monthly or annual income than the other options. Joint and Survivor Life only is available for the longer of 2 lives, usually spouses.
- Life & Period Certain: Payments are guaranteed for the lifetime of the annuitant. The payments are made for at least a "certain" number of years regardless of when the annuitant dies. The certain year options are usually 10 and 20. Joint and Survivor options are available for Life and Period Certain.
- Fixed Period: Payments are made for specified number of years regardless of when the annuitant dies.
Step 5: Decide Which is the Right Solution For You
The main reason to buy a fixed annuity is that they're predictable. Fixed annuities are the tortoise of financial products. They're designed to "not lose money." They pay a predictable rate of interest and guarantee you income for life, based on account values that are promised by the insurance company.
- Variable annuities, on the other hand, offer the benefits of higher returns. Over the long term, they are likely to outperform fixed annuities, but they have investment risk. And sometimes the losses can be painful. Think 2008-2009, when the stock market lost 50% of its value.
Step 6: Know What To Look For And What To Ask Your Independent Insurance Agent
If a fixed annuity fits your goals and addresses your concerns the next question is who and what company should you buy from. Fixed annuities are sold by licensed insurance agents. Some agents can only sell the products of the company they work for, others can sell products from multiple companies.
- Surrender Penalties - Make sure you know how long the surrender penalty period is. The surrender period for a MYGA should be the same as the rate guarantee. Generally, surrender periods beyond 10 years should be avoided.
- Renewal History - Your agent should be able to tell you what the renewal rate history is for a fixed annuity, indexed, MYGA or otherwise. Renewal rates for fixed indexed products is especially important.
- Income Options - If you are purchasing an income annuity, or a GLWB make sure you know what the beneficiary provisions and fees are.
- Financial Strength - When you buy a fixed annuity the money is invested in the insurance company's portfolio, which is typically high quality bonds. If, however the insurance company fails, your money goes with it. Each state does have a fund to reimburse policy holders, but they are limited. That's why financial strength of the company that you buy from is important. That said, companies that don't have top ratings often have more competitive offerings.
The Benefits Of An Independent Insurance Agent
Fixed annuities can be an important part of your retirement plan. While they have many features and benefits, they are not for everyone. Annuities are complex, and searching through options can be confusing, time-consuming and frustrating. An independent insurance agent's role is to simplify the process. They work for you, not the insurance company. They have the experience and knowledge to help you decide if a fixed annuity is right for you.