Modern day has most baby boomer investors confused on what’s right for them. With ETF’s, target date retirement funds, and structured products, how is any typical investor really supposed to know what is actually a good investment and what is a dog. When it comes to baby boomers approaching retirement, a common investment thrown around is the ever popular “Annuity“. But even in the in the annuity world, there are several different kinds to choose from: fixed, variable, life, immediate, index.
So many choices have boomers scratching their heads trying to figure what exactly is right for them. To try and bring some clarity to the the table, we’ll start a series that addresses the different types of annuities and break down their pros and cons. First on the list….The Fixed Annuity.
The Fixed Annuity
Fixed annuities are investment products issued by insurance companies to offer a stabilized income off one’s investments. Fixed annuities typically pay an fixed interest rate for a specific time period that is determined by the issuing company. The fixed annuity is often compared to a “CD” like investment in that you know exactly what you are getting interest wise. Well, sort of. I’ll explain in a bit.
Who Insures It?
On thing that is very important to note is that fixed annuities are not FDIC insured. The financial risk of fixed annuities is that the backing of the issuing insurance company. How important is that to know? Well, being the fact that AIG nearly crumbled this year, how safe would you feel with an AIG fixed annuity right now? If I were you, not very safe at all. All insurance companies have to have rankings by companies like Moody’s or Fitch’s that is basically a report card rating of the insurance company’s health. But like the housing market, these rankings did little to warn investors of the near collapse of several of the larger insurance giants.
How Much Do They Pay and For How Long?
This is where you need to pay close attention. Unlike CD’s that pay you a fixed rate for specific time period, Fixed annuities usually have something called a “teaser rate“. For example, they will quote you a higher first year rate, say 5% or 6%, but then the minimum will be 3% for the remaining years on the contract. From my experience, the agent will say, “The 3% is the minimum, but it can always go up”. Now do you think that an insurance company, in a time of epic financial crisis, they are going to pay you more than they have to? Exactly. Don’t ever think you’re going to get more than the minimum in almost every case.
Are They a Good Investment?
In some cases, I could definitely see where a fixed annuity could make sense. But in most cases, why not just do a longer term CD? Your money is not tied up for an extended period of time and what you get is a little more black and white.
Have you purchased an annuity? If so, what has been your experience?
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You might as well stop right here because the most sensible annuity is Fixed Annuity. And even it is considered expensive and must be evaluated very carefully.
Very nice point about the insurance company credit rating and stability.
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Hi there – thanks a lot for the link! Nice looking website.
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Great insight on annuities, but don’t forget about the various withdrawal options of annuities…short term, long term, opting to receive a monthly check for so many years, spousal reciept of money after your death, etc. There are so many ways to make annuities work for a person to make retirement a little more secure.
Interesting comment about fixed annuities. The thing is….in the history of annuities which started in 1926, have any of them failed? Even through the depression? No.
I believe they are better than CD’s for several reasons. 1) the interest your earn on a CD which is typically minimal is a taxable event. the interest you earn on a fixed annuity is tax-deferred. 2) since a fixed annuity is an insurance product, it avoids probate. your beneficiary receives the money within 5-7 days upon receipt of a death certificate. it’s uncontestable. 3) many of the annuities allow you to withdraw up to 10% a year without penalty if you are 59 1/2 or older. you also don’t have to “annuitize” your payments, but you can let your money grow with compound interest. 4) CD’s are FDIC which has been a bit suspect in it’s ability to provide the safety it use to provide 5) AIG failed because it invested it’s money in real estate and the mortgage industry. 6) each state guarantees the insurance company operating in it’s state up to a certain amount per transaction. Also, insurance companies are insured by insurance associations that guarantee their transactions. plus, the feds audit them every 90 days to make sure they have the minimal amount of reserves to protect their account holders should they all withdraw their money at once 7) also, check the interest rate history of the insurance company regarding the interest rates they have paid through the years. is it on par with what was going on in the market at the time?
In order to get a decent rate on a CD, you have to tie up your money for years. It you touch it, you are penalized heavily. if interest rates increase…you only what the interest rate agreed upon at the time you opened the CD.