Pros and Cons of Buying Fixed Annuities

It is important that one subjects any investment decision to very close scrutiny before going ahead with it. After all, when you are putting in your life's savings, you cannot afford to be careless. When it comes to investing, as part of your retirement planning, you need to be even more careful. One of the most opted investments that fall in the retirement planning category are fixed annuities. They are increasingly being opted for as long term investment opportunities.

What Are Fixed Annuities

Let us see how do annuities work? The idea behind fixed annuities as insurance products is quite simple to understand. You pay an insurance company a lump sum, or an accumulated, amount in installments for a fixed period, in return of which the insurance company pays you fixed amounts of money till a predetermined period of time or event occurs.

There are deferred annuities, that start paying out money after a fixed amount of time and there are immediate annuities that start paying out immediately after the lump sum is invested with the insurance company. There are life annuities that pay a person till the end of his lifetime, no matter how long it is. Understanding annuity and its types is important before you opt for any one of them.

There are several features that change, depending on the type of insurance company you opt for. Let us now look at the pros and cons associated with fixed annuities, which will help you decide whether they should be a part of your retirement planning.

Fixed Annuity - Pros and Cons

Every investment comes with certain pros and cons, which need to be considered. Now that you know how does an annuity work, let us first take a look at the former among fixed annuity pros and cons. One of the prime benefits of opting for a immediate fixed annuity is the lifetime of income that it guarantees you. You will be paid for as long as you live, which is a comforting thought!

Another advantage is tax benefit that you get, by buying the annuity from your 401 (k) plan or IRA money. You only have to pay taxes on the interest money that you get. Most insurance companies offer an added clause of inflation protection, so that your future payouts are in sync with the cost of living at that point of time.

One obvious disadvantage of a fixed annuity remains that your principal amount has been locked in for life. There is no way of retrieving it for alternative investment.

Another prime con of fixed annuities is that the investment returns are low compared to some of the other options. There is a trade off between consistency and size of your return. You must take this fact into consideration. Consult an investment advisor who knows how to evaluate fixed annuities.

What you need to look for is how well the annuity agreement meets your financial requirements in the future. You need to project out future payouts and see if they will match the varied financial needs that may arise in the future. Ultimately what you need is enough cash to stay afloat in retirement. Making a realistic analysis of your future requirements and understanding the details of the long term financial payout, along with pros and cons of fixed annuities, will help you decide whether they are the right investments for you.