Fixed annuities appeal to many pre-retirees because they are a relatively safe asset to include in a retirement portfolio. Their fixed rate ensures the annuitant has a reliable stream of cash in the absence of a regular paycheck, which supplements other income sources like Social Security, pensions, and the returns on investment vehicles. Not only that, but the guaranteed rate of return makes it easier to predict how much money the annuity will provide, allowing for accurate calculations of retirement budgets.
Perhaps you are considering adding an annuity to your portfolio. If so, it’s important to understand exactly how to purchase a fixed annuity. We explain the process here.
Where Do You Purchase a Fixed Annuity?
Insurance companies are the primary seller of fixed annuities, as annuities are classified as long-term insurance products, but you may also be able to purchase them through certain banks, brokerages, and mutual fund companies. Companies that sell fixed annuities are likely to have other types of annuities on offer as well, such as indexed annuities and variable annuities. The return rate on these other annuities fluctuates depending on the performance of an underlying market index or portfolio of investments, respectively.
A Step-by-Step Guide for Purchasing a Fixed Annuity
Follow these steps to purchase a fixed annuity:
- Set Your Financial Goals
The first step is about visualizing your destination so that you know what you need to get there. When setting financial goals in general, the United States Securities and Exchange Commission recommends prioritizing your objectives and determining how many years you have to realize each one. Settling on these factors now can help you later when you arrange the details of your annuity.
- Shop Around
As mentioned, you can purchase fixed annuities from insurance companies, banks, brokerage firms, and mutual fund companies, but not all sellers operate on the same level. As you shop around, look for an entity with a strong financial strength rating, which indicates a high likelihood that it is capable of satisfying its obligations to customers. Three agencies that provide ratings are Standard & Poor’s, A.M. Best, and Moody’s.
Another important factor is the interest rate. Different providers offer different rates, and you want the one that offers the highest rate for your intended term length. Use free online resources to identify providers who can provide rates within your preferred range.
- Determine How Much To Contribute
You can contribute as little as $2,500 to a fixed annuity, but more money accrues more value in interest. Fortunately, unlike an individual retirement account or 401(k), annuities do not have contribution limits, so you can fund your account with as much money as you’d like.
- Choose a Funding Method
You will also have to choose how you’d like to fund your fixed annuity. You have two primary options. One is to pay the entire contribution in a lump sum. The other is to pay regular smaller sums directly from an account. Should you choose the latter, you can elect to transfer the sums from your bank or investment account, or you can roll over a retirement account into the annuity.
- Choose Your Beneficiary and Terms
You yourself are the primary beneficiary of your fixed annuity, but you can also specify another beneficiary to cover for the possibility that your distributions will outlast you. Also, you will have to determine term lengths — for the lengths of both the contract and the distribution period. Contract terms typically last five to 10 years, while payout terms can be for a specified period or the rest of your life.
Key Considerations When Purchasing a Fixed Annuity
Consider these factors so that you make a well-informed decision about your fixed annuity:
- Fees: You may have to pay fees or commissions on your fixed annuity, which amounts to a percentage of your account’s value.
- Penalties: There are two penalties commonly associated with annuities. One is the surrender charge, which the insurer levies if you withdraw past a certain threshold before the end of the contract term. The other is a tax penalty that the IRS charges if you withdraw from the account before the age of 59.5.
- Free-Look Period: The insurance company may offer a free-look period of 10 to 30 days, in which you can choose to cancel your annuity without paying a penalty.
- Riders: A rider is an optional enhancement you can add to your fixed annuity. Broadly speaking, riders fall under two categories — living benefit riders and death benefit riders. The former applies to you during your lifetime, whereas the latter relates to financial benefits conferred on your beneficiary if you pass away. Riders can increase the value of your annuity but come with fees.
Hopefully, this guide will prove helpful as you shop for and finalize your fixed annuity. For additional help determining your financial goals and annuity options, we recommend speaking with a financial adviser.
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