Fixed annuities

Immediate fixed annuities provide pension-like income for life

Immediate fixed annuities are the oldest, most common type of annuity: you pay an insurance company a lump sum up front, and in return, you receive a fixed monthly payment for life (or some other specific time period)—a reliable stream of income you can’t outlive.

Immediate fixed life annuities may make sense, in our view, if you’re seeking income now and don’t want to worry about market fluctuations—at least for a portion of your savings. The insurance company manages those details and makes sure you receive a fixed payment that lasts for life. As long as the insurance company is solvent, you’ll receive a payment for the same amount every month.

If you live longer than average, you’ll benefit from owning an immediate fixed life annuity. The rate of return depends on your initial investment and how long you live. Annuity experts call this a “mortality credit.” If you live longer than other investors, you’ll benefit. In fact, it may be most useful to think about an immediate fixed annuity not purely as compared to other investments, but more for its insurance features.

What about the current low-interest-rate environment—can that impact payments from an annuity? It may not make the most sense to load up on immediate fixed annuities when interest rates are low, as the payments depend, to a degree, on the market. But if you need guaranteed income, it probably won’t pay to wait too long either. One strategy is to stagger your purchase of immediate fixed annuities over time, much like a bond ladder but using annuities, as your guaranteed income needs grow.

It’s worth noting that monthly payments from immediate fixed life annuities are generally higher the older you are at the time of purchase. The insurer anticipates that it will be making payments for a shorter period of time, so it can pay a higher proportion of the lump sum on a monthly basis. This feature isn’t shared by variable annuities with GLWBs.