The goal of annuities is to provide a steady stream of income during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59.5.
There are two basic types of annuities. Fixed and variable annuities.
A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose.
Fixed Indexed Annuity
A fixed indexed annuity also offers a variable rate of return with one major difference. You cannot lose money in a fixed indexed annuity. Performance is based on a specific index and not invested in the market. They pay guaranteed rates of interest, in many cases higher than bank CDs.
Fixed annuities can be deferred or immediate. The deferred variety accumulate regular rates of interest and the immediate kind make fixed payments – determined by your age and size of your annuity – during retirement.
The convenience and predictability of a set payout makes a fixed annuity a popular option for retirees who want a known income stream to supplement their other retirement income.
Fixed Interest or Immediate Annuities
Fixed interest annuities are the simplest form of annuity. They are also called multi-year guaranteed annuities. Although they are not issued by a bank, they work basically the same as CDs. They pay a fixed interest rate for a fixed amount of time. Interest stays in the annuity unless otherwise designated. They also have surrender charges so be sure to leave your money in for the entire term.
Top 10 Reasons to Consider an Annuity*:
- Guaranteed Principal Security
- Not Tied to Stock Market Volatility
- Income May Qualify as Tax Free
- Income is Guaranteed by Insurers
- Hedges Against Potential Inflation
- Could Increase with Market Upturns
- Offers Spousal Continuation Option
- Benefits for Paying for Healthcare
- Better Liquidity than Other Policies
- Low Management Fees (< 1%)