The Pros and Cons of Fixed Annuities

The precarious condition of the U.S. economy and stock market is causing many Americans to lose their confidence in being able to sufficiently fund their retirement years.

Generally speaking, a chaotic economy will have the largest affect on individuals that have small tolerances to risk and that have a limited time horizon in front of them, such as individuals about to retire. Since fixed annuities offer stability and the potential for growth, but don't involve the individual assuming a lot of the risks associated with the financial market, many individuals nearing retirement find them very attractive and valuable. Of course, soon-to-be-retirees aren't the only investor group that will find the guaranteed stability and returns of a fixed annuity attractive in such an unstable economy.

Like any investment, fixed annuities have both pros and cons. Any consumer considering purchasing a fixed annuity should consider both sides very carefully:

Pros

1. Fixed annuities feature guaranteed returns. During the accumulation phase of an annuity contract, the insurer guarantees a minimum rate of return.
2. An unpredictable market is a moot issue for a fixed annuity owner. Market volatility has absolutely no bearing on the rate of return since the insurance company is obligated by contract to meet the minimum rate of returns.
3. An annuity owner will not be taxed on annuity gains until they actually withdraw the money. Other financial vehicles, such as CDs, are taxed based on the interest it earns during the year.
4. Just like with a CD, the consumer can lock a set rate of return in for a set number of years.

Cons

1. All of the above pros aren't without sacrifices being made somewhere. The rate of return will be more conservative than gains from the financial market.
2. It's more difficult to liquidate fixed annuity assets because they offer a locked-in rate of return. There may also be surrender charges during the surrender of an annuity. Any withdrawal from an annuity will be taxed like regular income. If the funds are withdrawn before the individual reaches 59 ВЅ- years-old , then the withdrawal could be subject to a federal income tax penalty of ten percent.

When all is said and done, a fixed annuity might not be the best option for those looking to make big money at a big risk. On the other hand, a fixed annuity could be the ideal option for those looking to add stability and modest guaranteed returns to their portfolio.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

For more information, feel free to Contact Neptune Financial to schedule an appointment.

Basic Understanding

This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings.

An individual seeking information regarding their investment or retirement needs should contact a financial professional.

Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.