A fixed annuity is a two-part savings vehicle offered by insurance companies. In the first part, called the accumulation phase, the annuity pays a fixed rate of interest for a set period, much like a bank certificate of deposit. Currently, three-year fixed annuities pay up to 5.65 percent, according to Annuity.org, while 10-year fixed annuities pay up to 5.45 percent. Fixed annuities feature a minimum rate — typically 1 percent to 3 percent — that they will pay each year, even if interest rates fall below that level. Interest on your earnings is tax-deferred until you start taking withdrawals.
The second part of the fixed annuity is the distribution phase. Typically, you can have your entire amount paid out at once, over your lifetime or for a set period — say, 10 years. If you choose a lifetime payout, you’ll get the same amount each month no matter how long you live. In some forms of fixed annuities, however, the insurance company will get any leftover money if you die earlier than projected. You can also get annuities that will pay your beneficiaries after you die.
This calculation assumes you have a nonqualified annuity, which means you’ve already paid taxes on the money you invest, and the earnings are tax-deferred until you withdraw at retirement. Be aware that a fixed annuity is a contract between you and the insurance company, and each company’s annuity contract will be different. It’s important to read the contract and make sure that all its provisions are in line with your goals.
