Secure Your Future with Fixed Annuities
Discover reliable fixed annuity solutions for peace of mind.
Secure Your Future with Fixed Annuities
Discover reliable fixed annuity solutions for peace of mind.
About Fixed Annuity
Our Mission
At Fixed Annuity, our mission is to provide reliable insurance solutions tailored to your financial goals. We aim to empower clients with knowledge and options for securing their future.
Frequently Asked Questions
From a rate of return perspective, fixed annuities often provide a higher guaranteed interest rate than US government bonds or bank CDs with similar terms, particularly in periods of higher market interest rates. However, each investment type offers distinct features regarding risk, taxation, and liquidity.
Fixed Annuities
- Fixed annuities typically offer multi-year guaranteed rates (e.g., 4.05% to 6% for one- to ten-year terms) that tend to be higher than current US Treasury yields and bank CDs.
- Earnings from fixed annuities grow tax-deferred until you begin withdrawals, allowing more compounding over time.
- They provide a guaranteed income stream, often for life, making them attractive for retirement income planning, but they offer limited liquidity and may have surrender fees for early withdrawals.
US Government Bonds
- US Treasury bonds are considered among the safest assets, directly backed by the US government, and currently yield between 4% and 5% depending on maturity.
- Interest from Treasuries is subject to federal taxes, but not to state and local taxes; bonds are liquid and can be sold in secondary markets, though their prices may fluctuate with interest rates.
- They do not offer tax-deferred growth on interest, which is typically taxable annually.
Bank CDs
- Bank CDs provide fixed returns, typically lower than fixed annuities for similar periods.
- Interest is taxable in the year it is credited to the account and CDs are FDIC-insured up to applicable limits.
- Early withdrawal penalties reduce liquidity, but CDs offer safety and predictable short-term returns.
Comparison
Fixed annuities are well-suited for those seeking higher returns and tax deferral in exchange for reduced liquidity, while government bonds and CDs offer enhanced liquidity and safety, usually at the cost of lower rates.
When comparing rate of return on investment, immediate (income) annuities generally offer a higher guaranteed interest rate than both US government bonds and bank CDs with similar time horizons, but they come with different risk, liquidity, and tax implications.
Immediate Annuities
- Immediate annuities are designed to provide guaranteed income, often for life, making them attractive to retirees seeking stability.
- Their rates of return are generally higher than CDs because funds are locked in longer, and payments are backed by the insurer rather than the government, with no FDIC protection but often some limited state-level coverage.
- They offer tax-deferred growth, with income payments partially consisting of a return of principal and partially interest, which can offer tax efficiency in some cases.
US Government Bonds
- US government bonds (such as those from the US Treasury) are widely considered the benchmark for safety because they are backed by the full faith and credit of the US government.
- Their rates of return tend to be lower than those for immediate annuities over comparable periods, especially when interest rates are low.
- Bonds offer predictable returns and have high liquidity, making them suitable for conservative investors.
Bank Certificates of Deposit (CDs)
- CDs promise a fixed return over set terms and are insured by the FDIC (up to $250,000 per account), making them one of the safest savings vehicles.
- However, they generally pay lower interest rates compared to immediate annuities for the same commitment period.
- CD interest is taxable when credited, while annuities benefit from tax deferral.
Summary
I Immediate annuities suit those prioritizing guaranteed retirement income and higher returns over time, while government bonds and CDs are safer and more liquid, but generally with lower returns.
Deferred annuities typically offer higher rates of return than US government bonds and bank CDs over similar holding periods, mainly due to their tax-deferral benefit and higher guaranteed base rates.
Deferred Annuities
- Deferred fixed annuities (e.g., MYGAs) commonly offer interest rates in the 5%–7% range for multi-year terms, which tends to be higher than prevailing rates on bank CDs (4%–5%) and US Treasury bonds (4%–4.8%) for similar durations.
- The interest earned in a deferred annuity compounds on a tax-deferred basis, meaning investors do not pay taxes until they withdraw funds, allowing greater compounding over time.
- Liquidity is moderate—withdrawals before the end of the surrender period typically incur penalties.
US Government Bonds
- US government bonds (such as Treasuries) are the benchmark for safety with rates around 4%–4.8% for three- to seven-year notes.
- Interest is taxable federally each year, but not at the state and local level.
- Bonds are more liquid, and can be sold before maturity, but may incur loss of principal due to interest rate changes.
Bank CDs
- Bank CDs generally offer fixed yields, currently ranging from roughly 4%–5% for top rates among major institutions.
- Interest on CDs is taxed annually, which can lead to a lower effective long-term return, especially if reinvested.
- CDs are FDIC-insured up to standard limits and usually come with penalties for early withdrawals, reducing liquidity.
Comparison
Deferred annuities are best suited for those focused on maximizing long-term, tax-deferred yield, while US government bonds and CDs offer differing mixes of safety, liquidity, and shorter-term planning advantages.
A fixed S&P 500 indexed annuity is designed to deliver a lower long‑term expected return than investing directly in the S&P 500 , in exchange for principal protection and downside guarantees. Direct S&P 500 exposure historically compounds at roughly 10% annually with full upside and full downside volatility, while a typical fixed indexed annuity linked to the same index tends to realize only a capped or fractionally-participating slice of that upside, often landing in the mid‑single‑digit return range over time.
How fixed S&P 500 indexed annuities earn returns
- Fixed indexed annuities credit interest based on the index’s price change (usually excluding dividends) and then apply caps, participation rates, and/or spreads that limit credited growth in strong years.
- For example, research using an 11% annual cap on the S&P 500 showed an average credited return of about 6.6% per year over long histories, illustrating how upside limits compress returns versus the uncapped index.
- In exchange, the contract guarantees that negative index years credit zero (not a loss), so principal and prior credited interest are protected from market drawdowns.
Historical S&P 500 return profile
- Long‑run S&P 500 total returns (with dividend reinvestment) have averaged around 10% annually over multi‑decade periods, with substantial year‑to‑year volatility and drawdowns exceeding 30% in some bear markets.
- That 10% figure is before any advisory fees, fund expenses, or taxes, but it reflects full participation in both dividends and price appreciation, with no caps or floors.
Rate‑of‑return trade‑off in practice
- From a pure rate‑of‑return perspective, an investor who can tolerate equity volatility and stay fully invested is historically better positioned to earn a higher long‑term compound return by owning the index (e.g., via an S&P 500 index fund or ETF) than via a fixed indexed annuity tied to that index.
- However, for a risk‑averse retiree or pre‑retiree who prioritizes principal protection and is willing to give up a portion of the equity upside, the “bond‑plus” return profile (often mid‑single‑digit expected returns with no market‑loss years) of a well‑priced fixed indexed annuity can be attractive relative to traditional fixed income.
Key structural differences affecting return
- The annuity’s crediting formula usually ignores dividends, which historically have been a meaningful part of S&P 500 total return, further widening the gap versus direct index investing.
- Insurer pricing, rider charges (e.g., for guaranteed lifetime withdrawal benefits), and changing caps/participation rates over time all drag realized returns below the raw option‑theoretic potential implied by the index path.
- Tax deferral inside the annuity can partially offset the lower gross return for a buy‑and‑hold, high‑bracket investor, but the growth is ultimately taxed as ordinary income on withdrawal, so the after‑tax advantage versus direct index investing depends heavily on the investor’s tax situation and account type