Choosing the Best Annuity Plan for You
There are many different types of annuities, each designed to cater to particular needs and situations. Annuities also offer unique benefits with varying levels of risk and reward — all to ensure that you will have money available in retirement.
Who Should Buy an Annuity?
If you are looking for a guaranteed source of income in retirement, then an annuity could be an option for you. Annuities can keep you from outliving your money by ensuring that you will always have a steady income stream.
Depending on your financial situation, you might want to consider an annuity if you are at or near retirement age.
Many retirees rely on Social Security, pensions, or savings to get through retirement — creating the potential for income gaps.
For example, your Social Security payments may not go as far as you expect, especially if you plan to start taking it early.
Annuities can help you have a higher standard of living in retirement without the fear of running out of money in the process.
You may also want to compare the benefits of life insurance versus an annuity as you work on your retirement planning.
Comparing Annuity Plans
|Type||How/When You Are Paid||Risk Level|
|Immediate||Immediately after you invest||Depends|
|Deferred||Years after you build up investment||Depends|
|Fixed||Payments based on fixed rate||Low|
|Fixed Indexed||Payments tied to an index||Moderate|
|Variable||Payments tied to investments||High|
Which Type of Annuity Is Right for You?
There are many different types of annuities. Some require you to already have significant savings on hand, while others let you build up money over time. Others carry a high level of risk and reward or can be steadier and more straightforward.
Your financial situation and retirement plan will impact which type is best suited for your needs.
If you are nearing retirement and are looking to supplement the money you’ll be receiving from Social Security, an immediate annuity could be valuable.
If you buy an immediate annuity, then you will put in a substantial chunk of money, like some savings that you have, right away. You will then receive payments from that lump sum over a set period of time.
This period could be the rest of your life if you wanted it to be, setting up a guaranteed stream of income in retirement.
Your payments are calculated based on the annuitant and whether you want them to last several years or a lifetime.
According to Forbes, you should begin receiving payments very quickly after your investment.
It’s important to remember that immediate annuities are not very liquid: You may face penalties if you attempt to withdraw any of the initial money you put in — so consider this as a permanent investment.
If you are still years away from retirement and don’t already have a significant amount of savings, a deferred annuity could be a good option for you to build up your retirement income over time.
You will not begin receiving payments right away in a deferred annuity as you would in an immediate type. Instead of handing over a lump sum of cash or savings, you can steadily build up the value of your annuity over time – even years – by putting money away in small amounts.
The value of your annuity will increase over time as the insurance company grows your investment and you continue to put more money into it.
You don’t have to pay income tax on your money until you start withdrawing it, and there are no limits on your contributions like there would be with a 401(k).
There is also typically a death benefit, so your family will still receive the money you’ve saved even if you die before it is annuitized.
After the value of the annuity has grown for a certain amount of time, it can then be annuitized and you can start receiving payments.
If you are nearing retirement or already retired and want a guaranteed rate of interest with not much risk or reward involved, consider a fixed annuity.
Fixed annuities carry the lowest risk because your payments are set and you know what you will receive. You can save tax-deferred money and increase your savings over a period that typically lasts up to a decade.
You also don’t have to worry about how changes in the market or your investment impact your payments.
The vast majority of the risk of a fixed annuity falls on the insurance company that you use. Whether your annuity was deferred or immediate, you’ll receive monthly payments similar to a pension once it is annuitized.
Fixed Indexed Annuities
Fixed indexed annuities are an option if you want to build up money and are okay with risk yet still want some form of a safety net.
Your payout is tied to an index in this type of annuity, like the DOW or S&P 500. When the index your annuity is tied to performs well, then your payments will be larger. If the index is down, then so are your payments.
Fixed indexed annuities may not be as overly risky as you might think, though. Your potential payment typically has a cap in both directions, which means that you can only ever earn so much regardless of how well the index does.
Additionally, your payment can only fall so low even if something catastrophic happens in the market.
A variable annuity is very straightforward and works like many other typical investments: You put in an amount of money that is then invested, and your annuity rate is based off of how well your investment is performing.
The better your investment does, the more money you will receive in your payments.
This type of annuity probably carries the most risk and is subject to a lot of volatility since the payments you’ll receive are essentially at the mercy of the market.
If you are comfortable with balancing high risk with a potentially very high reward, then this could be an effective annuity option for you.
Making a Decision
There are many factors to consider when determining what annuity plan is best for you and if you should buy an annuity. Whether you have a lump sum you want to invest now or small payments you hope to make over time and how much risk you are comfortable with all play a significant role in the plan that is best for you.
Annuities can play a significant role in your standard of living in retirement and ensuring that you never have to worry about no longer receiving some form of income.
It’s highly advised that you speak with a financial advisor to go over your specific situation and the options that fit your needs.
5 Cited Research Articles
- Rodeck, D. (2021, January 6). What Is An Immediate Annuity? Retrieved from https://www.forbes.com/advisor/retirement/immediate-annuity/
- Financial Industry Regulatory Authority. (n.d.). Fixed Annuities. Retrieved from https://www.finra.org/investors/learn-to-invest/types-investments/annuities/fixed-annuities
- Insurance Information Institute. (n.d.). What Are Deferred and Immediate Annuities. Retrieved from https://www.iii.org/article/what-are-deferred-and-immediate-annuities
- Insurance Information Institute. (n.d.). What Are the Different Types of Annuities. Retrieved from https://www.iii.org/article/what-are-different-types-annuities
- U.S. Securities and Exchange Commission. (n.d.). Variable Annuities. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/variable-annuities