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Don’t Ignore Fixed Annuities Because of Low Interest Rates

Although fixed annuity rates are historically low, fixed annuity products still carry value and may provide some financial stability to retirees. In The Motley Fool’s “Fixed Annuity Rates: Dependable Monthly Income,” article author Jordan Wathen refers to fixed annuity products as the “reverse” of a life insurance policy, which pays a benefit upon your death.(1) In contrast, you purchase an immediate annuity to provide monthly income payments that will continue for as long as you live.* Fixed annuity rates typically follow the pattern of interest rates in general. Right now they are low compared to other economic times. However, fixed annuities should not be discounted simply because rates are not high. They may still have a lot to offer, including being one of the most dependable sources of retirement income.

The most important factors that determine your payouts from a fixed annuity are the amount of premium, your age and your standard life expectancy. Wathen’s article contains a chart showing a sample of expected income from a $100,000 fixed annuity for males and females aged 55-80. It’s clear that your income stream is much higher the older you are when you begin withdrawals. A male starting income at age 60 might receive $500 a month in income, while a male starting income at age 75 might receive $760 per month. One of the main benefits of fixed annuities is their relative simplicity. They can help protect you from the risk of outliving your retirement assets – just the opposite of life insurance policies that protects your heirs financially when you die. You know exactly how much money you will receive each month for the rest of your life.* There is certainty with fixed annuity products. Fixed annuities pay out the same amount, regardless of interest rate fluctuations. The only exception will be if, along with your annuity, you buy an income rider to provide small increases to your annual income to help offset the effects inflation.

There are a few risks inherent with fixed annuity products. Annuities are subject to the claims-paying ability of the insurance company issuing them, so there is a small risk that your insurer will go bankrupt. Although this risk is small, it is still important to select an insurer with good financial strength ratings from a company like A.M. Best or Fitch Ratings. There is also a risk that you will die before receiving your annuity money back in monthly payments. It’s unlikely that you’ll die before getting any of your premium back, but if you want to make sure that your heirs receive any unpaid premium, you can purchase a “cash refund” rider. This benefit pays less each month to you, but ensures that any premium money minus your payout total is paid out to your beneficiaries upon your death. Inflation is the final risk that you take on when you purchase a fixed annuity product. This can reduce the spending power of your annuity income when inflation rates are high. One way to combat inflation risk is by using varied financial products for your retirement assets. For instance, use a fixed annuity for guaranteed* monthly income and put other money in products like stocks, to retain some potential to grow those assets.

Many insurance companies offer fixed annuity products, so one tactic to consider is to use competition to your advantage when shopping for one. Despite the historically low interest rates right now, fixed annuity products may still be appropriate for and offer value to those looking for lifetime income. The drawbacks of fixed annuity products should be understood, and balanced with other financial products for other objectives. Fixed annuities are simple and can help ensure that you do not run out of money in retirement.

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*Guarantees of annuities rely on the financial strength and claims-paying ability of the insurance company that issues them. Lifetime payouts may be a benefit of the base annuity contract, or may be offered through the additional purchase of a lifetime benefit rider.

1 Wathen, Jordan. “Fixed Annuity Rates: Dependable Monthly Income.” The Motley Fool, June 23, 2015. http://www.fool.com/investing/general/2015/06/23/fixed-annuity-rates-dependable-monthly-income.aspx

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