4 ways to use annuities at any stage in life

Key Points

  • Annuities can help you grow your money with protection and share your wealth
  • Annuities can provide you with a guaranteed income for life
  • You don't have to pay taxes on earnings in annuities until you begin making withdrawals

Whether you're still saving for retirement, or are already retired, an annuity is a solution you might want to consider to help you build wealth and create a dependable income for yourself.

What are annuities?

Annuities are long-term insurance products that can help you grow your money with protection, create income to help you live confidently in retirement and share your wealth with the loved ones and organizations you’ll leave behind.

Different types of annuities

Most annuities fall into one of two basic categories — immediate or deferred. With an immediate annuity, you begin to receive income payments soon after you make your initial payment. A deferred annuity is intended to help you grow your money over time until you are ready to take income. Deferred annuities can be either variable or fixed.

What are variable annuities?

Variable annuities offer the opportunity to invest in the market through underlying funds that are generally a mix of stocks and bonds and sometimes alternative investments. So the value of a variable annuity changes from day to day with the performance of the funds in which it is invested.

What are fixed annuities?

Fixed annuities, on the other hand, pay a guaranteed rate of interest.  Those interested in purchasing fixed annuities forego the potential of market returns in exchange for the security of knowing their initial payment is protected from market losses.

Annuities and retirement

Annuity guarantees are based on the continued strength, soundness and are subject to the claims-paying ability of the issuing company. The guarantees do not apply to the performance of a variable annuity’s underlying investments, which will vary with market conditions. That means it is a good idea to consider the long-term stability of the company that issues the annuity.

Annuities can be a good choice for retirees who want to make their retirement income last. They also can be helpful for younger investors. Here are some reasons to consider an annuity, whether you're already retired, near retirement or have more time to prepare.

Before you retire

While you're planning for retirement, your goal is to grow your money as much as possible. But an unpredictable market can create challenges along the way. Annuities offer some ways for you to address these challenges:

  • Tax advantages: One of the key benefits of annuities is their tax treatment. Generally, earnings in an annuity compound without being taxed, so you will not pay taxes until you actually begin making withdrawals.
  • Protection features: Many variable annuities offer optional benefits for an additional fee that can protect your investment from market downturns. At the end of a waiting period, if you experience any losses in your investment, the insurance company will give you back your initial payment, minus any withdrawals and fees.

Keep in mind there are varying fees associated with annuities. Based on your financial goals, your financial advisor will be able to help you determine if the benefits outweigh the fees.

In retirement

When you have reached retirement and you’re no longer getting a paycheck from your employer, you'll need to create your own dependable stream of income. An annuity can help you do just that by providing you with flexible income options.

  • With an immediate annuity, you can take a lump-sum payout from your 401(k) or other account and turn it into a stream of steady payments guaranteed to last for life or, if you prefer, for a specific number of years. This can provide a reliable source of retirement income.
  • With a deferred annuity, you have several income options. You can choose to annuitize your contract, which converts your annuity's value to a stream of guaranteed income payments. Or, you can choose an optional benefit for an additional fee that provides income guaranteed to last as long as you live, regardless of how your investments perform.

Annuities are complex, and their fees, interest rates and optional benefits can vary widely. It's important to understand both the benefits and limitations to ensure you are getting the most out of your annuity. And with variable annuities - like any investment - there is the potential of losing money. Talk to your advisor about your options and how an annuity may fit into your retirement portfolio.