Down Market: A Good Time for a Fixed Annuity?

Let's face it. The stock market's fluctuating around the bottom of the barrel, and some bank interest rates are the lowest they've been in decades.

A fixed annuity is one in which an interest rate of return is solidified for a specific number of years. The contract may even be set up for your lifetime, instead of a few years. This is opposed to a variable annuity in which the interest rate of return varies based on the performance of the investments that are chosen by the policyholder. And in uncertain economic times, predicting the future can be tricky.

Plus, with a fixed annuity, you save yourself money. The tax benefits are much better for a fixed annuity than for a certificate of deposit plus an annuity can cover the policyholder for life.

With a certificate of deposit, you must make one payment to buy the CD. You can't add to your account in a few months. However, with a fixed annuity, there is no limit to how much you can contribute. You may make either one big payment or smaller ongoing contributions.

You will know for certain the rate of return on the investment from day one of the purchase with your fixed annuity. Because annuities offer a guaranteed rate of return, even if the performance of the investment drops to zero, the return is still guaranteed to the policyholder.

Since the markets are so volatile, having an investment guaranteed makes the policyholder feel safer. A slumping economy may dwindle your earnings down, but a guaranteed rate of return protects you from that danger.

Because of the current market conditions, more people are turning to annuities because they are safer. With the way companies are going under and the lack of certainty in the market, fixed annuities are definitely a way to go.

Now, something else you need to consider with fixed annuities is how much you'll have to pay when you sell. And if you're investing in an annuity for the short-term, you need to do some careful math to make sure it won't end up costing you money.

We wanted to establish a bit of extra income. There was a good recommendation about ImmediateAnnuities.com on CNN. We also liked that we could see excellent reviews about them on Google. They were very thorough from our first inquiry to when we decided to buy our annuity from Mass Mutual. They always answered our questions promptly and followed up with the insurance company, too. We have been receiving our monthly payments since last November and couldn’t be happier. What more can we say?

Keith and Samantha Isley

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There are two ways to handle this "payout phase." The first is called a deferred annuity, in which the policyholder elects to not touch his earnings until he reaches age 59½. The first advantage to this type of annuity is that taxes are deferred until the money is withdrawn. By the time you reach age 59½, you may be in a lower tax bracket, which means your taxes will be lower at that point. The second benefit is that this is a very good investment option for someone younger who is saving for retirement. A third plus is that there is no limit to your contribution. This is not the case for a 401K or IRA investment account. Fourth, if the policyholder dies, the policy does not. It goes to straight to the heirs, which is a nice death benefit. Finally, this type of annuity allows the policyholder to receive the earnings (during retirement) either in one big payment or in regular payments. If the payments are taken in installments, the tax liability is stretched out over a number of years.

You may also decide to receive the payments now instead of later by selecting an immediate annuity. With this option, you'll receive income payments for the rest of your life or for a specified period of time. Therefore, you don't have to wait to age 59 ½ to earn income from the annuity.

The payout phase for an individual will depend on how long he or she has to wait until retirement. This is a good option for someone who is retiring sooner than later. Thus, a struggling economy will not disrupt your investment. A distinct advantage to this plan is that you are only taxed on the earnings when the income is paid out.

Keep in mind that the IRS inflicts a penalty on you if you withdraw income before you are 59½. If you'll fit this category, you'll pay a 10-percent penalty on the income withdrawn. Because the economy is very unstable, leaving your money in this account for the long-term is much safer.