How Does a Fixed Annuity Work?

How Does a Fixed Annuity Work?

Have you ever purchased a certificate of deposit (CD)? If so, then you may find that a fixed annuity is awfully similar.

Like a CD, you can use a fixed annuity to build wealth. They’re also considered low-risk investments meaning that your principal is secure. And, after each matures after a predetermined timeframe, you can collect your money at a guaranteed minimum rate.

But, that’s why the similarities end. CDs are usually reserved for short-term goals, like putting a down payment on a house. Fixed annuities are long-term investments that you’ll use during retirement.

With that out of the way, here’s how a fixed annuity works.

You purchase a fixed annuity through an insurance company. You have the option to either do this in one lump sum or through a series of payments. Said insurance company then guarantees that the money in your account will earn a certain rate of interest.

During the accumulation phase, your money will grow tax-deferred. When you, the annuitant, begin receiving a regular income from the annuity, the insurance company will calculate your rate through a variety of factors including;

  • The premium amount
  • Current interest rates
  • Your age and life expectancy
  • Your gender

If you’re feeling amphibious, and don’t mind crunching some numbers, you can use the following formula to calculate your payments;

Annuity Formula

Annuity Value = Payment Amount x Present Value of an Annuity (PVOA) factor.

For example, if you have a $500,000 annuity with a 4% interest rate that you’ll annuitize for 25 years. If so, the PVOA factor would be 15.62208. So, 500,000 = Annual Payment x 15.62208. And, that would make the annual payment gives $32,005.98.

Keep in mind that how your money will grow and what you’ll receive is detailed in your contract. You could set it up so that you’ll be getting a set dollar amount, interest rate, or another formula to your liking.

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More