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What to Know About the Different Types of Annuities

by Rohan Mathew
What to Know About the Different Types of Annuities

As American retirees live longer than ever, it becomes more and more important to have retirement savings and income that will sustain you and your lifestyle for your lifetime. 

One way to fund your retirement is to use annuities. What are annuities? 

Annuities are contracts between you and the insurer that gives you a guaranteed lifetime income in retirement. Sounds too good to be true? It isn’t!

But there are four different types of annuities that you need to be aware of. Let’s look at each of them in detail. Keep reading!

Immediate Annuities

The main problem with retirement income planning is that you have no idea how long you might end up living. That’s why planning for it can be such a mind-boggling endeavor. 

Immediate annuities provide an immediate guaranteed lifetime payout. But you are trading liquidity for guaranteed income. If an emergency crops up that you need access to your lump-sum savings, you are out of luck. 

Another great thing is that the fees are woven into the payout. 

Deferred Annuities

With deferred annuities, you get the lump sum payment on a date in the future. This option is great because it offers a chance for your investments to grow before you start receiving payments from your annuities for retirement.

You also don’t have to pay taxes until you take out the money. These are also subject to early withdrawal penalties. 

Fixed Annuities

These are the simplest kinds of annuities for retirement. The insurer will give you a guaranteed fixed interest rate on your investment and you have to agree to the length of your guarantee period. 

The interest rate can last anywhere from a year to the entire duration of your annuity guarantee. The great thing is that your fixed annuities payments aren’t affected by market volatility – the anxiety-inducing ups and downs.

Thus, you will know exactly what your monthly payments will be, making it easy to plan with an annuity for your retirement.

Just remember that if you die before your guaranteed period, the payments end with your death (the annuitant), meaning your beneficiaries do not get anything. 

Variable Annuities

These are tax-deferred and allow you to invest your money into sub-accounts, kind of like a 401(k). Because the interest rate is variable, the subaccounts can even outpace inflation, which is a bonus.

Of course, this means that variable annuities are subject to market fluctuations, and volatility. 

The Different Types of Annuities Need Not Be Confusing

All in all, you don’t need to start feeling uneasy and confused about the four different types of annuities. A good investment advisor will be able to sit down with you and explain to you exactly which one suits your needs best.

The main idea here is that you don’t want to outlive your retirement income, and every person will have a different annuity that will work best for them.

Enjoyed this article? Don’t forget to check out our other personal finance articles on our website.

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