Fixed annuities, often called Multi-Year Guaranteed Annuities (MYGAs), guarantee a fixed interest rate for a set term. Once purchased, your rate is locked in, providing stable, predictable growth. MYGAs are popular because they usually offer higher interest rates than traditional savings accounts or CDs while still protecting your principal. At the end of the term, you can withdraw funds, reinvest in another MYGA, or convert to a different annuity.
While fixed annuities may not be the first product that comes to mind when considering annuity options, they remain a valuable component of financial portfolios. They provide stability in uncertain markets by offering guaranteed returns, making them especially appealing for risk-averse investors. Unlike variable annuities, which fluctuate with market performance, fixed annuities deliver predictable income streams that can help support long-term retirement planning.
This article will examine five critical factors to help you understand how fixed annuities work and which features matter most when deciding if they’re the right choice for you.
How Do Free Withdrawal Provisions Work in Fixed Annuities?
The first step in your research should be to understand exactly how your free withdrawal provision will work. People are worried that their money is inaccessible when they purchase a deferred annuity, but almost all deferred annuities offer annual access to a portion of your account value. The most common provision offered is 10% of the account value or the interest that you have earned in the current year. A cumulative withdrawal provision offers an added benefit because you can take a larger withdrawal if you have not taken one for a few years. If you haven’t taken money out in 3 three years and your withdrawal percentage is 10%, you can withdraw 30% of your account value free of penalty.
Determine if your percentage can be taken on the account value or only the original premium as well, because that can make a big difference in your withdrawal amount too. It’s also important to clarify whether withdrawals reduce future guaranteed income benefits, as this could impact long-term planning. Reviewing these details carefully will help you avoid surprises and ensure your annuity works in line with your financial goals.
What Are the Trade Offs for Annuity Bonuses?
If your fixed indexed annuity comes with a bonus, you need to be clear exactly what you are giving up to receive that bonus. This is an extra amount credited to your premium upon the purchase of your indexed annuity contract. When you are given a bonus in your annuity, there is always a trade-off for another feature. You might only have a 5% withdrawal rate in exchange for your initial bonus, or maybe no free withdrawals at all. Some people see great value from bonuses, especially when they are combined with an income rider. While an annuity with a bonus may offer the most value, a different annuity option might be more suitable for your situation. Be sure to understand the trade-offs involved in receiving a bonus.
Why Do Withdrawal Percentages Matter for Retirement Income?
The withdrawal percentage related to your fixed annuity is very important. Advisors often focus on high rollup rates and big bonuses, but you need a good withdrawal percentage as well. A 5% withdrawal percentage on a $200,000 income rider will pay you $10,000 per year in retirement. But an 8% withdrawal percentage on a $150,000 income rider will actually pay you $12,000 per year. A huge amount of income in an annuity is not quite as flashy when you can only take out a very small percentage at a time. Even though withdrawal percentages are not typically the first thing marketed, they are important and must be considered when looking at your fixed annuity choices.
What Else Should I Know About Flexible Premium Fixed Annuities?
Certain deferred annuity products allow you to make multiple premium deposits. If you have such a flexible premium account, there are several factors to take into account. Although rolling surrenders are rare to find anymore, you want to make sure that your fixed annuity does not have one. This will start a whole new surrender period every time you deposit additional premium into your annuity. Bonuses can also be affected with flexible premium accounts as well. Some annuities only offer a bonus on the premium deposited in the first year. With income annuity rates changing frequently, you won’t be able to accurately determine your monthly income payment until you have deposited all of your premium funds. Although these issues may seem small now, when you stretch the effect over a couple of decades, something small like this can make a large impact on your annuity.
Can ROP and Bailout Caps Protect Your Fixed Annuity?
Finally, to check if your fixed annuity has an ROP or a “bailout” cap. Many people are worried that they will be locked into a fixed annuity at a lower rate and they’ll miss out when rates dramatically increase. This isn’t exactly likely, but it keeps a fair amount of people away from fixed annuities during low interest rate times. A return of premium (ROP) feature ensures that you will never receive less than what you put into your fixed annuity product if you surrender the annuity. You still have to follow any surrender schedule in your contract, but you will be able to exit the contract when allowed without a net loss. Fixed annuities with bailout caps typically set a cap at 50 to 100 basis points below the current cap. If the annual cap ever gets renewed below your bailout cap level, you can leave your contract and keep any interest that you have earned without being penalized.
Have Questions About Annuities? Contact Us!
Each and every annuity product sold has its own nuances that have to be researched and fully understood before you make a purchase. By knowing the answers to these 5 fixed annuity questions, you have a better chance to purchase a fixed annuity that is right for your individual financial plan. An expert at Annuity FYI would be happy to answer any of your fixed annuity questions.
