An annuity is a way to save for retirement and turn your savings into a stream of income. You can purchase an annuity with a lump sum payment or with a series of payments.
An annuity has two phases, the accumulation period and the payout phase. During the accumulation phase, you pay into your annuity and it grows tax deferred. Then, at the end of the annuity’s surrender period, you can withdraw the money without penalty.
Variable Annuity
A variable annuity is a tax-deferred investment product that offers growth potential and lifetime income. It’s typically appropriate for people who can tolerate market volatility and seek a balance between risk and potential reward. It’s also ideal for people who have maxed out their other tax-deferred accounts, like IRAs or 401(k)s. However, these investments are complex and should be evaluated carefully by a financial professional before investing. They often come with a variety of fees, including mortality and expense charges, sales charges, and investment management fees.
Some of these fees can be high, especially in the accumulation phase. For example, the insurance company may add a bonus credit to the contract value based on a percentage (typically between 1% and 5%) of purchase payments. This bonus can offset a portion of the underlying investment fees and other costs.
Some variable annuities offer other benefits, such as death benefits or access to principal protection riders. These features can increase the overall return, but they should be carefully considered before making a decision. In addition, many variable annuities have initial sales loads and other fees, so be sure to ask about them before buying one. In addition, the underlying investments in a variable annuity are subject to market risk and can lose value. Withdrawals from a variable annuity prior to age 59 1/2 may be subject to taxes and a 10% penalty.
Immediate Annuity
An immediate annuity allows you to take a lump sum of money and immediately turn it into income payments. These payments can be distributed on a monthly, quarterly, or annual basis and may last as long as you live. These payments are guaranteed to never decrease, unlike deferred annuities whose payouts fluctuate with the investments they hold.
Immediate annuities are often sold as a way to mitigate longevity risk, but they also provide many other benefits. These include:
Simplicity – You don’t have to manage an immediate annuity, so it’s a great choice for those who don’t want to worry about the underlying investments. It’s also a good option for those who would like to receive a lump sum of money and then have the peace of mind that comes with knowing they will never run out of money in retirement.
Inflation could cause your immediate annuity payments to lose buying power, so you might consider purchasing a rider with your contract that provides an inflation adjustment. These riders are available from some annuities, but they will typically cost you more money at the outset. You can also purchase a period certain rider to ensure that a beneficiary will receive some money from your annuity after you die. This can help ease the financial burden of funeral expenses or leaving an inheritance to your heirs.
Fixed Income Annuity
A fixed income annuity, also known as a guarantee annuity, grows your money based on a rate set at the beginning of your contract. These rates are often similar to certificates of deposit (CDs) and government bond yields. The difference is that with a fixed annuity, you don’t pay taxes on the interest until you start to receive payments. This feature is especially attractive during this low-interest-rate environment.
Another benefit of a fixed-income annuity is that you can withdraw some or all of your funds without penalty. You can also choose to add a rider that provides cost-of-living adjustments (COLAs). This feature allows your payments to increase each year to keep pace with inflation.
You can fund a fixed-income annuity with a lump sum or with a series of premium payments over time. It’s important to understand the fees associated with this type of annuity, as they can vary widely from one insurance company to another.
When you purchase a fixed-income annuity, it’s backed by the financial strength of the issuing insurance company. You can learn about the insurer’s history and financial strength by checking its rating with an objective industry rating agency. The agency will provide you with a letter that gives you a good idea of the insurer’s ability to make future payments as promised in your contract.
Tax-Deferred Annuity
Deferred annuities are tax-deferred investment vehicles that allow clients to build extra savings consistently and automatically. These annuities can be purchased in a lump sum, or through regular payments. They have the added benefit of compounding over time, which can boost your payouts later in life. They work a bit like IRAs and 401(k)s, in that the money invested is not taxed until you take a distribution. However, you may have to pay a penalty if you withdraw your money before age 59 1/2.
There are two phases to a deferred annuity: the accumulation phase and the payout phase. During the accumulation phase, customers put money into their account and earn interest on that money. Then, when they choose to start receiving income, the tax on those returns is based on their normal income tax rate. The payout phase lasts until the owner dies or the spouse, whichever comes first.
A deferred annuity is a great tool for pre-retirees and retirees who want to supplement their other retirement savings. It’s also a good option for those who have trouble saving enough to cover their retirement expenses. However, you should be aware of the fees associated with this type of annuity, which can include commissions, administrative charges and funding fees. Also, be sure to check the annuity company’s financial rating before you make any decisions.