Annuities For Dummies
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Fixed deferred annuities offer safe, but low, returns and tax deferral. Risk-averse investors buy them when they offer higher interest rates than CDs, when the stock market is declining or appears headed for a fall, and when they’ve already parked as much money as possible into other savings vehicles, like employer-sponsored retirement plans.

Here are some of the reasons why people buy fixed annuities:

  • Safety: Buying a fixed annuity with a multi-year guarantee (MYG) fixed annuity and holding it for the entire term is a safe, conservative way to grow your money. It’s even safer than a bond or shares in a bond fund because a bond’s price or the share prices of a bond fund can fall in response to rising interest rates.

  • Tax deferral: Annuities, like IRAs and 401(k) plans, grow tax-deferred. You earn interest each year, but you don’t pay taxes on it. The advantage? Your savings grow faster than they would if your gains were taxed every year.

    The longer you defer taxes, the better — especially if you expect to be in a lower tax bracket in retirement.

  • Stable rates: When you buy an MYG fixed annuity, you know its annual interest rate and the exact worth of your investment at the end of the term. As long as you don’t make withdrawals, the result is entirely predictable.

  • Higher returns when bond-yield curve is steep: A steep bond-yield curve occurs when bonds of longer maturities (like a ten-year Treasury bond) pay higher rates of interest than bonds of shorter maturities (like a three-month Treasury bill). At such times, fixed annuities often pay higher interest rates than CDs.

  • If the owner dies, the assets avoid probate: It’s hard to get excited about a benefit triggered by your own demise, but annuities are famous for them. If you die while owning a fixed annuity, your money goes straight to the beneficiaries on your contract. Because the money doesn’t become part of your estate, it doesn’t go through probate (the legal process), where creditors and relatives can lay claim to it.

  • The option to annuitize: Like all annuity contracts, a fixed annuity can be converted to a retirement income stream. Although this option is the defining feature of annuities, few people know about it or care about it and even fewer use it.

About This Article

This article is from the book:

About the book author:

Kerry Pechter is the senior editor of Annuity Market News. As a reporter who writes about annuities and the annuity industry full-time and as a former marketing writer who specialized in annuities at The Vanguard Group, he brings both an outsider’s and an insider’s perspective to the writing of this book.
A financial journalist for many years, Kerry has written for the New York Times, the Wall Street Journal, the Los Angeles Times, and many other national and regional publications. His previous books include two career guides, A Big Splash in a Small Pond: How to Get a Job in a Small Company (Fireside) and An Engineer’s Guide to Lifelong Employability (IEEE). He is a graduate of Kenyon College.

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