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Fixed Annuities

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Fixed Annuities

Fixed annuities offer a guaranteed growth rate over a typical period of one to fifteen years. Funds in fixed annuities are usually invested in government securities and high grade corporate bonds.

Features

Fixed annuities work similar to CD-like investments, paying guaranteed rates of interest, which are often higher than bank CDs.

There are two basic types of fixed annuities:

Guaranteed Return Annuity (GRA)

A GRA offers a guarantee that you will never receive less than 100% of your principal investment should you surrender.

Market Value Adjustment Annuity (MVA)

An MVA does not guarantee your principal if you surrender when rates rise. However, this short-term risk is offset by higher returns.

Pros

The guaranteed interest rates of fixed annuities mean your investment will not be subject to stock market fluctuations.

Investing in a fixed annuity can also be done with low minimums, usually $1,000 to $10,000 initially, and these funds won’t be taxed until you take them out.

Cons

Interest rates are guaranteed only for a limited period and then drop to a minimum of 2 to 3% as early as after the first year. If you don’t like the lowered rates and withdraw your money early, the surrender charges could be hefty.

Going for a fixed lifetime income stream means your annuity won’t be keeping up with inflation, which will slowly decrease the buying power of every dollar. This could be a concern once you’re receiving annuity income for decades.

Recommendations

If you want a stable source of income to complement your Social Security and pension in retirement, a fixed annuity will help ensure that your basic expenses are taken care of. A fixed rate of growth means you can rely on predictable returns to give you peace of mind.

However, make sure you’re clear on how long the initial rates are guaranteed, and set your surrender period to be the same to maximize your returns.


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