Fixed and Immediate Annuities

The word annuity means a stream of payments. We’re familiar with this concept as it applies to traditional pensions. Unfortunately, there are fewer and fewer people eligible for a traditional pension. For investors planning for retirement, they may consider adding a fixed rate annuity to provide an income stream in addition to other investment holdings.

Fixed Rate Annuities have many unique benefits:

  • Growth is tax-deferred. Compound growth without having to pay the IRS for a few years may provide faster growth than taxable investments.
  • The investment risk is minimal and based on the claims-paying ability of life insurance companies. In a fixed annuity your interest rate is generally set at the time of purchase.
  • For Annuitization, there are different payout options including a specified period, a lifetime payout, a guaranteed period (during which your beneficiaries would receive payments should you pass,) and in many
    cases a joint life option for the surviving spouse.
  • Assets avoid probate.


Annuities serve a unique purpose for retirees however they do get their share of bad press. There are two areas of concern you may have heard. The first involves a Life only, immediate annuity. For example, a person invests $170,000 in an annuity. At age 65 they will receive $1,100 a month until they die. Upon passing the money remains the property of the insurance company, not the annuitant’s heirs regardless of their age at death. Fortunately, insurance companies now allow you to add different features and riders that provide an income stream or lump sum to beneficiaries upon death.

The second bit of bad press involves fees. When an investor sets up an annuity, the insurance company invests the money to pay an income stream over a long period. If the investor wishes to cancel the contract before the end of the surrender schedule the investor may receive a lesser amount than they paid. This penalty is one of the reasons it is essential to understand the terms of your annuity before investing. One of my clients owns a car dealership, and he laughed when I explained this to him. He told me if someone drove a new car off his lot and came back in a year because they didn’t want it any longer, there would be a significant drop in the car’s value. I like to share that story because more people can relate to a vehicle than the costs involved in creating and selling a financial product. Annuity surrender fees typically decline over a 5-9 year period. Once that period is over, if the annuity is not annuitized, the investor
can access all funds without penalty but must consider the tax implications of a full withdrawal. Often a partial withdrawal, transfer or 1035 Exchange is most advantageous.

Immediate Annuity

An immediate annuity is merely an annuity which begins payment to you within a year. Unlike other annuities where you may have been making periodic contributions and allowing it to grow over time, you are exchanging a lump sum for an income stream that starts right away. Many retirees decide to take a portion of 401(k) money or IRA funds to establish a guaranteed income stream and increase certainty within their retirement

A fixed annuity whether it is immediate or deferred is a compelling option for retirees. They aren’t for everyone, and there are several types of annuities. I’ll discuss these in my podcasts. An annuity may or may not be the best fit for a couple with a traditional pension plan, as they may not need the certainty of guaranteed payments and they may opt for higher potential returns or the liquidity of other investment vehicles.

How to Buy an Annuity

It’s important to get the help of a trusted professional when deciding if an annuity or a combination of annuities suits your needs. It is possible to be too conservative or underestimate your income needs. A fully-licensed financial advisor that provides investment and financial advice has a larger pool of options than an insurance agent that sells annuities. Often an insurance agent doesn’t represent multiple companies and this results in a limited number of options for you, the investor. The company they represent may have the perfect plan for you, or it may not. You want to speak with someone that can shop many plans at many companies to find the best fit for you. Also, I firmly believe that anyone discussing annuities ought to have a solid understanding and ability to compare a wide variety the option including securities, mutual funds, real estate, and insurance vehicles. It’s not just about annuity versus annuity. It’s comparing
annuities against several investments to find the most suitable portfolio for your situation. Lastly, an experienced advisor knows the ratings and strength of the insurance company guaranteeing your income stream. This rating is critical when making an informed decision.

Fixed Annuities are among the most basic form of an annuity. The simplicity of these vehicles makes it easy to understand and offers protection for retirees who need to add as much certainty as possible to their retirement. The best way to know if it is a fit for you is to make an appointment to come in and meet with me to discuss your situation. Wright Wealth Management can help you recognize risks, steer you around them, and help you get the most of this enjoyable period in your life.

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