- 4-Minute Article
- 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.
- 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, a 2019 study showed that 69% of annuity owners believed their retirement savings and investments wouldn’t run out, even if they were to live until age 90. By comparison, among those who didn’t own an annuity, only 57% had the same confidence.1
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 may 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 solution. This type of annuity is often funded with one lump-sum payment. When you purchase it, you and your 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 guaranteed income in the future, there are five basic types of deferred annuities2 to consider purchasing: deferred income, fixed, fixed index, index-linked, and variable.
Not only can deferred annuities provide you with the benefit of predictable, guaranteed income in the future, some may also offer ways to grow your account value – 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. Like Social Security, 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 index annuity offers opportunities to grow your account value up to a specific rate by tracking the performance of well-known market indices. And your purchase payment is 100% protected against market downturns.4
An index-linked annuity is like a fixed index 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 index annuity, the potential of an index-linked annuity is often higher because it offers a guaranteed return plus a market-based return. The trade-off for higher growth potential is that instead of the 100% downside protection of fixed index annuities, the level of downside protection in index-linked annuities can vary.
A variable annuity provides investment options that have the potential for more growth than fixed index 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 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 flexible features and steady income payments that last the rest of your life, can make annuities a good fit for many investors. Your 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.