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Fixed annuities are an attractive investment option for those seeking to obtain stable returns on their investment with virtually no risk. However, when you plan to retire early, the advantage of fixed annuities could easily transform into a handicap.

Early retirement is a double-edged sword. According to research conducted by the Life Insurance Marketing and Research Association (LIMRA), those who retire earlier tend to have a higher life expectancy. That is good news on one hand, but it also suggests that early retirees face a higher longevity risk. The conservative nature of fixed annuities can easily fetter the capital growth necessary to amass more retirement savings in a shorter period of time.

For those who plan to retire before the average retirement age, the relatively low returns offered by fixed annuities compound the difficulty of having a shorter investment horizon. When you have a shorter investment horizon, you need accelerated growth. Annuity providers did not design fixed annuities to provide that. A fixed annuity is slow, steady and reliable, but you cannot even hope that it will grow at a faster rate than the annuity provider stipulates.

Based on their higher life expectancy, early retirees are more exposed to inflation risk during retirement. The payout rate of fixed annuities is based on a number of factors. However, the most important characteristic is that fixed annuities have fixed payouts. The longer exposure to inflation after early retirement will erode your retirement income significantly, especially in the latter stages of your retirement.

Life annuities are one form of fixed annuities. Purchasing life annuities (with the exception of straight life annuities), when you plan to retire early is not always advisable. This is because life annuities with insurance components generate less retirement income per premium dollar. Unless the insurance components add significant value to your financial plan, certain life annuities should be avoided once you plan to retire early.

That you plan an early retirement does not necessitate complete avoidance of fixed annuities. Some fixed annuities can work for early retirees if used properly. You can either invest lump sums earlier in the accumulation phase or extend the accumulation phase well past your retirement date. With some annuity providers, the terms and conditions of fixed annuities are negotiable. This means that you may have the power to make a fixed annuity fit neatly into your early retirement plans.

A fixed annuity is only a retirement tool. When you plan an early retirement, this tool must be used more cautiously. Fixed annuities may not be the ideal financial instrument to finance all or even the majority of your retirement plans. However, in the context of a diversified retirement portfolio- fixed annuities can help you to retire early without increasing the risk of outliving your retirement savings.

Learn more about this author, Darrell Victor.
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