Fixed annuities are relatively conservative financial products. Unless there are good reasons to choose otherwise, they are the most suitable annuity for the majority of people to choose when they retire, because they can provide a guaranteed minimum income.
Logically, you would expect a fixed annuity to pay you a fixed monthly payout for a fixed time period, and this is almost true.
In fact, the time period is fixed and the minimum payout rate is also fixed.
The payout rate you earn on a fixed immediate annuity is actually variable, but you can be sure that it will never fall below the guaranteed, fixed minimum level that you agree to when you buy the annuity.
The Fixed Annuity Process
The initial payout rate you are offered when you buy an immediate fixed annuity will be guaranteed for one or more years. You can fix it for ten years if you like. At the end of this period, you will be offered a renewal rate. The renewal rate can never be lower than the minimum guaranteed level you agreed to when you bought the annuity.
Renewal rates change to reflect the returns available to your insurance company. Returns from fixed annuities largely depend on the Federal Reserve’s interest rate policy, bond rates, and residential mortgage rates.
When interest rates are low, as they have been for some years now, fixed annuity payout rates also tend to be low.
Insurance companies invest the money you’ve paid for your annuity in a range of investments – typically government bonds, corporate bonds and residential mortgages.
Even if you live to the age of 200, the insurance company is obligated to keep paying you the minimum monthly income it promises you when you buy the annuity – provided you buy an annuity that covers you for the whole of your life.
Factors that Influence your Fixed Annuity Renewal Rate
Some insurance companies can offer higher interest rates on annuities by increasing their portfolio risk – they can increase their holdings of junk bonds, for example. No doubt you would like to have security and peace of mind when you retire; chasing the very highest return at the cost of increasing risk might not be in your best interests. If the insurance company you buy an annuity from has solvency problems, creditors will be ahead of you in the scramble for cash.
It’s important that you buy your annuity from a strong, reputable insurance company, a company that you feel sure will still be around on your 100th, if not your 200th birthday.
Use reports from credit ratings agencies like Moody’s and Standard and Poor’s to screen insurers. As we saw in the financial crisis, however, even the most apparently secure banks and financial companies can run into difficulties. You can use the ratings agency reports to at least reassure yourself that you’re not entrusting your money to a company which agencies have any concerns about right now.