Fixed Annuity Strategies in an Uncertain Market

Fixed annuities provide a guaranteed fixed rate of return that can offer stability to your retirement portfolio, especially in today's uncertain market.

These products are designed to provide a stable foundation of downside protection for your retirement savings plan with guaranteed returns and the possibility of income for life.

What Role Do Annuities Have in a Diverse Portfolio?

Incorporating stable fixed annuities in your retirement plan as part of a diversification strategy provides peace of mind while still allowing upside returns from other more risky investments. Before we dig into the role of annuities in a diversified retirement portfolio, let's review the basics of annuities.

Annuities are financial products issued by life insurance companies. A fixed deferred annuity has two phases: the accumulation period and the payout phase.

The accumulation phase is the first phase and is generally pre-retirement, when you are interested in building up the balances in your retirement nest egg. You fund your annuity with premiums paid to the insurer in a single lump-sum payment (a single premium annuity) or over time in periodic premium payments (a flexible premium annuity).

The payout phase is generally post retirement, where you want to create foundational income that is guaranteed to be paid. To trigger this phase, you either annuitize your annuity, which means you convert an annuity you currently own into a stream of income payments, or you purchase a new annuity called an immediate — or income — annuity. With annuitization, you can usually choose the timing and frequency of the income stream.

Types of Annuities by Risk Tolerance

There are three general categories of annuities that you can purchase depending on your risk tolerance and investment objectives. Some people have a mix of all three types in their portfolio.

Fixed annuities feature a fixed minimum interest rate that lasts the entire term of the annuity contract (generally three, five or seven years). In most cases, the company offers a promised rate that is higher than the minimum (for instance, Canvas Annuity's products are fixed annuities that offer a minimum guarantee of 3%, but today's actual guaranteed rate for the five-year Future Fund version is an impressive 6.20% as of this article’s publication).

Variable annuities are a more speculative version of annuities because the product's returns are linked to stock market participation and will vary by market conditions. When you buy them, you choose sub-accounts to put your money into. Depending on how the investments perform, your crediting rate may increase or decrease. You could even lose money, so they are much riskier than fixed annuities.

Fixed indexed annuities are a mix between the two. When you buy a fixed indexed annuity, you link your funds to a market index, like the S&P 500. This product does offer a minimum guarantee generally of 0% or better, so you are protected against downside risk, but the insurance company also caps your ability to grow your money as well.

Why Fixed Annuities Deserve a Place in your 2023 Portfolio

Let's face it, it's been a tough couple of years of diminished stock market returns. This is reflected not only in the declining performance of many individually-owned stocks, but also in 401k, IRAs and mutual fund returns, for example.

While it’s never a good idea to completely retreat on stock market linked investments (you may miss a market rebound), carving out a portion of your nest egg to purchase a fixed annuity may be a good idea, especially in the current unstable financial and geopolitical environment. Fixed annuities can help stem some of the losses you are experiencing from other market-linked investments.

Why Purchase Age Matters

What is a Good Age to Buy an Annuity for Accumulating or Distributing Money?

If you’re on the younger end of the age spectrum, say 30 to 45, an annuity may not be your best bet, primarily because you will have limited access to your money due to surrender charge periods. If you are in this age group, you might prefer to put into retirement investments with greater risk but potentially greater payoff.

If you are in the 46 to 59 age group, you may benefit from an annuity accumulation strategy. This is especially true if you are thinking about purchasing an annuity with qualified money, generally sourced from retirement accounts like 401(k)s and IRAs.

If you are in the 60+ group you can benefit from tax deferment because federal tax penalties on withdrawals expire when you turn 59 1/2 years old — especially if you are moving qualified money into a fixed annuity. Annuity withdrawals are intended to start at retirement age, but, unlike IRAs, annuities are an even more flexible tax-deferred investing option, with fewer limitations. Seek the advice of a financial advisor or tax expert when deciding to use an annuity as a tax deferral vehicle.

Retirement planning experts suggest that if you are aged 70 to 75, it could be a good time to begin guaranteed income payments by annuitizing an existing deferred annuity or by purchasing a new income annuity contract.

Creating an "income base" that covers current and anticipated monthly expenses like medical premiums and utilities can give you peace of mind and allow you to use the remainder of your retirement nest egg for discretionary purchases like travel and dining out.

Why Choose a Fixed Annuity?

Among all annuities, fixed annuities are the most conservative and with interest rates on the rise (that’s a positive for these products) now may be the time to consider segmenting a portion of your retirement nest egg to a fixed annuity. Just a reminder that there are two primary benefits of this product.

Pre-Retirement Returns

In 2023, having a portion of your retirement portfolio in a product that guarantees positive returns can be a winning strategy and relieve the stress caused by uncertain financial markets.

Fixed annuities are a great way to build up pre-retirement balances and can complement more growth-oriented investments like IRAs and 401ks.

Guaranteed Income

The core benefit of annuities is their ability to create a guaranteed stream of income that you cannot outlive that can supplement social security payments. You choose the period of time that you'd like to receive the annuity payments.

For instance, this can be 10 years, 20 years or lifetime payouts. Income annuities usually come with death benefits and spousal continuation options.

Should You Add an Annuity to Your Portfolio?

If you are considering a stable, conservative way to drive positive performance, adding a fixed annuity to your pre-retirement from Canvas Annuity may be a solid option.

With rates for a Canvas Annuity Future Fund five-year guarantee product at a whopping 6.20% (as of the date of publishing this article), you will be securing a level of protection against uncertain equity markets.

Canvas annuities can be purchased online in minutes. There is no need to meet with an agent, though we do have friendly phone and chat support available before, during, and after your purchase.