When you're planning for retirement, knowing what your money may earn can be just as important as knowing where it's invested.
A fixed annuity is designed to provide a specified interest rate for a defined period of time, allowing your money to grow without being directly exposed to day-to-day stock market fluctuations. But how does that growth actually work?
With a fixed annuity, the insurance company credits interest according to the terms of the contract.
For example, imagine you place $100,000 into a fixed annuity earning 5% annually for five years.
If interest compounds annually and no withdrawals are taken, the value would grow approximately like this:
Starting amount: $100,000
After 1 year: $105,000
After 3 years: $115,762.50
After 5 years: $127,628.16
That's approximately $27,628 in interest over the five-year period.
The example is simple, but it illustrates one of the important features of fixed annuities: interest can earn interest over time through compounding.
Compounding means that interest credited to your annuity can become part of the amount on which future interest is calculated.
Instead of earning interest only on your original deposit, you may also earn interest on interest that has already been credited.
Over longer periods, that can make a meaningful difference.
Even relatively small differences in interest rates can affect the value accumulated over several years.
That's why it's important to consider more than simply the advertised rate when evaluating a fixed annuity. The length of the guaranteed rate period, surrender period, withdrawal provisions, carrier, financial strength and other contract features can all matter.
A higher rate doesn't automatically mean a particular annuity is the right choice for every person.
That depends on the specific annuity contract.
At the end of the initial guarantee period, you may have several options depending on the product, including continuing the contract at a renewal rate, selecting another available guarantee period, taking permitted withdrawals, or considering other options available under the contract.
This is one reason it's important to understand both the rate and the terms before purchasing an annuity.
Fixed annuities are insurance products, and their features can vary significantly from one carrier and contract to another.
Depending on the product, differences may include:
Understanding those differences can be just as important as comparing rates.
Sometimes the easiest way to understand compounding is simply to see the numbers.
The CDA Fixed Rate Annuity Calculator lets you enter an amount, interest rate and term to see an educational illustration of how that amount could grow over time.
At CDA of America, we believe understanding your options is an important part of making informed financial decisions.
For decades, CDA has worked with individuals, families and businesses to help them better understand insurance, retirement and financial strategies designed around their goals and priorities.
Have questions about fixed annuities or retirement income strategies?
This material is provided for educational and informational purposes only and is not intended as investment, tax or legal advice. Examples are hypothetical and do not represent an actual insurance product or guarantee of future results. Annuity rates, guarantees, features, surrender charges and other contract provisions vary by insurance carrier and product. Guarantees are subject to the claims-paying ability of the issuing insurance company. Withdrawals may be subject to surrender charges and applicable taxes. Consult appropriate financial, tax or legal professionals regarding your individual circumstances.