It’s never too early to start planning your future, especially when nearing retirement.
One of the most significant decisions you will have to make is what to do with your hard-earned savings, but your money over the years may not be enough to last throughout your retirement. That’s why it’s always an excellent option to continue making money even after you’ve retired from your day job.
When it comes to your retirement, annuities can be a great way to ensure that you have a steady stream of income during your golden years, but with so many different annuities available, it can be challenging to decide which one is right for you.
In this article, we’ll go through the types of annuities and help you decide which one best suits your needs.
A Bit of an Overview About Annuities
An annuity is a financial product that provides regular payments to the annuitant, typically after retirement. The payments are made either for a certain period or for the rest of the annuitant’s life.
The annuitant is the person who purchases the annuity and is usually the one who will receive the payments. In some cases, the costs can be made to a beneficiary, such as a spouse or a child.
While providing protected income, annuities can also offer tax-advantaged options to hold and grow your investments. It can also protect from market volatility.
Since it is a contract between the consumer and the insurance company, an annuity can be custom-made to meet your unique retirement needs and goals with the risks you’re willing to take.
The Different Types of Annuity
Now that we have a brief overview of annuities let’s take a look at the different types of annuities available.
Single Premium Immediate Annuity
With a single premium immediate annuity (SPIA), you make a lump sum payment to the insurance company in exchange for fixed income payments that begin immediately. It is also known as an immediate annuity or income annuity.
The payments can be made for a specific time, such as 10 or 20 years, or a lifetime. SPIA is often used as a hedge against longevity risk, which is the risk of outliving your savings.
SPIAs can be an excellent option for people who want to immediately start receiving income from their annuity and do not want to worry about making additional payments down the road.
Deferred Income Annuity
A deferred income annuity (DIA) is similar to an SPIA, but the income payments are delayed until a future date.
This type of annuity is often used when you want to save money on a tax-deferred basis in the future. You will owe taxes on the annuity payments when you start to receive them.
This type of annuity can be a good option for people who want to defer income payments until later. It can also be used as part of a retirement income plan, which can help ensure that your money lasts throughout retirement.
Fixed Annuity
A fixed annuity is an annuity that provides a guaranteed rate of return on your investment.
This type of annuity offers the least amount of risk. The insurance company assumes all the investment risk and guarantees you will receive the agreed-upon fixed interest rate.
The payments you receive from a fixed annuity are also guaranteed and will not fluctuate with changes in the market. This can provide peace of mind for risk-averse people who do not want their income to be affected by market volatility.
Fixed annuities can be a good option for people who want guaranteed income payments and do not want to worry about the ups and downs of the stock market.
Fixed Indexed Annuity
A fixed indexed annuity (FIA) is an annuity that offers both a guaranteed rate of return and the potential for market-based returns.
With this type of annuity, your interest rate is based on the performance of a designated market index (i.e., S&P 500). It protects you from losing money if the market index declines in value and provides the potential to earn more if it increases in value. If the index goes up, so does your interest rate; if the index goes down, your interest rate will not go down.
This type of annuity provides the potential for higher returns than a fixed annuity but with less risk than investing directly in the stock market.
Fixed indexed annuities can be a good option for people who want the potential to earn more than a fixed rate of return but do not want to risk losing money if the stock market goes down.
Variable Annuity
A variable annuity is an annuity that offers the potential for market-based returns.
With this type of annuity, your interest rate and payments will vary based on the performance of the underlying investment options, which can include stocks, bonds, and mutual funds.
Variable annuities can offer the potential for higher returns than fixed annuities, but they also come with the risk of losing money if the underlying investment options perform poorly. This type of annuity offers a tremendous risk compared to other types.
Variable annuities can be a good option for people who want to participate in the stock market and are willing to take on more risk in exchange for the potential for higher returns.
Long-Term Care Annuity
A long-term care annuity (LTCA) is an annuity that provides income payments to help cover the costs of long-term care. This type of annuity is typically fixed and tax-free.
This type of annuity can be used to help pay for in-home care, assisted living, or nursing home care. The annuitant can also use it to cover other expenses related to long-term care, such as transportation or personal care items.
LTCAs typically have a more extended payout period than other types of annuities and often have higher payouts as well. This type of annuity can be a good option for people looking for financial assistance with long-term care costs.
What Should You Consider When Choosing Annuities?
There are a few things you should consider when choosing an annuity, such as:
The Purpose of Annuity
Annuities can be used for a variety of purposes, such as:
- To supplement retirement income
- To help cover long-term care costs
- To provide financial assistance in the event of a disability
- To create an inheritance for loved ones
Weight of Financial Need
Your need for income will also play a role in determining the best type of annuity for you.
For example, if you are relatively physically fit and are looking for an annuity to supplement your retirement income, you may want to consider a variable annuity. This type of annuity offers the potential for higher returns than a fixed annuity, which can help you boost your retirement income.
On the other hand, if you’re looking for an annuity to help cover long-term care costs, you may want to consider a long-term care annuity. This type of annuity typically has a longer payout period and higher payouts, which can help you cover long-term care costs.
Fees Paid to the Insurance Company
When you purchase an annuity, you will typically have to pay fees to the insurance company. These fees can vary depending on the type of annuity and the insurance company. For example, variable annuities typically have higher fees than fixed annuities. As such, you will want to consider the fees you will be paying when choosing an annuity.
The Minimum Guaranteed Return
The minimum guaranteed return is the interest rate the insurance company guarantees you will earn on your investment.
This rate is typically lower than the rate of return you could earn if you directly invested in the stock market. However, it also means less risk is involved, as you are guaranteed to make at least a certain amount of interest.
The minimum guaranteed return is an important consideration when choosing an annuity as it will determine how much income you can expect to receive from your investment.
Final Thoughts
Annuities can be a good option for people looking for retirement income or wanting to cover long-term care costs. There are various types of annuities, each with its own features and benefits.
When choosing an annuity, you will want to consider the purpose of the annuity, your need for income, the fees you will pay to the insurance company, and the minimum guaranteed return. By considering these factors, you can choose the best type of annuity for your needs.
