- Written by Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.Read More
- Edited ByMatt Mauney
Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.Read More
- Financially Reviewed ByToby Walters, CFA®
Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.Read More
- Published: May 8, 2020
- Updated: July 6, 2023
- 6 min read time
- This page features 6 Cited Research Articles
What Are the Main Types of Annuities?
The type of annuity you buy determines your future annuity payments.
Fixed and variable refers to the size of payments you receive from the annuity company.
Annuities may also be immediate or deferred. This refers to when the insurer begins paying you money.Similarities of All Annuities
Annuity TypesCan you roll your IRA or 401(K) into an annuity?
- Money in the account grows tax-deferred until you withdraw it.
- The annuity establishes a contract between you and an insurance company.
- Annuities provide periodic payments for a designated time.
- Fixed Annuities
- A minimum rate of interest is guaranteed, and periodic payment amounts do not fluctuate.
- Multi-Year Guaranteed Annuities (MYGA)
- A type of fixed annuity designed to protect your premium and accumulate interest at a guaranteed rate for a specific amount of time, typically a period of three to 10 years.
- Variable Annuities
- Includes a separate account where money is typically invested in mutual funds. Value varies depending on the performance of these underlying investments. Variable annuities carry the greatest risk.
- Indexed Annuities
- Earns interest based on a market index, such as the S&P 500. Greater potential for gains than fixed annuities but with less risk than variable.
- Deferred Annuities
- Annuity payouts are delayed until a future date. This gives money in the account time to grow during a process known as the accumulation phase.
- Immediate Annuities
- Payouts begin shortly after you make a lump-sum payment to the insurance company.
- Individual Retirement Annuities
- An individual retirement annuity provides a guaranteed retirement income and functions similarly to traditional IRAs, but only invests in annuities. These annuities can be either fixed or variable, with varying levels of risk and reward.
- TSP Annuities
- TSP annuities are a retirement income choice for Thrift Savings Plan holders, which is a federal retirement savings plan for eligible government employees. By converting TSP funds into an annuity, individuals can receive guaranteed monthly payments that will continue for their lifetime.
Key Differences in Annuity Types
Exploring key differences side by side is one of the easiest ways to determine the best annuity type for you.Compare Annuity Types
Annuity Type Pros Cons Fees Fixed Simple and straightforward. Based on a fixed rate of return. Lower payouts than other annuity options. None. However, there are usually surrender charges. Variable Potential for greater returns than other options. Carries the most risk. You may lose your principal. Highest. Immediate Payments begin within a year after purchasing it. You can no longer access the principal once payouts begin. None. Deferred You don’t pay taxes during the accumulation phase. Payments are delayed. Some.STEP 1STEP 2STEP 3
How soon are you retiring?STEP 1STEP 2STEP 3
What is your goal for purchasing an annuity?
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How Long Will Payouts Last?
You can customize many aspects of your annuity contract, including how long you want to receive periodic payments.
Annuity payouts can last the rest of your life or only a certain amount of time.
Some annuities also allow you to leave remaining funds to a beneficiary upon your death. Others turn your remaining balance over to the insurance company instead.Annuity Payout Options
Interested in Buying an Annuity?Learn how annuities provide premium protection, guaranteed retirement income and long-term care benefits through our partner Annuity.org.
- Single Life/Life Only
- Payments for life but no survivor benefit.
- Life Annuity with Period Certain
- Guarantees payments for life while also ensuring a beneficiary receives the rest of your annuity payments if you pass away during a certain time.
- Joint and Survivor Annuity
- Payments last the lifetime of you and a survivor — usually a spouse.
Using Annuities for Retirement Income
A growing concern for many older Americans is outliving their savings during retirement. In 2020, the average cost of retirement was $987,000, according to 24/7 Wall Street.
Annuities act as insurance against this risk. They provide a reliable stream of income tailored to meet your needs.
Immediate fixed annuities and variable annuities are two popular options to safeguard retirement income.
Immediate fixed annuities are the most common type of annuity. They share many similarities with pensions.
To purchase one, you pay an insurance company a lump sum of money. In return, the insurer guarantees to pay you a fixed monthly payment.
If there’s still money left in the annuity when you die, it goes back to the insurance company.
Variable annuities allow you to retain control over your principal. However, the size of your regular payout depends on the performance of underlying investments.
To protect against market instability, many insurance companies offer additional riders at an extra cost.
A guaranteed lifetime withdrawal benefit rider, for example, allows you to take money out of a variable annuity at a certain minimum level, regardless of market performance.
Tips for Growing Retirement Income
An annuity can be a smart addition to your retirement plan. These insurance products should not substitute a well-balanced investment portfolio.
Annuities can be complex, and contract details may be difficult to navigate. It’s best to speak with a trusted financial advisor to identify the best retirement income vehicle for you.
It’s also important to consider other investment options that help diversify your portfolio. Maxing out your 401(k) or IRA contributions is a good place to start.
Fixed securities, such as bonds and certificates of deposit, are other popular savings vehicles for retirement. These investments guarantee a fixed rate of return with minimal risk.Last Modified: July 6, 2023
6 Cited Research Articles
- Sauter, M.B. (2020, August 17). Retirement living: Here's what it costs to retire comfortably in every state. Retrieved from https://www.usatoday.com/story/money/2020/08/17/what-it-costs-to-retire-comfortably-in-every-state/42209705/
- Business Wire. (2017, February 15). Merrill Lynch Study Finds New Retirement Realities Usher in Opportunities and Challenges. Retrieved from https://www.businesswire.com/news/home/20170215005147/en/Merrill-Lynch-Study-Finds-New-Retirement-Realities-Usher-in-Opportunities-and-Challenges
- CNN Money. (n.d.). What payout options do I have? Retrieved from https://money.cnn.com/retirement/guide/annuities_basics.moneymag/index8.htm
- U.S. Securities and Exchange Commission. (n.d.). What are annuities? Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/annuities
- U.S. Securities and Exchange Commission. (n.d.). Immediate annuity. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/immediate-annuity
- U.S. Securities and Exchange Commission. (n.d.). What are variable annuities? Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/variable-annuities#What_Is
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