What Are The Pros And Cons Of A Fixed Annuity? 
Fixed annuities are similar to CDs in the sense that they pay guaranteed interest rates . The advantages are that fixed annuities typically pay interest rates considerably higher than bank CDs . Insurance companies also have tougher financial standards to meet for cash reserves than banks which can make them more secure in the eyes of a consumer . There are several different types of fixed annuities but they fall into two main categories immediate and deferred . Immediate annuities make a fixed payment determined by how much money you put into the annuity and your age . Deferred annuities accumulate interest and offer different payout strategies later in life . The longer you wait to initiate payout , the larger the payout each year . Many retirees are using deferred annuities as part of their retirement income strategy because it is guaranteed income for either a specific period or a lifetime stream of income . You can choose options like single life payout or joint life payout . If this sounds familiar , it is essentially like setting up your own personal retirement pension . The biggest concern from most folks heading into retirement is that they will run out of money before they die . Fixed annuities can help remove that concern as they can help avoid the ups and downs of a volatile stock market . Other advantages of a fixed annuity include a low investment limits . There are many companies that have minimums of just a few thousand dollars . The interest paid as your annuity grows in value is also tax deferred until you pull the money out . The biggest drawback of a fixed annuity is cash liquidity . Lets say you put in $ 100,000 and intend to begin taking lifetime income seven or ten years later but two years into that period , you changed your mind and want to withdraw your money . Just like with a bank CD , there will be a consequence for early withdrawal . This surrender charge can be significant . Whats the reason for the surrender charge ? The insurance company has taken your money along with thousands of other folks money and invested it in long term financial vehicles based on your initial commitment and now youre asking them to bust your money out because of your personal situation and that costs them money . The solution : Only put money in a fixed annuity that you are certain can be left alone to complete the strategy you set out on . Most fixed annuities do not have inflation adjustments . The spending power of a monthly payment over time will erode based on inflation and that needs to be taken into consideration . There are fixed annuities with inflation protection available at an additional cost . You can also use a laddered approach with multiple annuities to combat inflation concerns during retirement . If your own a single-life annuity and you begin receiving income and then die a year or two later , depending on the contract , payments could cease . The guaranteed payout in a situation like this varies significantly from product to product and this should be of primary concern when evaluating which annuity product or company best meets your individual needs . The best way to avoid this risk is to consider a joint-life annuity . Of course , there are many different types of fixed annuities and you need to consult with a qualified retirement income adviser in order to determine which type of fixed annuity fits your particular situation . 