Fixed Annuities

There’s power in the simplicity of a fixed annuity. It's a tax-deferred product, so you don't pay any taxes on the earned interest until the money is withdrawn. Here’s another perk: the full value of the contract stays intact throughout its length. This is beneficial because the additional interest earned is based on the total contract value, which means your money grows faster when compared to investments with taxable income returns.

Let's break it down.

Here's an example. Over a 20 year period, a $100,000 initial premium with a tax-deferred rate of 4.00% would require a taxable rate of return of 5.26% to equal the same amount of growth.

As interest is compounded on your annuity, it’s based on it's current value. Taxable investments have to pay taxes each year to the IRS, meaning the amount left in the investment that builds interest is lower after each tax payment. Deferring taxes means your interest grows uninterrupted, since taxes don't come out until you withdraw funds.

The hypothetical example assumes an initial premium of a marginal $100,000 into both a tax-deferred annuity, with a 4% growth rate, and investment into a taxable account, with a 4% growth rate. The tax bracket is assumed to be 24%. Actual taxes will be paid at the individual’s ordinary income rate for the tax year at the end of the contract period or upon early withdrawal.

Laddering, or breaking up your purchase into multiple fixed annuities with different contract terms, is a useful strategy to diversify interest rate exposure. A fixed annuity laddering strategy accomplishes two things: you’re able to secure a higher interest rate today that’s only available for longer time commitments and create multiple opportunities to take advantage of potentially higher future rates.

Let's put it into perspective. Instead of buying one 5-year fixed annuity, you could buy three fixed annuities with interest rate guarantee periods of 3, 5, and 7 years. The money locked in for longer will be eligible for higher rates today. You’ll also have liquidity available at multiple dates in the future, which allows for more flexibility and to catch higher rates if they rise in the future.

How does it work?

Say you have $120,000 in the piggy bank. Instead of buying one fixed annuity, you split that money into multiple, smaller purchases.

You would take that $120,000 purchase and split it between 3-year, 5-year, and 7-year fixed annuities, let's say $40,000 each. Based upon hypothetical rates, this would credit you 3.60%, 4.00%, and 4.05%, respectively.

Using this method, you'll own annuities whose rate periods will end in three different years, giving you a step up in future opportunities.

This is a hypothetical example. The chart shows account balance and cumulative pre-tax interest with no withdrawals. Chart shows assumed rates of return based on three $40,000 initial premiums, totalling $120,000, and is not indicative of any particular annuity’s return.