Annuities ensure that your retirement funds aren’t a depleting resource. These add financial stability and protection by providing you with a steady income. There are multiple types of annuities, which can be immediate or deferred, and the payment structure can be fixed, variable, or indexed.
What Are Immediate Annuities
When you offer a lump sum in exchange for immediate payments, that’s an immediate annuity. Your expenses can come every month, quarter, year, or twice.
The unique feature is that you can choose how long you want to receive your payments. You can decide to make these payments last for a lifetime or select a term that lasts 10-15 years. It may seem counterintuitive to pick a payout that lasts only 10-15 years, but you receive higher payments this way.
What Are Deferred Annuities
Deferred annuities more closely resemble 401k and Roth IRA retirement plans. When you choose this, you won’t begin receiving payments until you’re 59 ½ years old. Like immediate annuities, you decide how often you want prices to be disbursed to you. These payments will last a lifetime. However, you may also choose to receive your funds as a lump sum instead of a payment schedule.
These annuities have two phases – accumulation and payout.
The accumulation phase is when you contribute to your account, which grows tax-deferred. You can make unlimited contributions during this time. How it unfolds is up to you. If you choose fixed annuities, your payments will be the same each time. If you choose variable or indexed, your account grows by portfolio performance.
The payout phase is when you’ll start receiving payments. These payments are considered taxable income, so you must pay taxes on them. However, you can access your funds before this – but this typically has an additional withdrawal fee that comes with it.
Which Type Should I Choose
This depends on your preferences and where you are in life.
For someone nearing retirement, an immediate annuity may make more sense. By this point, you may not want to go through a period of going without supplemental income when you’re no longer working.
A deferred annuity is the better option if you’re younger. You’ll be able to grow your account more substantially than you could with your savings alone. You also have a tax advantage because you can contribute with pre-tax income. And suppose you choose a variable or indexed deferred annuity. In that case, you’ll be protected from future market inflation so that your dollar will be worth just as much (if not more) as it was when you initially contributed. Combining Annuities with some type of life insurance policy may be a good option as well.