What Is a Fixed Deferred Annuity?

April 4, 2023

An annuity is a contract between yourself and a financial institution designed to establish income payments throughout a set period that can even continue throughout the remainder of your life. This method serves as a suitable retirement option, either in itself or as a supplement to other plans, ensuring that you can receive a steady income of monthly checks throughout the contract.

People in the modern era live far longer than in the past. As it is impossible to determine how long you will need to stretch your retirement funds, a fixed deferred annuity can circumvent the problem, guaranteeing that you can enjoy your Golden Years without the fear that you may outlive your benefits.

The Types of Annuities

When deciding upon the best contract for your needs, various options are available, depending on your situation and how much risk you wish to take for potentially higher gains. Many people choose annuities precisely because they don't want to face the inherent dangers of alternatives such as stocks and bonds, preferring a more guaranteed outcome instead.

While the company you choose to handle the affair will invest your finances into various enterprises to enhance the total value, with an annuity, you are guaranteed a base payout regardless of how fruitful their attempts may be. In other words, you never have to fear that poor investing, inflation, or other detrimental factors will cause a significant impact on your eventual payment distribution checks.

Nonetheless, some choices can factor in your payouts and whether taxes play a significant role in your investment gains.

Immediate Annuities

For those nearing retirement age already, sometimes the decision is not about acquiring the most significant gains but managing existing funds to ensure that the retiree can stretch current assets over the course of whatever time they have remaining.

Immediate annuities have a limited accumulation phase or period in which you pay premiums to build your investment to receive a greater payout. In most cases, this process involves investing a significant lump sum in return for payouts that take place either immediately or within less than a year. This is a trade-off as you sacrifice the versatility that comes with having a larger pool of funds available for the security of a restricted amount.

This is an excellent method for those who worry that they will overspend or run through their retirement funds prematurely, as the monthly payouts not only create a boundary for spending but still accrue value through the contract's life.

Variable Annuities

Variable annuities offer the best chance for increased growth, but they come with an element of risk. With this contract, you permit the financial institution offering the annuity to invest your funds, generally in mutual funds or money marketing endeavors.

If these efforts bear fruit, you reap the benefits of greater monthly payouts, which enjoy tax-deferred status until an actual payout occurs. Therefore, your investment can continue to grow unfettered until you receive a check.

On the other hand, if they go poorly, you could risk losing money, resulting in variable checks that make it challenging to plan for what you may receive in any given month. As with most forms of investing, this type of annuity is a gamble, yet limited, as there are often minimum amounts the company can guarantee as well as a maximum allowance to balance this agreement.

One advantage to variable annuities is that you can often arrange payments for the duration of your life and can even arrange for a beneficiary to receive the remaining funds afterward.

What is a Fixed Deferred Annuity?

While the above methods each have their place, a third type provides a greater sense of security for investors, making it the most popular annuity. A fixed deferred annuity involves establishing a long-term accumulation phase in which you deposit monthly premiums, which will grow at a predetermined rate.

The financial institute will, of course, invest these funds in an attempt to make a profit, but you receive a secure and stable amount every month regardless of their success or failure in that regard. Fixed deferred annuities allow your invested funds to grow in a tax-deferred environment over time, and you can deposit as much as you want with no limitations. Doing so over an extensive period results in more significant monthly payments during the distribution phase, which begins when you choose to accept your first payout.

This is a great way to fight inflation and avoid the pitfalls of high-risk ventures such as stocks while locking in a solid growth rate. While you can establish this annuity at any age, many people begin in their mid-twenties or early thirties to allot enough accumulation suitable for a maximum yield during their retirement years, ensuring that they have a dependable monthly check ideal for spending their Golden Years in comfort.

In addition, like variable annuities, fixed deferred annuities allow you to allocate a beneficiary for any remaining funds in your account after death so your loved ones are taken care of.

Annuity Considerations

However, there are a few drawbacks, so keep these in mind when negotiating your annuity with your chosen financial institution. For one, the agency will likely leverage a set of fees for different purposes, so consider these when calculating your annuity payouts. Even though taxes are deferred until you receive funding, not all fees function that way.

Also, be aware that there are generally stipulations for early withdrawal before the age of 59 ½ years. This process often involves a 10% fee, so be mindful that if your circumstances change and you need immediate funds, there will be an added cost. For best results, plan accordingly and keep a nest egg fund for emergencies to maximize your annuity gains.

The Bottom Line

While there are other types of annuities, for the greatest security, a fixed deferred annuity is the best choice to ensure that you receive solid, dependable payouts throughout the remainder of your life so you will not have to worry about outliving your retirement. If you begin early, you can improve the value of your monthly checks through unlimited depositing power and tax-deferred growth. As an added benefit, you can choose a beneficiary to receive any remaining funds once the contract ends.


I believe in making the impossible possible because there’s no fun in giving up. Travel, design, fashion and current trends in the field of industrial construction are topics that I enjoy writing about.

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