Retirement planning can be stressful, especially if you’re constantly worried about running out of money. A great way to boost your income during retirement is with an annuity.
When do you want to receive payments? What kind of guarantee do you want? Are you willing to take some risk for a higher return? What is the Best Age to Purchase an Annuity? What is the best annuity for retirement?
These questions (and others) must be considered when choosing an annuity that’s right for you. Let’s look at some of the most common annuities.
Fixed rate annuities
A fixed-rate annuity guarantees that you’ll earn a set interest rate on your money. In turn, you’ll receive the same payout each year.
Fixed-rate annuities are risk-free for owners. Unlike similar investment accounts, fixed annuities aren’t tied to the stock market.
There are two subcategories of fixed-rate annuities, including immediate and deferred.
Immediate annuity
An immediate annuity requires you to send a lump sum of money to the insurance company. In turn, the company promises to pay income for the rest of your life, as well as your spouse’s life.
Immediate annuities pay as soon as they’re funded. The risk is that you lose control of the funds and instead shift everything, risk included, to the insurance company.
If you’re worried about outliving your income stream, this type of annuity is worth considering.
Deferred annuity
Deferred annuities are most popular. If retirement is still years away, a deferred annuity is a great option. With this type of annuity, income is deferred and doesn’t start until a future date.
A deferred annuity is preferable if you want to save tax-deferred money. Many people choose a deferred annuity because the return is guaranteed.
Once you start receiving payments, taxes must be paid on any earnings made in the annuity.
Variable annuities
Variable annuities allow you to make a series of payments are a single lump-sum payment. The insurance company agrees to make consistent payments, either immediately or at a set future date.
Variable annuities are best compared to life insurance, mutual funds, and a tax-deferred retirement savings plan wrapped into one. By investing money into a variable annuity, you choose which mutual funds you want to invest in.
Indexed annuities
An indexed annuity also allows for a series of payments or one-lump sum payment. The company credits the return based on changes to a certain stock index, such as the S&P 500.
Indexed annuities allow you to build tax-deferred money. You can withdraw up to 10% each year from the original invested amount without penalty.
For people who have plenty of time before retirement, an indexed annuity is an opportunity for higher gains without high risk.
Final thoughts
Annuities are a great option for retirement planning. Choosing the right type of annuity comes down to risk, fees, liquidity, tax consequences, and your planned retirement date. Shop around for the best annuity provider, and remember that they are not backed by the federal government. You can also check out our highest rated annuity companies.
