The current inflation rate for the last 12 months, from May 2020 to May 2021, is a whopping 5 percent. This is the highest rate we have seen since 2008 when it hit 5.6 percent. With this drastic inflation rate, it is important to aggressively plan for retirement. A seven-year annuity is one way to plan ahead.
What is an Annuity?
Typically offered by insurance companies, an annuity is a way to create a consistent flow of income or interest from money you already earned. You make a contract with an insurance company that allows them to hold your large amount of money in an account with certain restrictions on withdrawals. In return, the insurance company typically pays some kind of interest on your money.
Types of Annuities
There are many types of annuity but they all fall into three categories: indexed, fixed and variable. They vary in a couple of ways from each other in payout and risk.
These types of annuities are a slight risk because they are guaranteed a payout amount that is small but the rest of your profit depends on the market index. They have the potential for exponential earnings, but it is dependent on good market investments.
Fixed annuities pay a set amount in regular intervals. They are not as lucrative but carry no risk. There are two kinds of fixed annuities: fixed immediate annuities and fixed deferred annuities.
Fixed immediate annuities pay a predetermined rate right away. You can start withdrawing (a predetermined amount) from them immediately without penalty.
Fixed deferred annuities do not pay out until later after a set amount of time. This is where a seven-year annuity is categorized. It is similar to a certificate of deposit with an insurance company that accrues a set rate of interest for seven years.
Read More: Fixed Deferred Annuity vs. Savings Account
These are considered the riskiest of all the annuities. When you invest in a variable annuity, you are essentially picking and choosing mutual funds to put your money in and if they do well, you get a good return but, alternately, if they do bad, so do you.
It is important to know the difference between all the annuities in order to get the best fit for your money and lifestyle. A seven-year annuity is about as risk-free as annuities come and will guarantee you a return on your money.
At the end of the seven-year term on the annuity, the insurance company will give you options to either lock in at a new rate for an additional seven years, withdraw your money or choose to turn it into a monthly payout for steady income for yourself.
Read More: Annuity vs. Money Market Account
Best Annuity Companies
Now that you know what a seven-year annuity is, let's look at who is offering the best. To gauge the best annuity options, it is important to look at upfront fees in addition to interest rates. Here is an overview of what April 2021 rates looked like for seven-year annuities amongst several insurance companies:
- Nassau Life and Annuity - Nassau MYAnnuity 7X 0% Free - 2.9 percent
- Sentinel Security Life Insurance - Personal Choice Annuity 7 - 2.9 percent
- Atlantic Coast Life - Safe Haven 7 - 2.89 percent
- Upstream Life - Secure Legacy 7 Year - 2.85 percent
- Fidelity & Guaranty Life - FG Guarantee-Platinum 7 - 2.8 percent
- Sentinel Security Life - Personal Choice Annuity 7 (CA, FL) - 2.8 percent
- Nassau Life and Annuity - Nassau MYAnnuity 7X 10% Free - 2.7 percent
- Guaranty Income Life- -Guaranty Rate Lock 7 ($250K+) - 2.65 percent
- Great American (GALIC) - SecureGain 7 ($100K+) - 2.64 percent
As you can see, the rates are a little higher than a current-day certificate of deposit. Because the risk is low and your money isn't in high-risk stocks, the rates will never be very high on a seven-year annuity. However, you will have comfort knowing that your money has grown, even just a little bit, to add to your retirement funds at the end of those seven years.
Read More: How to Calculate an Ordinary Annuity Worksheet
With over seven years of freelance writing experience across a variety of genres, I have quite a bit of education and research to share with those looking for financial guidance. My personal experiences, including two house purchases, two paid off car loans, home refinance, and a Home Equity Line of Credit process, give me the practical knowledge to assist with large financial decisions. Meanwhile, budgeting everyday necessities for a family of seven focuses my expertise on daily savings. In addition, I have written financial articles for a top ranking finance site, Go Banking Rates.