Retirement planning should be a priority for every working citizen as early as possible in their career. Annuities are a great step towards achieving a comfortable retirement, but many don’t actually know the benefits of fixed-rate indexed annuities for retirement planning or how they work.
A fixed-rate indexed annuity is a long-term savings option that earns money based on a stock market index. These can be funded in two ways, (a lump sum or a series of payments) and will grow at a fixed interest rate. The benefits of these annuities include steady income, a protected investment portfolio, tax-free growth, and a death payout guarantee.
What is a Fixed Rate Indexed Annuity
Fixed-rate indexed annuities are an investment, savings account, and retirement fund all rolled into one. They earn money based on an indirect connection to the stock market called a stock market index. They can be acquired with a single lump sum or a series of payments.
In most circumstances, this initial investment amount will be guaranteed by the insurer so that you can’t ever lose the money, but it will have a growth cap as well. A contract will also contain a minimum return each year, (such as 2% growth) and may also include a participation fee.
Benefits of Fixed Rate Indexed Annuities for Retirement
Fixed-rate indexed annuities are a very safe and reliable option for growing one’s retirement fund. Let’s take a look at some of the benefits:
Steady Income
The best advantage of fixed-rate indexed annuities for retirement planning is how they will be paid out. Each individual can set their own payout terms, and they will be partially influenced by the contract terms and how much was initially invested. The money in this type of annuity can be paid out over many years: a longer payout term will result in lower monthly payments.
Fixed-rate indexed annuities are a very steady source of income during retirement that can give senior citizens peace of mind while assisting with long-term budgeting and income security.
Invested Money is Protected from Losses
Unlike investing directly in the stock market or more variable investment options, money put into fixed-rate indexed annuities will never be lost. The investment amount will be guaranteed by the annuity company, meaning it will never dip below that amount, even if the underlying market index takes a downturn. Interest earned over the years will also be protected.
Tax Deferment
Any money invested into a fixed-rate indexed annuity—and the interest that accumulates over the contract term—will not be taxed. The money will only be taxed once it is withdrawn as income, and since most people will be doing so during their retirement years, they will likely be in a lower tax bracket and therefore be able to keep more of that income for personal use.
Death Payout
A death payout option is pretty standard for most annuity contracts. It means that the money invested into the annuity will be paid out to the heirs if the investor passes away before payouts begin. Similarly, if payouts have already begun and there is still money left over when the investor passes, the heirs will receive a lump sum payment from that remaining money.
Final Thoughts
Although fixed-rate indexed annuities cannot offer the same growth rates as other savings/investment options, they are one of the most ideal choices for retirees due to their safe nature, reliable payout, and other benefits.
