As you approach your retirement, you may be wondering how to grow your retirement savings to provide financial stability for years to come. One worthwhile option is annuities. But, with many types of annuities out there, it’s important to know the difference. Here’s a breakdown of the different annuity types and tips to help you discover which one is best for you.
What Are Annuities and How Do They Work?
Annuities are an investment option with insurance companies that provide stable income throughout an individual’s retirement. While there are several types of annuities to choose from, they work similarly. What this means is that they all rely on an initial annuity investment from you that’s paid to the insurance company you want to purchase your annuity from. From there, the insurance company invests that payment so the account earns interest on top of the original investment.
This payment then continues to accumulate interest for the duration of the annuity contract. After the investment period, which can range from one to 10 years, you’re ready to receive payments from the annuity account.
Immediate annuities allow you to start receiving payouts soon after making a single premium payment. Also known as a single premium immediate annuity, this type of annuity helps to provide immediate income for the rest of your life in your retirement.
You can purchase this type of annuity with pre-tax 401(k), Traditional IRA, or other retirement plan funds, or you can opt for a non-qualified immediate annuity where you make contributions from post-tax savings. This type of annuity is ideal for individuals who have Social Security or other benefits that won’t cover their regular expenses, are about to retire or are in retirement already, have $250,000 or more in retirement savings, and want greater financial security in their retirement.
Also known as a longevity annuity, this type of annuity involves purchasing the annuity and then deferring payments until a set date. During this deferred payment period, the insurance company invests your premium, which can increase your eventual payments. Payments often begin two to 40 years after premium payment, and the longer you wait, the higher your payments may be. Similar to immediate annuities, this type of annuity is ideal for individuals who want more financial certainty in retirement and don’t need to access the funds immediately.
Fixed annuities are also known as multi-year guaranteed annuities (MYGAs) and let pre-retirees and retirees grow their money over a period of time to earn a fixed return. This enables individuals to generate low-risk accumulation that’s also tax-deferred until they’re ready to withdraw the funds. MYGAs are ideal for those who have money to invest for at least three years, the funds are intended for your retirement or heirs, you’ve already maxed out your other contributions, you have retirement assets in other accounts that can generate higher returns, or you want to preserve some financial liquidity.
This type of annuity is a tax-deferred annuity contract that involves investing your funds into sub-accounts, similar in nature to a 401(k) retirement plan. Investing in this type of annuity can help your funds match the rate of inflation and can actually help you outpace inflation rates. Variable annuities are ideal for those who’ve already maxed out their other contributions from the year and can provide a certain amount of guaranteed income to help offset living expenses.
Tips for Choosing an Annuity
There are many things to reflect on when choosing your annuity. Here are some tips to help you narrow down which annuity might be best for you:
- Payout timeframe: If you need funds shortly after purchasing your annuity, opting for an immediate annuity can be the right choice. However, if you can wait, choosing a deferred annuity can result in larger payments.
- Rate of return: Reflecting on the risk you’re willing to take in relation to your retirement funds can help you choose between a fixed, variable, or indexed annuity.
- Payout term: Annuities have different payout terms ranging from certain periods like five, 10, and 20 years to your lifetime and beyond.
- Payout type: There are two main payout options, a lump sum or monthly payment, that can provide you with a large sum to reinvest in other options or allow you to receive stable income for your lifetime.
There are many options out there for those wanting to grow their retirement funds and enhance their financial security during retirement years. Annuities are a great option for those wanting financial growth that’s less at the mercy of market volatility. With flexibility in annuity types that can provide immediate payouts or payments after set periods, there is an annuity out there to meet everyone’s needs.
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