Fixed Annuity
What Does Fixed Annuity Mean?
A fixed annuity is an insurance contract in which the annuitant, or annuity holder, makes a lump sum payment or a series of contributions in exchange for a guaranteed interest rate over a specified period. At a later agreed-upon date, the insurer provides regular payments to the annuitant based on the selected payout option.
Insuranceopedia Explains Fixed Annuity
Fixed annuities can be categorized as either deferred or immediate. An immediate fixed annuity provides payments that are determined by the annuitant’s age and the size of the annuity at the time of retirement. In contrast, a deferred life annuity has payments that are influenced by current interest rates.
One common stipulation in most fixed annuity contracts is that if the annuitant withdraws money before reaching the age of 59 and a half, they will incur an early withdrawal penalty of at least 10%. As long as the annuitant refrains from making withdrawals, the principal amount invested will remain tax-deferred. For example, if a man invests $100,000 and it grows to $200,000 by the time of his retirement, he may be entitled to monthly payments of $500. The IRS will only tax him on $250 of that amount, which is considered earnings, while the other $250 is deemed to come from his principal.
While fixed annuities guarantee a steady income after retirement, the payment amounts do not adjust for inflation or increases in the cost of living. As a result, an annuitant may find that the monthly payment is insufficient to cover their expenses over time.
