Battle Royale #2: Fixed v. Immediate Annuities

The Retirement Rumble - annuity blog

After a bloody battle in last week’s contest, we now bring you Immediate Annuity (IA) vs. Fixed Annuity (FA). Slow and steady wins the race, but will it win this battle? The word “annuity” means income, and when we talk immediate annuities, that’s all it is. You buy an IA and you receive a check for a given period or a lifetime. An IA may be the simplest investment product known to man. It’s the horseshoe crab of retirement products. In fact, it’s been around almost as long as the horseshoe crab. Annuity data can be traced back to the Romans over 2,000 years ago. It may be the simplest choice, but it also may be the wisest. Investment risk is gone, and the only other risk is inflation and mortality–as long as the insurer stays solvent, of course.

But don’t confuse the longevity with quality. Through the years, the fixed annuity has remained a savings stalwart for many Americans. Its simplicity and tax advantages make the FA an annuity to own when saving for retirement.

All right, enough talking: it’s time to see which old-school annuity moves on to face last week’s victor, the Variable Annuity. This week a savings vehicle (FA) is battling the ultimate distribution option (IA). Annuity battle No. 2 is here, so let’s do this!

Roll the Q&A please:

When does an IA work for retirement?

When you just want an income check in the mailbox. You lose access to your principal for the security of a check in your mailbox. It’s like your very own pension account.

Doesn’t an FA give me an income as well?

Yes, but the income offered from your FA may differ if you choose to annuitize (turn it into an IA) your contract. Don’t confuse partial withdrawals with annuitizing a contract.

Can you ever change your IA contract or features?

The answer is a loose NO. Most contracts do not allow revisions; however, some contracts promote that flexibility. Also, if you try hard enough, many companies will grant you the option to change. But it will come with a hefty contract penalty.

Can an FA’s interest rate ever change?

Yes, and it could change annually with some products. This hurts the FA in the competition, because some product guarantees can be confusing. But, nowadays, most FA products do a better job disclosing misleading bonuses and products that have long penalties with short interest-rate guarantees.

Would you explain the contract guarantees for both annuities?

Well, whatever income you agree upon is your contract guarantee. Nothing more, nothing less, usually. Now, FAs have current guarantees and minimum guarantees. Minimum guarantees might be an FA’s best feature because they tell you, based on a worst-case scenario, what your accumulation value and your income would be at any given time. Priceless.

Is it a good time to buy an IA? How about an FA?

These products work in all economic environments, but a little less so when rates are at historically low levels. So, if you buy an IA now, you have a low interest-type product, probably for the rest of your life. It’s still a good idea with some of your funds; just not all your funds.

Yes, rates are at all-time low levels. And as a result, I have to choose FAs over IAs in today’s match. FAs offer the flexibility to accumulate assets tax deferred for just a matter of a few years. At that time, you can move your funds to another contract if rates are higher. You don’t have that option with an IA. Now, if rates were much higher, the result may have been different. But FAs currently offer guaranteed income levels comparable to many IAs. And they are accumulation products as well.

Next week we’ll host a rumble between FAs and VAs. I can’t wait to see who will pull out the victory!

Pay-it Forward:

V-A-L-U-E: It’s what we all should be living by, and passing on to our teens. I just read that some colleges are implementing a $10k college education. There are a few strings attached, but some students can earn a college degree for a total of $10k. What a value! Compare that to kids coming out of college with a sociology degree and over $50k of debt. Where are the funds coming from to pay that nut? Teach your daughter about value, not about desire. The value age is here to stay!

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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About the author

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.

More posts by | Visit the site of Earl E Bird

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