Fixed annuities are essentially CD-like investments issued by insurance companies. Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs.
Fixed annuities can be deferred or immediate. The deferred variety accumulates regular rates of interest and the immediate kind make fixed payments – determined by your age and size of your annuity – during retirement.
The advantage: Fixed annuities pay guaranteed rates of interest, which makes them appealing to investors wary of the stock market’s ups and downs. What also make them appealing are their low investment minimums – usually $1,000 to $10,000 – and the fact that the interest they pay escapes taxation until you pull it out.
The downside: Their rates can also be fixed for a limited period, and then drop say, after the first year. If you don’t like the new rates and want to withdraw your money early, heavy surrender charges could kick in and cut into your returns.
Plus, if you decide to opt for fixed lifetime payments, those payments will not rise to keep pace with inflation. As a result, the value of the money you receive will decline over time as inflation erodes the purchasing power of each dollar. So for example, if you retire young and plan to keep collecting annuity payments for a longer period of time, the purchasing power of your money could be a big concern.