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Fixed Annuities: Predictability for Retirement Stability

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Personal investors must consider many factors when they make choices managing their wealth. One important consideration is risk tolerance.  Risk tolerance is one’s comfort level with potential swings in the value of the investments, known as volatility. Creating an asset allocation that balances riskier investments for growth potential against more conservative capital preservation vehicles is a personal decision, but one that all investors face.

Typical financial advice suggests that investors buy individual stocks, mutual funds or exchange traded funds to grow their wealth. These investments are typically volatile fluctuating up and down, but offer the best potential for increasing the value of one’s portfolio over longer periods.  For the safer portions of one’s allocation, bonds, certificates of deposit, or even money market accounts are commonly recommended.

There is, however, another option for safer, more secure investments.  A fixed annuity, which provides predictable interest or income payments, can provide investors with a similar rate of return as a bond mutual fund, but with even less risk.  An annuity is a contract between an investor and an insurance company. The investor provides a fixed amount of principal called premium to purchase a fixed annuity which can earn interest and offer an incremental guaranteed lifetime payout if desired. There are normally no management fees with fixed annuities, having guaranteed income for life as well as tax-deferred growth.

Traditionally, for investors looking to preserve their principal, the bond market is recommended as a safe haven, when using higher quality bond funds offering lower yields. However, even bond funds can fluctuate in value, particularly when low-interest rates rise, then the value of bonds drop conversely.  As a superior alternative, fixed annuities preserve both the original premium and all credited interest via the contractual agreement with the annuity provider.

As with any financial investment, the preferred financial vehicle depends on the investor’s specific needs.  However, annuities offer some advantages over bonds.  For example, fixed annuities do not fluctuate in value and provide a piece-of-mind based in their predictable design. Likewise, the growth of a fixed annuity is more predictable and knowing this earning pattern is attractive to investors who are looking for stability rather than volatility.

An annuity’s most attractive feature for most investors is its predictable interest earning ability or lifetime income options.  The annuity can provide a fixed-income stream; once you start taking distributions from your annuity, the insurance company amortizes the balance of money in a series of fixed monthly payments over the expected remaining years of one’s life. If you outlive your life expectancy, the monthly annuity payments continue.  It is this unique feature that offers many investors a level of security not afforded with any of the other financial vehicles.

For investors considering a way to enjoy predictable, regular income, a fixed annuity offers many advantages over other forms of investment.  While each investor must weigh their personal needs against available financial vehicles, the fixed annuity deserves serious consideration by all investors looking to balance their portfolio for a secure and prosperous retirement.

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