Always Compare Fixed Annuity Rates | What Do Fixed Annuities Earn?

Fixed annuities offer competitive interest rates typically 1-3% higher than bank instruments and money markets. Fixed annuities were never designed to give returns that are available in the stock market; however, over the last ten years or so, from 1999 through 2009, they have actually outperformed the market. And it’s anyone’s guess as to the market being up, flat or down for the next decade or two.

The insurance provider and the contract offered will determine the actual rate. Longer terms of 5-15 years offer higher rates than shorter-term annuities. Even though a 2-5 year annuity can still potentially outperform bank accounts. In addition to higher interest, fixed annuities have even greater growth potential with tax-deferral accelerating their growth.

When comparing fixed annuities to banks, the potential favors annuities. Moreover, banks and securities don’t offer much in the way of additional retirement features. Some bank instruments have early withdrawal penalties as do fixed annuities, and they are both considered safer and more secure financial vehicles. Here are some additional features of annuities:

Fixed Annuity Benefits

• Safety: Backed by highly rated state-regulated insurers
• Tax Deferral: Tax-deferred growth
• Higher Return: Better interest rates than banks
• Life Insurance: Death payout **guarantee options
• Liquidity: Flexible withdrawal privileges
• Unlimited Contributions, unlike IRAs and 401(k)s
• Inheritance: Pass money directly to heirs by passing probate
• Lifetime Option: Income you can’t outlive (Annuitization or a Living Benefit Rider)

Fixed Annuity Characteristics

• Lump-sum or periodic contributions
• Invested in mostly high-quality A-AAA bonds
• No risk to client. Insurance company assumes all risk
• Guaranteed interest
• Modest growth
• 3% to 6% interest crediting
• 1- to 15-year term
• Predictable, simple
• Guaranteed retirement income
• No annual fees

Fixed Annuity with Indexing Options

[FIA, Fixed Index Annuity]

• Lump-sum or periodic contributions
• Invested in mostly high quality A-AAA bonds
• Annual interest crediting risk. Insurance company **guarantees principal
• Higher rate potential based on index performance (such as S&P 500, Dow Jones, NASDAQ, etc.)
• Moderate growth
• 4% to 8% interest crediting potential varies with index performance
• 3- to 14-year term
• Sophisticated, greater potential
• Guaranteed retirement income options
• Annual fees, minimal to none

Investors that need their money prior to retirement may prefer bank accounts, money market or a securities-oriented investment to avoid the potential 10% IRS tax penalty imposed for taking money out of an annuity prior to the age of 59 1/2. For individuals at or near retirement, fixed annuities may be a better choice. If you’re looking to have a larger retirement nest egg, fixed annuity rates may help you meet that goal better than securities, CDs or a money market account.

Question: From 2000 to 2010, which financial vehicle would have likely outperformed the competition, a US Bank CD, a Lehman Brothers bond, an ING fixed indexed annuity or a Vanguard S&P 500 index fund?

Answer: An ING fixed annuity. It would have no loss years and several years with moderate gains allowing it to average out ahead of the other choices. The US Bank CD would have averaged around 3%. A Lehman Brothers bond would be worthless and the Vanguard S&P 500 funds total return would be at a small loss or near break even. The ING FIA would likely be up approximately 4% to 6% APY.