At their core, annuities are very straightforward. When you buy one, you’re giving up control of some of your retirement savings now in exchange for regular, scheduled payments in retirement that you can live off of for the rest of your life.
And that matters a lot as Americans live longer and longer. In fact, the number of people over 100 in this country increased from about 53,000 in 2010 to over 90,000 as of this year. If this keeps up, we’ll have more than 130,000 centenarians walking around by 2030, according to the U.S. Census Bureau.
But, when you start researching annuities, you quickly notice that you have some decisions to make. Not all annuities are the same just as no two retirements are the same, so it’s important to go into the process eyes open with a full understanding of what’s available to you and what you’re getting.
The 4 Types of Annuities
Let’s start at the top and look at the options and how they differ in funding your retirement. They are immediate fixed, immediate variable, deferred fixed and deferred variable, and the differences tend to focus on when you start receiving payments and how your investment grows over time.
Immediate annuity: Designed specifically to provide an immediate and guaranteed lifetime payout, these types of annuities are generally well known. But in order to get that you have to give up some flexibility with your money. You won’t be able to withdraw a lump sum should you ever need it but you’re covered in terms of income for the rest of your life, and that can go a long way toward peace of mind.
Deferred annuity: If taxes are your focus, a deferred annuity brings the same type of advantages as a traditional IRA. In short, you don’t have to pay tax on your money until you take it out in retirement, when you’ll presumably be at a lower tax bracket.
Fixed annuity: The most straightforward type, fixed annuities are based on a guaranteed fixed interest rate that your insurer assigns when you buy the annuity and determine the length of your guarantee period. This helps isolate your money from market swings and other changes that might come along years in the future.
Variable annuity: And then there is the best of both worlds. A tax-deferred product that can guarantee lifetime income, variable annuities also offer the most potential for investment gains for your money even after it goes into the annuity. It’s all based on market performance, so there is some risk, but these are popular with people who are less than 15 years from retirement because they allow them to continue to build their nest egg without giving up some of the security of an annuity.