Best Types of Annuities for Retirement

Jenny Handwerk |

Best Types of Annuities for Retirement

An annuity is a long-term investment agreement between you and an annuity provider that guarantees a consistent income stream in retirement.

Insurance companies often purchase annuities, while banks, brokerage firms, and other financial services companies sell them. You can make a single or a series of payments to buy an annuity. An annuity payout might be a single lump sum or monthly, quarterly, or yearly installments over time.

Annuities can offer retirees a steady income source, but selecting the correct type is critical to getting the most out of these products. To make an informed decision, you must first understand the essential characteristics of the most common annuities for retirement planning. 

It's also critical to recognize your financial support requirements in retirement. Finally, consider fees, liquidity requirements, and the annuity company's financial health. Collaborate with a chief financial officer to compare annuity options.

The Most Popular Types of Annuities

The sorts of annuities listed below are general types, and they can be customized with various "riders" that provide additional features or benefits based on customer needs.

Finding the correct annuity is a procedure that should be taken seriously; you should thoroughly investigate the insurance company's financials, going beyond the information provided by rating agencies. Once you've identified the finest approach for you, select the insurance company with the best financials that offer it.

Fixed Annuity

A fixed annuity guarantees a minimum return of 3% on your contributions. Depending on the performance of their investments, the annuity business may pay a rate higher than the minimum.

The accumulation phase is when you contribute to a fixed annuity, either in one lump payment or over time. The distribution phase is when you withdraw money in one big sum or over time.

If you choose a series of payments, you can get them over a specific number of years or for the rest of your life.

Immediate annuities

Immediate annuities are meant to provide an immediate, guaranteed lifelong payout. The disadvantage is that you are exchanging liquidity for a guaranteed income. If you need the entire lump sum for an emergency, you will most likely not be able to obtain it. However, if guaranteeing lifetime income is a top priority, a lifetime instant annuity may be your best alternative.

One characteristic that can entice immediate annuities is that the expenses are incorporated into the payout. This allows you to know exactly how much money you will receive in the future, throughout the remainder of your and your spouse's lives, based on the amount you initially contributed.

Variable Annuities

With a variable annuity, the insurer invests in a mutual fund portfolio the customer selects. The performance of those funds will influence how the account grows and how much the buyer will eventually get. Variable annuity payouts might be fixed or changed by the account's performance.

People who pick variable annuities are willing to take on some risk to make more money. Variable annuities are more suggested  for experienced investors who understand the many types of mutual funds and the risks they entail. 

Deferred Annuity

A deferred annuity allows you to begin receiving benefits at a later date. So, a deferred annuity is not a distinct type of annuity but rather a property of annuities in general. That means you may have a deferred fixed annuity, for example, which begins fixed payments later rather than immediately.   A deferred annuity allows you to establish an income stream when needed, usually in retirement.

Protecting your retirement

When assessing whether an annuity is good for you, evaluate your worries and the risks you'd like an annuity to assist in managing:

Does market volatility keep you awake at night?
Are you concerned about outliving your savings?

Unlike a portfolio of stocks and bonds subject to market fluctuations, annuities combine traditional investment qualities with insurance features. Annuities can provide a consistent source of income that you cannot outlive, and some can assist you in lessening the risk of investing in the market.

Annuities are also a way to systematically convert investments into predictable and guaranteed income, one of the most important factors to consider while managing your retirement portfolio. How exactly will you generate your retirement income? Annuities can help.

Consider taking your time when shopping for an annuity. Please consult a financial expert in your best interests, as we are here at Handwerk Consulting. If you'd like to have our assistance, feel free to schedule a call.