Could An Annuity Enhance Your Retirement Planning?

Maura Schauss |

By Maura C. Schauss, CFP®

When it comes to retirement planning, believe us when we say you have a lot of options in front of you. If you’re looking for ways to supplement or diversify your retirement income during the planning stages of your life, it may be time to consider an annuity. Annuities are unique long-term investments that can help mitigate the risk of outliving your retirement income.

There are many different types of annuities to choose from, so how do you decide which one is right for you? We’ve described 4 of the most common types of annuities below to help you understand your options.

Immediate Annuities

An immediate annuity is purchased from an insurance company and starts paying out almost immediately, often within the first month. An individual typically pays a lump sum to an insurance company. The insurance company will then make fixed payments (monthly, quarterly, or annually) for a fixed term or until death, depending on the options and terms you elect.  

An immediate annuity guarantees a certain amount of income each time the annuity pays out. These types of annuities are beneficial for retirees looking to supplement their retirement income with a safer option. But immediate annuities can be risky, because if you pass away earlier than expected, in most cases, the insurance company keeps the remaining balance.

Variable Annuities

A variable annuity, unlike an immediate annuity, pays a fluctuating income that is dependent on the performance of an underlying portfolio of mutual funds. Variable annuities transfer some of the risk to the annuitant (the owner of the annuity), but may pay off if economic markets rise and the investments pay higher returns.

Variable annuities offer the possibility of higher payments than fixed annuities. But this possibility also comes with the risk that the portfolio may fall in value if markets don’t perform well. However, variable annuities offer greater opportunity for tax-deferred growth as well as protection from creditors.

Variable annuities can be a viable long-term investment option for individuals still planning for retirement. But annuities are complex, and understanding the various fees, risks, and calculations formulas for variable annuities is necessary but can be a daunting task.

Fixed Annuities

A fixed annuity is an insurance contract in which the insurer pays a fixed interest rate return on the principal paid by the annuitant. The annuitant can pay a lump sum or make payments over time. When the payout phase is initiated, the insurer will calculate the payments based on factors such as the account balance, the annuitant’s age, and the length of time payments are to continue.

Fixed annuities come with many benefits, including the predictability of investment returns, the opportunity for tax-deferred growth, guaranteed income payments, and owning a relatively safe investment. Fixed annuities may be of interest to pre-retirees as a way to provide additional secure income in the retirement planning phase.

Indexed Annuities

Indexed annuities sit in between variable annuities and fixed annuities. The interest rate return on an indexed annuity is based on the performance of an index fund like the S&P 500, whereas a variable annuity is based on the performance of individually chosen securities by the annuitant.

The benefits of an indexed annuity include the opportunity to earn more when the economy does well, but with some protection against market decline. The returns an annuitant will see are often not the full return of the index performance. Instead, the insurer offers a participation rate, which is a percentage of the potential gain an annuitant could receive from the index performance.

The indexed annuity offers a relatively safer option for investors as opposed to riskier investments in the stock market. An indexed annuity could be a potential option for more risk-averse investors.

Is An Annuity Right For You? 

If you’re thinking about adding an annuity to your retirement planning, it’s always best to consult with a financial advisor who can walk you through the pros and cons of each type of annuity and assist you in how to structure it to fit your needs. Educating yourself and seeking objective advice is the only way to make the best decision for your needs. If you’re ready to talk all things annuity, call our office at 703.584.2700 or click here to schedule time with us

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