Are annuities fixed income?
Annuities and bonds are popular ways for investors to generate an income stream. Both are considered members of the "fixed income" asset class.
What is the rate of return on an income annuity? An income annuity is not an investment that provides you with a rate of return over a fixed period of time, like a CD. Rather, it's an income product that provides you with fixed monthly income that is guaranteed for life, no matter how the markets perform.
For instance, a $100,000 annuity purchased at age 65 with immediate payments might yield about $614 monthly. If the annuity has a 5% interest rate over 10 years, the monthly payment could be approximately $1,055.. At age 70, the same annuity might pay around $613 monthly for life.
A fixed annuity is not the right choice for everyone. The main drawbacks are around limited growth, penalties for early withdrawals and taxation of earnings.
Annuities Offer Guaranteed Income in a Recession
Regardless of the annuity, most retirees will eventually wish to convert it into a stream of income. The annuity payments can be used to supplement other sources of income, like investment income, pensions, and social security checks.
Here's how much income a $300,000 fixed annuity might pay per month: $3,517 if you choose single life only, which allows you to receive income for life but does not offer a death benefit to your beneficiaries.
If the insurer can expect to receive a 7 percent return on its $50,000, the monthly payout would rise to $449.96. At a 3 percent return, the payout would drop to $327.05. Insurers base their anticipated return on the performance of their often-conservative investment portfolios.
Estimated Monthly Payments from a $250,000 Annuity
At age 65, monthly payments range from $1,387 for a single life with cash refund to $1,465 for a single life-only option.
Single Premium Immediate Annuities (SPIAs): The best age to start an annuity, like an immediate annuity, is typically between 70 and 75. Some financial advisors refer to this as the “age 75 rule.” This age range allows for the maximum payout and immediate income to support your retirement.
If a 72-year-old man invests $120,000 in an immediate annuity that pays out only as long as he lives, he'll get about $810 in monthly income.
Has anyone ever lost money in a fixed annuity?
Finance strategists has explained that, yes, it is possible to lose money with an annuity. Market performance, early withdrawal penalties, and high fees can all contribute to potential financial losses. Additionally, if an insurance company defaults or goes bankrupt, the guarantees of your annuity may be impacted.
CDs can be more flexible than annuities, with shorter terms and lower penalties if you need to withdraw your money in an emergency. Annuities will generally pay a higher interest rate than CDs. A CD is best for short- to medium-term investments and an annuity is better for a long-term investment in your retirement.
Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed. but for others they are a great option to help save for retirement.
Annuities offer benefits like a steady income in retirement and tax-deferred growth with no annual contribution limits. However, they can come with high annual fees, early withdrawal penalties and may not provide inheritance for heirs.
As you can see, many annuities are largely shielded from stock market crashes, except for variable contracts. Even so, variable annuities usually have some safeguards built into them for guaranteed income to cushion this risk. Just be sure to find out what the costs and fees are for any annuity that you buy.
Key takeaways
If buying an annuity would leave you without enough savings to cover unexpected expenses, or if you are prioritizing short-term savings goals, then an annuity may not be the right choice for you.
There are a variety of options that are better than an annuity for retirement depending on your financial situation and goals. These include deferred compensation plans, such as a 401(k), individual retirement accounts, dividend-paying stocks, variable life insurance, and retirement income funds.
Because annuities grow tax-deferred, you do not owe income taxes until you withdraw money or begin receiving payments. Upon withdrawal, the money will be taxed as income if you purchased the annuity with pre-tax funds. You'll only owe taxes on the annuity's gains if it was purchased with post-tax dollars.
If you purchase your $1,000,000 annuity between the ages of 60 – 70 and start taking payments immediately then you can expect to receive between $4,500 and $6,500 per month for the rest of your life or for the time period of your annuity payout.
Annuities are not FDIC insured and are not bank deposits. Although each state does have its own guaranty fund, it should not be thought of as a substitute for FDIC insurance. State guaranty fund rules vary significantly state-by-state. You can find more state specific information here.
How long will a $500,000 annuity last?
According to the 4% rule, if you retire with $500,000 in assets, you should be able to withdraw $20,000 per year for 30 years or more. Moreover, investing this money in an annuity could provide a guaranteed annual income of $24,688 for those retiring at 55.
When should you start taking money out of your annuity? To avoid an early withdrawal penalty tax from the IRS, wait until you turn 59 ½. After you turn 73, the IRS requires you to take a required minimum distribution each year.
A Fixed Annuity can provide a very secure, tax-deferred investment. It can provide a guaranteed minimum interest rate, with no taxes due on any earnings until they are withdrawn from the account.
In general, 401(k) plans — and the very similar 403(b) plans offered by nonprofit organizations — are a better way to grow your cash for retirement than an annuity. For starters, 401(k) contributions are deducted from your taxable income, while annuity purchases generally aren't.
McClanahan noted that even combined with an average Social Security benefit, $250,000 in savings is only likely to produce $2,632 a month over 25 years, when inflation and other factors are considered. That would mean a difficult struggle for many Americans.
