Jason Fitzgerald Korb is a licensed insurance broker offering insurance solutions in the Virginia, Maryland, and Washington, DC area. Here are some answers to an often asked question among his clients.
There are four basic types of annuities to meet your needs: immediate fixed, immediate variable, deferred fixed, and deferred variable annuities. These four types are based on two primary factors: when you want to start receiving payments and how you would like your annuity to be invested.
The drawback is that you're trading liquidity for guaranteed income. You generally won't have access to that full lump sum if you need it for emergencies. However, if securing lifetime income is a major concern, then a lifetime immediate annuity could be the right option for you.
A feature that can make immediate annuities so appealing is that the fees are woven into the payout. This allows you to know exactly how much money you'll receiving in the future, for the rest of your life and your spouse's life based on the amount you originally contributed.
Financial organizations like Thrivent that offer immediate annuities frequently offer additional income payout options, like recurring payments over a fixed term, or until you die. You may also have an optional death benefit which allows you to have payments sent to people and/or causes of your choosing.
2. Deferred annuities: The tax-deferred optionDeferred annuities provide guaranteed income in the form of a lump sum or monthly income payments on a date in the future. You pay either a lump sum or monthly premiums to the insurer, who will then invest these funds in a manner consistent with your contractual agreement. Depending on the investment type you choose, deferred annuities offer potential for the principal to grow before receiving payments.
Deferred annuities are a great option if you want to contribute your retirement income on a tax-deferred basis – meaning you are not taxed on the retirement income until you take money out. Unlike IRAs and 401(k)s, there are no contribution limits for deferred annuities.
3. Fixed annuities: The lower-risk optionFixed annuities are probably the simplest type of annuity to understand. The insurance company pays a guaranteed fixed interest rate on your investment for an agreed upon period of time (the guarantee period). That guaranteed interest rate on your investment could apply to anywhere between a year and the full-length of your guarantee period.
When your contract is over, or at the end of the guarantee period, you may choose to either annuitize your contract, renew your contract, or transfer your invested dollars into another annuity contract or retirement account.
Because fixed annuities offer a guaranteed interest rate, your income is typically not impacted by market volatility so you can anticipate the amount of your monthly payments. Of course, a downside of remaining in a fixed annuity with a guaranteed interest rate would be the inability to benefit from potential upswings in the market. In addition, the guaranteed interest rate may not keep pace with inflation. All in all, a fixed annuity may offer the most benefits during an annuity’s accumulation phase and be less effective during the annuitization phase for generating retirement income.
4. Variable annuities: The potentially highest upside optionA variable annuity is a type of tax-deferred annuity contract that allows you to invest your money into sub-accounts, similar to those in a 401(k). Sub-accounts can help an annuity’s growth keep up with, and sometimes outpace inflation. Annuity contracts with specific riders can offer guaranteed lifetime income.
Like mutual funds, sub-accounts are dependent upon market risk and performance. Variable annuities also offer a death benefit rider or an income rider that provides your beneficiaries a guaranteed income. A guaranteed lifetime withdrawal benefit, or GLWB, is a rider which helps protects against both longevity risk and market risk. This dual protection may be beneficial if you are 15 years or less from retirement.
A variable annuity can be a great addition to your retirement income plan if you've already maxed out your Roth IRA or 401(k) contributions for the year. You may also wish to consider adding guaranteed income riders to your variable annuity. Guaranteed income features may allow you to feel more confident about the future so you can focus on your goals in the present knowing you won't outlive your money.
There are four basic types of annuities to meet your needs: immediate fixed, immediate variable, deferred fixed, and deferred variable annuities. These four types are based on two primary factors: when you want to start receiving payments and how you would like your annuity to be invested.
- When you are planning to begin receiving payments – You can either receive your annuity payments immediately after paying the insurer a lump sum (immediate payments) or you can receive monthly payments in the future (deferred payments).
- How your annuity investment may potentially grow – Contributions to an annuity can grow in a couple of different ways – through interest rates (fixed return) and by investing your contributions in the market (variable return).
The drawback is that you're trading liquidity for guaranteed income. You generally won't have access to that full lump sum if you need it for emergencies. However, if securing lifetime income is a major concern, then a lifetime immediate annuity could be the right option for you.
A feature that can make immediate annuities so appealing is that the fees are woven into the payout. This allows you to know exactly how much money you'll receiving in the future, for the rest of your life and your spouse's life based on the amount you originally contributed.
Financial organizations like Thrivent that offer immediate annuities frequently offer additional income payout options, like recurring payments over a fixed term, or until you die. You may also have an optional death benefit which allows you to have payments sent to people and/or causes of your choosing.
2. Deferred annuities: The tax-deferred optionDeferred annuities provide guaranteed income in the form of a lump sum or monthly income payments on a date in the future. You pay either a lump sum or monthly premiums to the insurer, who will then invest these funds in a manner consistent with your contractual agreement. Depending on the investment type you choose, deferred annuities offer potential for the principal to grow before receiving payments.
Deferred annuities are a great option if you want to contribute your retirement income on a tax-deferred basis – meaning you are not taxed on the retirement income until you take money out. Unlike IRAs and 401(k)s, there are no contribution limits for deferred annuities.
3. Fixed annuities: The lower-risk optionFixed annuities are probably the simplest type of annuity to understand. The insurance company pays a guaranteed fixed interest rate on your investment for an agreed upon period of time (the guarantee period). That guaranteed interest rate on your investment could apply to anywhere between a year and the full-length of your guarantee period.
When your contract is over, or at the end of the guarantee period, you may choose to either annuitize your contract, renew your contract, or transfer your invested dollars into another annuity contract or retirement account.
Because fixed annuities offer a guaranteed interest rate, your income is typically not impacted by market volatility so you can anticipate the amount of your monthly payments. Of course, a downside of remaining in a fixed annuity with a guaranteed interest rate would be the inability to benefit from potential upswings in the market. In addition, the guaranteed interest rate may not keep pace with inflation. All in all, a fixed annuity may offer the most benefits during an annuity’s accumulation phase and be less effective during the annuitization phase for generating retirement income.
4. Variable annuities: The potentially highest upside optionA variable annuity is a type of tax-deferred annuity contract that allows you to invest your money into sub-accounts, similar to those in a 401(k). Sub-accounts can help an annuity’s growth keep up with, and sometimes outpace inflation. Annuity contracts with specific riders can offer guaranteed lifetime income.
Like mutual funds, sub-accounts are dependent upon market risk and performance. Variable annuities also offer a death benefit rider or an income rider that provides your beneficiaries a guaranteed income. A guaranteed lifetime withdrawal benefit, or GLWB, is a rider which helps protects against both longevity risk and market risk. This dual protection may be beneficial if you are 15 years or less from retirement.
A variable annuity can be a great addition to your retirement income plan if you've already maxed out your Roth IRA or 401(k) contributions for the year. You may also wish to consider adding guaranteed income riders to your variable annuity. Guaranteed income features may allow you to feel more confident about the future so you can focus on your goals in the present knowing you won't outlive your money.