If you want your savings to grow without the ups and downs of the market, you have probably come across the term fixed annuity. The simplest way to think about it is a CD with a few extra features. It offers a guaranteed interest rate for a set period, along with tax advantages that a bank CD does not provide. Below, we explain what it is, how it works, and who it tends to suit best.
How a Fixed Annuity Works
For many savers, the appeal is simple: steady, predictable growth without exposure to the stock market.
Think of It Like a CD
The easiest way to understand it is to picture a certificate of deposit with a few added features. It works much like the CD you would open at a bank, with one important difference in how it is taxed, which we cover below. You contribute a lump sum, and your money earns interest at a set rate.
A Guaranteed Rate for a Set Term
It provides a guaranteed interest rate for a set period of time. These terms typically run anywhere from one to ten years, and your rate is locked in for the term you choose. More often than not, the longer the time horizon, the higher the rate.
Key Takeaway: Fixed annuities lock in a guaranteed interest rate for a term you select, usually one to ten years, with longer terms often earning more.
The Tax Advantage Over a Bank CD
This is where an annuity and a traditional CD part ways.
How a CD Is Taxed Each Year
Say you put $100,000 into a two-year CD earning 5 percent. At the turn of the year, you owe taxes on the interest credited to that CD, even if you never touched it. The growth is taxed as it is earned.
How Tax Deferral Helps Your Money Grow
An annuity feels much like that CD, with one key benefit. You do not pay taxes on unrealized gains. Your dollars compound and grow tax-deferred, and you are taxed only when you begin taking distributions. That lets more of your money keep working for you year after year.
Pro Tip: Tax deferral can make a real difference over a multi-year term because the dollars you would have paid in annual taxes stay invested and keep compounding.
Need help deciding if an annuity fits your goals? Contact Senior Benefits Plus for a free consultation.
Who Benefits Most
An annuity like this fits a lot of people well, but it really targets one type of saver.
Built for the Risk-Averse Saver
If you are extremely risk-averse, this is your product. Think of the person who would rather put cash in a tin can and bury it in the backyard than risk it in the market. This option gives that person growth without market risk.
For Anyone Who Wants to Sleep at Night
It is also a strong fit if you were hurt by past recessions, you do not want market exposure, or you simply want guarantees and peace of mind. For anyone who values certainty over chasing returns, that is the whole point.
Key Takeaway: These products suit risk-averse savers who want guaranteed growth and zero market risk.
Choosing the Right Policy
There are thousands of annuities on the market, and finding the right one is the hard part.
Rates are Always Moving
We are in a very dynamic interest rate environment, and rates shift over time. Because the rate and term you lock in shape your entire return, the timing and structure of your purchase matter more than many people realize.
Finding the Right Fixed Annuity for You
With so many options, it pays to work with someone who knows the ins and outs and has your best interests at heart. You can do the research yourself, or you can let us do the heavy lifting. Call Senior Benefits Plus today and let our team help you find the right fixed annuity for your retirement.
