Annuities are an investment product that can deliver great value to the beneficiary, both immediately and in the future. An annuity offers guaranteed income for life and sometimes has the added bonus of capital appreciation. They make sense as a portion of an retirement portfolio, as they provide an income supplement that will help you maintain the lifestyle you want while minimizing risks.
Here are the different types of annuities, briefly explained:
Fixed rate annuities
A fixed-rate annuity pays out a guaranteed interest rate that is usually higher than a bank-issued CD. There are no fees associated with fixed-rate annuities and the interest rate you receive is guaranteed to remain the same. You can choose to draw income from the annuity right away or you can defer the accrued interest and allow it to compound on a tax-deferred basis. Fixed-rate annuities are simple, predictable, and a very good way of allocating accumulated funds or dealing with RMD distribution.
Variable rate annuities
With a variable rate annuity, your account is invested according to the agreement you have with your insurance company, usually in a selection of sub accounts that might include mutual funds, stocks or bonds. The ultimate value of your annuity is dictated by the performance of these sub accounts. There is greater risk here, but there is also the potential for significant appreciation over the short-term, giving pre-retirees access to better opportunities for future income. Variable rate annuities generally carry high fees and can vary a great deal in terms of benefits. A rider can be purchased to lock in a set amount of income, which will protect your investment from potentially devastating market fluctuations.
A fixed-indexed annuity gives you the benefit of either a guaranteed annual return, or a return on a specified market index, such as the Dow Jones or the S&P – whichever is greater. This is the primary difference between a fixed annuity and a fixed-indexed annuity. A pre-determined period must pass before the principal is guaranteed. Fees charged against the annuity include expenses and various formulas, spreads, and caps, but even in a down market, you will never be at risk of losing your initial investment. The fees are moderate compared to other types of annuities, and the returns resemble what you might expect from a CD with the added potential for some leverage against inflation when the market is up.
An immediate annuity works in much the same way as a life insurance policy, with a twist: instead of paying your insurer a monthly amount which will then be paid out as a lump sum upon your death, you deposit a lump sum and the insurer pays you income until you die or for a specified period. There is no fee for an immediate annuity although payments are generally much higher because you are paying the principal and the interest.
Deferred annuities postpone payouts until a later date. If you are looking for a way to boost your retirement income and don’t need the income right away, this is a good way to do so. For instance, you might still be willing and able to work right now, but you may not be so in the future. Deferred annuities have moderate fees compared to other types of annuities.
Wondering about what annuity is right for you?
Annuities can help facilitate the retirement lifestyle you have worked so hard for. Since every situation is different, speaking to a financial advisor is always advisable as they are well-qualified to help.