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Fixed Annuity Examples

CD Type Fixed Annuity
CD type fixed annuities are actually quite simple and easy to understand.  They have a stated contract length between 3-10 years and a guanteed interest rate to be paid during that time.  Lets assume that a person is looking for a good interest rate and doesn't need to get to the bulk of their money for a few years.  They may enter in a 5 year Fixed annuity contract paying 5% for all 5 years.  Assume this person deposits $100,000.  They would have the ability to withdrawal the interest fo $5,000 per year (they could take the interest monthly if they preferred) and at the end of the 5 years they would receive their initial deposit of $100,000 back.  If they chose not to witdrawl anything during the term of the contract they would have accumulated $127,628 due to compouding interest. 

Traditional Fixed Annuity
There are other fixed annuities that do not offer a guaranteed rate for all years.  For example in a traditional fixed annuity a company may offer a 6 year contract with a very attractive 3 year rate let’s assume it is 5.25%.  In this example you would be guaranteed 5.25% for the first 3 years.  After that point your rate for the next 3 years would be adjusted according to the current interest rates at that time generally with a floor of 3%.  That means in year 4-6 you could earn as little as 3% or as high as....(whatever current rates are). In this example if you started with $100,000 you would earn $5,250 each year for the first 3 years, for the next 3 years you would be guaranteed $3,000.00 but if rates were higher you may earn much more than even your first 3 years rate of 5.25%

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