Different types of annuities for your needs
Annuities are commonly used as a form of retirement income because they offer a guaranteed income stream for a fixed period or the rest of your life. There are five main annuity types, each offering unique features and benefits. This article will examine fixed, variable, indexed, immediate, and deferred annuities.
Fixed annuities
A fixed annuity provides a fixed rate of return on your investment over the contract's life. The rate of return is determined at the time of purchase and guaranteed throughout the annuity’s life. These are considered low-risk investments. The insurance company that issued the annuity guarantees your principal and interest. Your account will grow, tax-deferred, over a fixed timeframe. Fixed annuities are a good choice if you are risk-averse and want to protect your principal investment while earning some money.
Benefits of a fixed annuity at a glance:
A guaranteed interest rate for the duration of the contract
Tax-deferred growth
Predictable income stream
Ideal for risk-averse investors
Variable annuities
If you want a more flexible retirement investment option, consider variable annuities. These annuities are managed within a portfolio because they’re invested in mutual funds, stocks, and bonds. Your rate of return will heavily depend on the performance of the underlying investments, which makes variable annuities a bit riskier than fixed annuities. Another thing to consider when purchasing a variable annuity is that your investment will not be guaranteed. But, variable annuities offer the possibility for higher returns than fixed annuities, and the growth is tax-deferred. If you’re willing to take some investment risk, then you have the potential to be rewarded with higher returns.
Benefits of a variable annuity at a glance:
Offers more flexibility[1] when it comes to investment options
Tax-deferred until withdrawals are taken
Guaranteed retirement income
Legacy protection
Indexed annuities
Indexed annuities are a type of annuity that provides a return based on the performance of a stock market index, such as the S&P 500. Index annuities offer the potential for higher returns than fixed annuities but with less risk than variable annuities. Your rate of return is limited to a certain percentage, known as the cap rate. Indexed annuities are suitable for you if you want the potential for higher returns while limiting your investment risk. One of the downsides to indexed annuities is that they may come with higher fees than the other options.
Benefits of indexed annuities at a glance:
A guaranteed minimum rate of returns
Tax-deferred until you begin withdrawing
Provide some protection against inflation
Guaranteed income and beneficiary payments
Immediate annuities
With immediate annuities, you’ll receive payments after making a lump sum investment. Not only will payments start immediately, but they’ll also continue for a fixed period or the rest of your life. Immediate annuities may be a good option if you want a guaranteed income stream—immediately.
Benefits of immediate annuities at a glance:
Reliable income stream for a specified time
Tax-deferred growth
Option for individual or joint income revenue
Easy to manage
Deferred annuities
A deferred annuity allows you to invest a lump sum for a fixed period. Once that period is up, you will begin receiving regular payments. Because deferred annuities are invested longer than immediate annuities, they offer the potential for higher returns. This can be a good option when you have a large lump sum to invest over a longer time horizon and would like to receive a steady retirement income stream.
Benefits of deferred annuities at a glance:
May be good for large lump-sum investments (single premium) or a series of payments over a period of time (flexible premium)
Tax-deferred until withdrawals
Different withdrawal options are available: lump sum, annuitization, and regular monthly.
Single premium offers principal protection; flexible premium ties up less of your money.
Annuities are versatile financial products that can provide a guaranteed income stream for a fixed period or the rest of your life. The type of annuity you choose will determine the features and benefits offered. Always read your contract for a more in-depth look at what your annuity can and will not do. When in doubt, speak with a financial professional.
