If you’ve looked into annuities, you might have mixed feelings about them. There is no shortage of strong opinions about whether annuities are appropriate in retirement. The truth is that there is no one answer and the answers could mean something different for each person.
What is an annuity, exactly? There are two main ways types of annuities: fixed and variable. And there are two ways annuities can function in terms of paying an income: immediate and deferred.
Fixed and Variable Annuities
The type of annuity—fixed or variable—is based on how the interest is credited:
- Fixed annuities guarantee your money will earn at least a minimum interest rate. Fixed annuities may earn interest at a rate higher than the minimum but only the minimum rate is guaranteed. The insurance company sets the rates. Fixed annuities can provide a steady stream of income that is guaranteed for the timeframe you choose.
- Variable annuities earn investment returns based on the performance of the investment portfolios, known as subaccounts, where you choose to put your money. The interest in a variable annuity isn’t guaranteed.
A special kind of fixed annuity is called a fixed indexed annuity. Fixed indexed annuities earn interest based on changes in a market index, which measures how the market or part of the market performs. The interest rate is guaranteed to never be less than zero, even if the market goes down.
Your Retirement Reality Tip
Fixed indexed annuities allow you to receive a guaranteed minimum interest on your premium and provide you the opportunity for interest credits based on the performance of an external index.
Immediate & Deferred Annuities
As you might guess, immediate annuities begin paying income right away, while deferred annuities start paying after an accumulation period, usually a set number of years until income begins.
Immediate annuities can be used for a variety purposes; simply stated, they can be used to provide the consistent stream of income to pay for any obligation or need. In retirement, they’re generally for people who are already retired and need their annuity to pay benefits right away.
Deferred annuities can be a viable retirement income tool for people looking for potential growth followed by an income at some time in the future.
If you’d like to talk with a professional about your plans and preferences for retirement income, contact us to set up a retirement income review.