- 4-Minute Article
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- Sep 10, 2020
Now or Later: Choosing an Annuity Based on Your Income Needs
Learn which type of annuity can help you get closer to your financial goals.
Updated: June 10, 2024
- How do annuities work?
- What are the different types of annuities?
- Which annuity may fit best within my time horizon?
As life expectancies continue to increase and people spend more years in retirement, it can be reassuring to have guaranteed income sources in your portfolio that you won’t outlive. In fact, research shows that 78% of annuity owners believe their retirement savings and investments will last the rest of their lives. By comparison, among those who didn’t own an annuity, only 61% had the same confidence.1
Source: How Much Do People Value Annuities and Their Added Features? Center for Retirement Research at Boston College. January 2, 2024.
Talking with your financial professional about the role an annuity can play in your portfolio can help you become more confident about your retirement income sources. To help determine which type of annuity may be right for you, consider whether you need lifetime income now or in the future.
| Annuity type | Initial premium | When you receive payouts | When you might choose it |
|---|---|---|---|
| Immediate | Lump-sum payment | Within the first 12 months; as quickly as in one month | You want to convert investments to guaranteed income and need to begin receiving the income now; you want to take proceeds from the sale of a business to invest in a way that produces income immediately |
| Deferred | Lump-sum payments or installment payments | In the future, at an agreed-upon date | You want to build the value of an annuity over time and don't need to begin receiving income right away; you want to give your annuity the potential to grow with the markets |
If You Want Income Now
If you want to start receiving guaranteed income payments immediately, a single premium immediate annuity may be a good option. This type of annuity is often funded with one lump-sum payment. When you purchase it, you and a financial professional can choose when you want to receive payments: monthly, quarterly, semi-annually, or annually. You can also choose whether you want to receive payments for a set amount of time or for life. These choices will impact the amount of income you will receive.
“A single premium immediate annuity is a very common choice for when people retire and then use a portion of their 401(k) funds to purchase an annuity,” says Mark Haser, CFP®, a financial planner in Massachusetts. “Another common time when people purchase this type of annuity,” he adds, “is when making the transition from work to retirement through the sale of their business because they then have an influx of cash that they need to invest.”
If You Want Income Later
If you anticipate needing income in the future, there are five basic types of deferred annuities2 to consider purchasing: deferred income, fixed, fixed indexed, index-linked, and variable.
Not only can deferred annuities provide you with the benefit of reliable income in the future, some may also offer ways to grow your account value – which is initially the amount used to purchase the annuity – on a tax-deferred basis.3
Though deferred income annuities share similarities to single premium immediate annuities, there are differences. For instance, instead of receiving income payments immediately, you can choose a date in the future to begin receiving payments. Similar to Social Security benefits, with most deferred annuities, the longer you wait to begin receiving income, the higher your payments will be.
A fixed annuity guarantees a fixed interest rate for a specified guarantee period, with no risk of loss due to market downturns or decreases in interest rates.4
A fixed indexed annuity offers opportunities to grow your account value up to a specific rate by tracking the performance of various market indices. Plus, your purchase payment is protected against market downturns.4
An index-linked annuity is like a fixed indexed annuity in that it offers the potential for growth up to a certain percentage or cap rate. Compared to the growth potential of a fixed indexed annuity, the potential of an index-linked annuity is often higher because it offers a market-based return by tracking the performance of a chosen index or indices. The trade-off for higher growth potential is that the level of downside protection in index-linked annuities can vary.5 An index-linked annuity can also feature an income rider that can provide an additional stream of guaranteed lifetime income to help meet the needs of a long retirement.
A variable annuity provides investment options that have the potential for more growth than some fixed indexed or index-linked annuities. This comes, however, with the possibility of additional risk that the investments you choose may lose value over time. Your account value and income payments can vary depending on how those investment options perform.
Customization Is Key
Besides there being a variety of annuity products in the market, many annuities offer customization options to help suit your needs.
For example, adding a death benefit rider for an annuity can help ensure that your loved ones will be financially taken care of should you pass away. This added protection may be available in addition to the standard death benefit that many annuities offer, and its value may be increased through market growth. Death benefits may also allow a spouse, as the beneficiary, to continue funding the account if income payments haven’t started.
A guaranteed lifetime withdrawal benefit is a popular option for deferred annuities that allows you to withdraw funds from your annuity during the accumulation phase before regular income payments begin.
The combination of features and steady income payments that last the rest of your life can make annuities a good fit for many investors. A financial professional can help you take the next steps in understanding what type of annuity may be right for you based on your financial goals.