Fixed Annuities- Are they right for boomers?

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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