An annuity is a financial instrument that can provide a steady income stream during retirement. Investing in these policies is a fantastic way to secure one’s financial future for years to come. Each annuity has its own unique benefits and risks to consider. Let’s review three general types of annuities and how they work for retirees and their loved ones.
What Is an Annuity?
An annuity is a retirement savings account funded through installments or lump-sum deposits. These investments come in various forms to meet diverse needs and objectives.
Annuities may be great choices if you’re looking to mitigate long-term risk, leave a legacy for loved ones, or guarantee retirement income. Their interest rates and relative security can make them worry-free investments later in life.
The downside of annuities is that policyholders, commonly called annuitants, can’t withdraw their deposits without incurring penalties. A good rule of thumb is to not invest more money than needed for unplanned expenses. Given their limited flexibility, it’s essential to weigh the costs and benefits of distinct types of annuities.
1. Fixed Annuities
Fixed annuities guarantee steady income disbursements over their terms. They’re purchased for immediate or deferred use and can promptly start residual payments for a set time. Due to these consistent payments, fixed annuities are great options for anyone looking to divest from risky investments. Residual payments are based on an annuitant’s age, deposit size, and interest rates.
These investments pay higher amounts to older policyholders, so many retirees use them to supplement existing retirement income. A good usage of a fixed annuity is for a retiree who doesn’t receive recurring payments from Social Security or a pension plan. A downside of fixed annuities is that the conservative interest rates may not keep pace with inflation.
2. Variable Annuities
Variable annuities allow one to allocate their deposit to investments like stocks, bonds, mutual funds, and money markets. Because of these investments, variable annuities offer the potential for higher returns but carry the risk of losing value over time.
These annuities are ideal for individuals who want to invest their savings, delay tax payments, and pursue higher returns. Deferred annuities are often purchased during an annuitant’s career to provide a stable income stream during retirement.
This type of annuity also offers tax-deferred growth potential and higher return rates than other investments due to compound interest. The main downside of variable annuities is that payments start around ten years after the policy’s creation. Due to the deferrals, a retiree needing immediate income would benefit from a fixed or indexed annuity instead.
3. Indexed Annuities
These annuities allow investors to capitalize on the returns of a stock market index like the S&P 500 or Dow Jones without incurring losses when the markets decline. The earnings come from index funds linked to an assortment of stocks. This diversified approach to index funds not only curbs the risk from variable annuities but also provides moderate returns.
Indexed annuities are also perfect for risk-averse investors who want steady, high returns. However, those more comfortable with risks should also consider variable annuities if they’re seeking high returns on their deposits.
Let’s Discuss Types of Annuities
Investing in annuities requires an understanding of your needs, goals, risk tolerance, and investment horizon. It’s crucial to meet with an insurance agent and discuss your financial goals and the types of annuities before considering this investment. Reach out to an agent today to learn more about our annuities, insurance policies, and other forms of income protection. Whether you’re looking for reliable income today or want to invest in your future, we certainly have a policy for your needs.