When it comes to low-risk investing, annuities have traditionally been considered a good option.Generally associated with a steady stream of income, they can provide security for those looking to grow their savings and protect against market volatility. But it’s important to understand that annuity purchasers have options at the end of their term. A common type of annuity is a deferred fixed annuity which offers the flexibility of a lump sum payment at the end of the investment period rather than making payment throughout the life of the annuity, or the owner’s lifetime.
Understanding Deferred Fixed Annuities
While deferred fixed annuities don’t immediately pay a consistent stream of income, they do offer some important benefits. Among these are a fixed annual percentage yield (APY) rate and tax-deferred growth, which can help to grow savings over time without being subject to interest rate changes or market fluctuations.
Serving as a great alternative to savings vehicles such as high-yield savings accounts or certificates of deposit (CDs), deferred annuities also typically have higher rates of return in exchange for less liquidity. They also generally have more flexibility than CDs by allowing investors to withdraw up to 10% of their funds each year after the first contract year.
For investors who do want to opt for a steady income stream, deferred annuities can also provide payout options upon annuitization as an alternative to lump sum payments. If investors choose to go this route, deferred annuities typically offer regular fixed payments over the course of five to 10 years, or life, which can serve as a guaranteed form of income.
What to Consider
Determining whether a deferred fixed annuity is right for you comes down to your personal goals and investment horizon. For investors who need a consistent stream of income now, an immediate annuity may be a better option. With this type of product, investors are guaranteed regular fixed payments throughout the lifetime of the annuity, though it’s worth noting that immediate annuities don’t benefit from tax deferred growth the same way that deferred annuities do. For those with longer investment horizons of three to 10 years, a deferred fixed annuity could provide a higher rate of return and act as a great alternative to high-yield savings accounts or CDs. In addition to protecting your savings, a deferred annuity can also provide peace of mind by removing the risk associated with market volatility. For investors seeking financial security, this can help to create balance within their portfolios.
The Bottom Line
Different types of annuities serve different needs, so deciding which type is best for you comes down to understanding your short- and long-term goals as well as your overall financial priorities. While investing always carries some level of risk, lower-risk options such as deferred annuities can help to provide a safety net irrespective of market behavior. If you’re looking for longer-term investment that can help you grow your money safely and act as a counterbalance to market swings, fixed deferred annuities could be a good option for you.