Hello my American saving friends. Earl E. Bird is back with part 2 of this 4 part series, which gets down and dirty with annuity terms. I’m here to break through the clutter of financial jargon so you don’t have to. Camilla Cat has no hair on her tongue, no pun intended, and gets right to what Americans, like you, need to know in order to build a solid nest egg for your future.

Camilla Cat: What is a fixed annuity?

Earl E. Bird: It’s a fixed rate product that provides tax advantages and contractual guarantees. I like to call it a “tax-deferred nest egg.” Your interest, if left untouched, grows tax-deferred like a 401k or IRA. The minimum guarantees in your policy give you a rate that your money can’t earn below. For example, a fixed annuity with a 3 percent minimum guarantee will never earn less than 3 percent for the life of the annuity owner. What other product gives you interest rate guarantees for your lifetime?

Camilla: Can I just buy a bank certificate of deposit (CD)?

Earl: Sure you can but no bank CD offers you the features a fixed annuity policy could. The annuity policy provides benefits like interest and income guarantees, annual partial withdrawals, and estate planning options like how to pay your heirs at the time of your death. 

Camilla: Great information Earl but aren’t rates too low right now to purchase a fixed annuity?

Earl: True, rates are low right now but never too low to purchase a fixed annuity. Too many savers get caught up in interest only mode when purchasing a fixed annuity. As stated, you buy a fixed annuity on its services and not the interest yield. After all, fixed annuities offer guarantees that solidify your nest egg even in a low-interest environment. However, the interest you do earn gives you no volatility or account value fluctuations like a mutual fund.

Camilla: How long do I have to keep my money in a fixed annuity?

Earl: Usually four years on the short end, and ten years on the long end. But I seldom recommend any products over seven years because that’s long enough to lock up your funds in one product with no product options permitted.  You can always withdraw your funds prior, however expect a surrender penalty for early withdrawals. Some products guarantee you will never receive less than your original deposit on any full surrender. I find this feature very valuable when interest rates are historically low like today. A fixed annuity is a long-term “retirement tool,” and virtually no annuity owner surrenders the annuity and takes their money. Most hold on to their annuity or transfer to other annuity products for their lifetime.

Pay it forward:

Fixed rate products belong in every investment portfolio.  Of those fixed rate products, a percentage belongs in a fixed annuity. A fixed annuity makes sense for savers of any age.

Do You Know Your Annuity Products?
Part 1: Varied Annuity    Part 2: Fixed Annuities    Part 3: Fixed Index Annuities    Part 4: Index Annuities

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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