When you're thinking about saving for retirement, a 5-year fixed annuity can be a good choice. To get the best deal, you need to compare offers from different companies.
Here's how:
A 5-year fixed annuity is contract with an insurance company that agrees to pay a set interest rate each year, similar to a Certificate of Deposit (CD).
You purchase an annuity with a lump sum of money, and the insurance company promises to pay you a interest for five years.
Why 5 years? Five years is a good middle ground.
It's not too short, so your money has time to grow, and it's not too long, so you can access your money sooner than with longer plans.
Also consider your other options. Some companies offer plans for 3 years, 7 years, or even 10 years.
Think about when you'll need the money for retirement. If you need it sooner, a shorter plan might be better. If you can wait longer, a longer plan might earn you more interest.
Just like shopping for anything else, comparing rates helps you find the best deal. Look at rates from at least three different companies.
Try to compare rates around the same time, and use the same website or brokerage. This way, you're comparing offers based on the same conditions.
What affects the rate?
Guaranteed interest rate: This is the interest rate the company promises to pay you for the entire 5 years. It won't change, even if market rates go up or down.
Surrender charges: These are fees you pay if you take your money out before the 5 years are up. They're like penalties for breaking the agreement early. Make sure you understand how much these fees are and how long they last.
Market value adjustment (MVA): Some plans have an MVA. This means the amount you get back could change if interest rates change significantly while you have the plan. Ask the company to explain this clearly.
Financial strength: You want to make sure the company is strong and stable. Look for ratings from companies like A.M. Best, Standard & Poor's, Moody's, and Fitch. These ratings tell you how financially sound the company is.
Customer service: Read reviews from other customers. See if the company is easy to work with and if they answer questions quickly.
Website and support: Make sure the company's website is easy to use, and that they offer good customer support by phone or email.
A 5-year fixed annuity can be a good fit for several types of people, especially those who:
Are approaching retirement (or in early retirement):
If you're a few years away from retirement, or just started, a 5-year annuity can provide a safe place to grow a portion of your savings. It offers stability when you might be concerned about market volatility.
It can bridge the gap between when you stop working and when you start relying heavily on Social Security or other retirement income.
Want predictable growth:
If you prefer knowing exactly how much your money will grow, a fixed annuity is ideal. The guaranteed interest rate provides peace of mind.
This is especially helpful if you're risk-averse and want to avoid the ups and downs of the stock market.
Have a lump sum to invest:
Fixed annuities are typically funded with a single, lump-sum payment. If you have a significant amount of money from a maturing CD, an inheritance, a bonus, or the sale of an asset, this could be a suitable option.
Need a safe place for short- to medium-term savings:
If you have a specific financial goal in mind for the next 5 years, like saving for a down payment on a second home or funding a child's education, a fixed annuity can offer a safe place to grow those funds.
Want to diversify their retirement portfolio:
Even if you have other investments, adding a fixed annuity can diversify your portfolio and reduce overall risk. It provides a stable, predictable component to balance out more volatile investments.
Are looking for tax-deferred growth:
If you want your money to grow, and not be taxed on the growth until you take it out, this is a good option.
However, a 5-year fixed annuity might *not* be right for you if:
You need Immediate access to your money: If you think you might need to withdraw your funds before the 5-year term ends, the surrender charges could be a significant drawback.
You're looking for high growth potential: Fixed annuities offer stability, not high growth. If you're looking for the potential for significant returns, you might consider other investment options.
You're very young and have a long time until retirement: If you're decades away from retirement, you might be better off with investments that have higher growth potential over the long term, even if they come with more risk.
What happens if I need my money before the 5 years are up?
You can withdraw your money, but you'll likely face surrender charges. These charges are penalties for taking your money out before the agreed-upon term. The amount of the charge usually decreases over time. Always check the contract for the specifics. Some annuities may allow a small percentage of penalty free withdrawals per year.
Is my money safe in a 5-year fixed annuity?
Yes, your initial premium is protected from market losses. Fixed annuities are issued by insurance companies, and their financial strength is what backs the product. Check the insurance company's financial ratings from independent agencies like A.M. Best.
How are 5-year fixed annuities different from CDs (Certificates of Deposit)?
Both offer fixed interest rates, but annuities offer tax-deferred growth, which CDs don't. Also, annuities are issued by insurance companies and CD's are issued by banks. Annuities often have longer surrender charge periods than CD's have early withdrawal penalties.
Will my interest rate change during the 5-year term?
No, the interest rate is fixed for the entire 5-year term. This is one of the key benefits of a fixed annuity – you know exactly what rate you'll earn throughout the contract period.
