What is an annuity?

An annuity is a financial product that provides regular and guaranteed payments to an individual, typically for a period of time after retirement. Annuities are often used as a retirement planning tool, as they can provide a guaranteed stream of income for life. This can be especially helpful for those worried about outliving their savings. 

What are the different types of annuities?

There are four main types of annuities: deferred, immediate, fixed, and variable, but they all work by providing a guaranteed income stream, each with its features and benefits.

Immediate annuity

This is the most basic type of annuity. An immediate annuity begins making periodic payments to the annuitant immediately after the initial investment, typically a lump sum. 

Pro: Provides a guaranteed income stream for life, which can be helpful for retirees who are seeking a reliable source of income.

Con: Once purchased, the annuity cannot be canceled or changed, so it is important to ensure that the payments will meet the individual's needs over the long term.

Deferred annuity

A deferred annuity builds up the annuity's value over time through periodic contributions or a lump sum payment. The annuity payments are then made at a future date that the annuitant chooses.

Pro: Can grow over time, providing the potential for larger payouts later on.

Con: Often come with higher fees than immediate annuities, which can eat into potential earnings.

Fixed annuity

A fixed annuity pays a guaranteed rate of return. This means that you know exactly how much income you will receive each month, making it easier to budget. The payments are guaranteed for the annuity's life, and the annuitant does not have to worry about the interest rate changing over time.

Pro: Offers a guaranteed rate of return, which can provide peace of mind in retirement. Offers tax-deferred growth, which means you won't have to pay taxes on your earnings until you withdraw the money.

Con: Have lower potential growth potential than other types of annuities.

Variable annuity

A variable annuity does not have a guaranteed rate of interest and depends on the performance of the underlying investment. The annuitant bears the risk of the interest rate changing but has the potential to receive larger payments if the interest rate goes up. 

Pro: It may offer higher returns than fixed annuities if the underlying investments perform well.

Con: Comes with more risk than a fixed annuity, as the payout will fluctuate depending on the performance of the underlying investments.

Conclusion

The type of annuity right for you will depend on your circumstances and goals. If you're thinking about using an annuity as part of your retirement planning, talk to a financial advisor to see if it's right for you. At NAIFA, we have a team of professionals to help you plan your retirement. Use our Find an Advisor tool to get started today!