What Is a Fixed Annuity? Pros and Cons

A fixed annuity is a financial tool that can help you meet your retirement goals. Fixed annuities offer guaranteed returns, tax-deferred growth, and steady monthly payments once you retire, making them worth consideration. Of course, it’s also essential to consider the potential cons of a fixed annuity so that you can choose the right financial products.

What Is a Fixed Annuity?


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A fixed annuity is an insurance contract that pays a fixed rate of return. Investors agree to a fixed interest rate when choosing an annuity. A fixed annuity differs from a variable annuity in that it pays the same interest rate regardless of market performance. 

Fixed annuities mostly appeal to investors who want a way to grow their funds and turn them into stable monthly income payments during retirement. The length of a fixed annuity contract varies, typically between three to 10 years, making annuities a good option for those nearing retirement age.

Pros of a Fixed Annuity

Exploring the pros and cons of a fixed annuity can help you decide if this is the right financial tool for your goals. A fixed annuity offers the following benefits:

Predictable Return on Investment

One of the biggest advantages of a fixed annuity is a guaranteed return. Unlike variable annuities, a fixed annuity offers a fixed interest rate that lets you know exactly how much you can expect to receive once your annuity matures. Your payout depends on your interest rate, how much you contribute during the accumulation phase, and the payout length.

Tax-Deferred Contribution

Fixed annuities are tax-deferred, which means you can take advantage of tax-deferred growth. You won’t owe taxes with a fixed annuity until you withdraw your funds. The tax benefits of a fixed annuity can be especially beneficial to higher earners. When you begin withdrawing funds from your annuity, you may be in a lower tax bracket, leading to lower tax obligations.

Steady Income Payments

A fixed annuity is a retirement savings vehicle that can provide steady income payments once you retire. Depending on the annuity, you may receive monthly payments for a set period or the entirety of your life. Some fixed annuities also come with optional death benefits, which means your beneficiaries can receive your payments if your annuity outlives you.

Cons of a Fixed Annuity

It’s essential to be aware of the potential cons of a financial tool when choosing the right one for your goals. Here are a few considerations of fixed annuities:

Illiquid Funds

Most annuities are illiquid, which means they’re not easily converted to cash. Some annuity funds may allow you to withdraw a small percentage of your funds without penalty. However, prematurely withdrawing your initial contribution or earnings can incur expensive penalties and fees. Always review the potential fees and withdraw penalties before choosing a fixed annuity.

High Fees

Annuities can come with fees, including commissions. Choosing a fixed annuity can help you save on fees, as they don’t charge management fees as variable-rate annuities do. All annuities are typically subject to surrender charges, which are the fines and fees you’ll have to pay if you withdraw your funds early. Shopping around and inquiring about fees is the best way to choose a profitable fixed annuity.

Not Federally Insured

Unlike savings and checking accounts, annuities aren’t federally insured. This means choosing annuities through insurance companies with good ratings is extremely important. It’s also important to note that many fixed annuities are backed by state guaranty associations. However, coverages and protections vary depending on the state.

Opportunity Cost

Fixed annuities typically carry less risk than other financial tools but offer a guaranteed rate of return. This trade-off means there may be the potential for opportunity cost with annuities, which refers to the loss of potential returns if you were to contribute those funds elsewhere. 

There is also the opportunity cost that comes with a fixed rate. While a fixed-rate annuity can protect you from sharp declines in the market, it also means you may lose out on returns if the market performs well. Diversifying your risk among multiple financial tools of varying risk levels allows you to take advantage of strong markets while also protecting yourself during downturns.

A fixed annuity can be a great addition to your retirement planning strategy if you research and choose a provider with minimal fees. Contributing to a fixed annuity allows you to plan ahead to receive steady monthly payments at a fixed rate of return once you retire. You can also use a fixed annuity to control tax liability, making it a worthwhile financial product for those nearing retirement.

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