Out of the types of annuities, we will now discuss the fixed annuity. So what is a fixed annuity? A fixed annuity is very much like a certificate of deposit. These, known as CDs, are simply investments of an amount of money that will earn at a specific interest rate as defined by the certificate of deposit.
The reason fixed annuities are like a certificate of deposit is that they are fixed, meaning they guarantee a certain interest rate. Usually these interest rates are higher than CDs at a bank because it’s a much longer term investment.
So if you are asking or are asked, “What is a fixed annuity,” you can answer because it is very similar and not any more complex than a CD at a bank.
How Does a Fixed Annuity Work?
When asked, “How does a fixed annuity work,” the answer that it is like a CD is sufficient for someone who’s not truly interested in understanding at a certain level of depth, but what about the rest of us who truly want to commit our money to a serious investment? Let’s answer that then.
A fixed annuity works in one of two ways. There is the deferred fixed annuity and the immediate fixed annuity. Obviously you deposit some money into this annuity account and then it generates earnings based on interest. Now, depending on which type you go for will determine the amount you can earn.
For instance, a deferred annuity is going not going to pay you out until the later time of your retirement, hopefully past age fifty-nine and a half so you don’t incur a penalty. The amount of cash in the account will grow as you continue to contribute to it, and the amount earning interest will also grow. This is great if you have quite some time before retirement
However, you can also opt for an immediate annuity. This type of annuity will pay you immediately, and the value of the payments will be fixed, based on your current age and the amount of money in the account.
So essentially you allow your money to sit in an annuity account, earn a little interest, but be trickled out to you in payments during retirement. This is a good option if you are coming late to the investment game and need to ensure a regular stream of income in retirement.
A Fixed Annuity is a Popular Option
Fixed annuities are easy to understand and predictable, making them a very convenient investment for anyone hoping to keep a steady stream of income in retirement and help them regulate their spending.