The Pros and Cons of a Fixed Annuity

Published September 21, 2018
Fixed annuities have several financial benefits to help make retirement planning simpler, but also have some drawbacks. Find out what a fixed annuity has to offer before you purchase.
  • Use this helpful list of fixed annuity pros and cons if you are looking for guaranteed growth
  • Guaranteed growth for a 3-10 year investment term
  • You can choose features and options to customize a fixed annuity that fits your needs
  • Knowing that you’ll have a guaranteed portion of your portfolio allows you to take more risk elsewhere

fixed annuity (MYGA) is a tax-deferred retirement savings vehicle that provides fixed asset accumulation, much like a CD. With a fixed annuity, you can invest your savings over a specified time horizon (typically 3 to 10 years), earning a fixed return. The interest earned in your fixed annuity is not taxed until withdrawn, and your principal is guaranteed. Here are the added benefits of a fixed annuity.

  • Guaranteed, Strong Return

    The money you invest in a fixed annuity will accumulate at a fixed rate, which is specified upfront and guaranteed for the entire contract. Fixed annuities generally offer higher rates than CDs with the same contract length.

  • Tax-Deferred Growth

    From the government’s perspective, an annuity is a retirement savings vehicle. As such, it receives similar tax treatment as IRAs: no taxes are paid until distributions are made. For a fixed annuity, this means that interest will accumulate and compound without incurring annual taxes, as is the case for a CD.

  • Principal Protection

    Unlike with most other investments, there is no market risk associated with a fixed annuity. Your principal is protected and guaranteed to accumulate at a fixed rate, making MYGAs a good place to park money you’ll need in the near future. 

  • Some Liquidity

    Fixed annuities provide some liquidity, typically making 10% of the contract’s cash value available penalty-free annually if you’re over 59½.

  • Simple & Easy To Understand

    There are a lot of complex products, but a fixed annuity is one of the simple ones. Assuming you leave your money in the fixed annuity until maturity, all you need to know is (1) how long until your money is available and (2) what your return will be over that period of time. There are no hidden fees that you need to worry about.

Despite these benefits, fixed annuities are not good for everyone or for all situations. Here are some of the drawbacks:

  • Penalties For Withdrawals Under Age 59½

    Fixed annuities are really meant to be used for retirement savings. The IRS issues a 10% penalty on gains withdrawn from a fixed annuity for account holders who haven’t reached age 59½ .

  • Not For Generating Income

    While the fixed annuity has a lot of great benefits, it’s not the most effective way to generate income in retirement. Instead, fixed annuities are typically used for accumulation. There are other products that are better for converting assets into income, like DIAsSPIAs and QLACs.

This checklist is a good outline, but we know that it’s sometimes easier to sort through the specifics of your financial future with someone over email or phone. We’re always here to help! You can contact us at [email protected].

How Can I Buy a Fixed Annuity?

At Blueprint Income, we offer fixed annuities from more than 15 top rated insurance companies. Click below to get real-time personalized quotes.

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From there, you’ll get access to our annuity guides and team of specialists to help you analyze your retirement finances and walk you through the application process.

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Lauren Minches

Lauren Minches

Financial Planning Professional

Lauren is an actuary by training with expertise in retirement, finance, and risk. She writes about annuities to make them easier to understand and evaluate. Her goal is to help people create retirements with more time for living and less time thinking about money.