What Are the Different Types of Annuities?
Fixed annuities pay a guaranteed interest rate and fixed income. Variable annuities tie returns to underlying investment subaccounts, offering growth potential but with market risk. Indexed annuities link returns to a market index with downside protection. Immediate annuities start payments right away; deferred annuities accumulate value first. Each type has distinct risk, return, and fee characteristics.
What Are the Benefits and Drawbacks of Annuities?
The primary benefit of annuities is guaranteed lifetime income, eliminating longevity risk. They also provide tax-deferred growth for non-qualified annuities. The drawbacks include high fees (especially for variable annuities with riders), surrender charges for early withdrawal, complexity, and reduced liquidity. Annuities work best for people who need guaranteed income beyond Social Security and pension payments.
When Does an Annuity Make Sense for Retirement?
An annuity may make sense if you have no pension, worry about outliving your savings, or want to ensure essential expenses are covered regardless of market performance. Financial planners often suggest annuitizing only enough to cover basic living expenses. Avoid annuities if you need liquidity, have a shorter life expectancy, or haven't maximized tax-advantaged accounts first.
Frequently asked questions
Are annuities a good investment for retirement?
Annuities are insurance products, not traditional investments. They can be a good tool for guaranteed income but are often not suitable as primary investments due to high fees and complexity. Many people find it helpful to compare total costs and benefits carefully, and to consult with a fee-only fiduciary advisor before purchasing.
What happens to my annuity when I die?
It depends on the annuity type and options you selected. A life-only annuity stops payments at death with no residual value. Joint-and-survivor annuities continue to a spouse. Death benefit riders or period-certain options can ensure beneficiaries receive remaining value.