The kinds of annuity
Sorted three ways (when it pays, what it is for, how it invests) the right one becomes obvious.
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An annuity is a powerful tool for a stable retirement, but the varieties and structures are many. Carriers release new products constantly, and each one differs in how interest is credited, what it guarantees, and the rules for using it.
1. By when it starts paying
Annuities divide in two according to when the income begins.
Immediate annuity
You place a lump sum and income starts within a year, sometimes the following month. It suits someone at or already past retirement who needs steady cash flow now.
Deferred annuity
The money grows or sits for a period, and income begins at a chosen date later. It suits someone with time before retirement who wants growth and future income together.
2. By what you want from it
What you most want out of it should decide which product you choose.
Income annuities
The aim is income guaranteed for life. Some designs keep paying the agreed amount even after the underlying account is exhausted.
Accumulation annuities
The aim is growing the money efficiently with tax deferred. The options available depend on your appetite for risk.
Accumulation also includes variable annuities, which carry investment risk. I put protection of principal first, so I focus on products where the deposit is guaranteed.
There are also purpose-built annuities that strengthen the death benefit or add long-term care coverage.
3. By how it invests
How much risk to principal you can accept decides what fits. Broadly: a fixed, guaranteed rate, or a variable one that reaches for more.
Fixed
You carry no investment risk; the carrier credits the rate it agreed. It suits anyone who puts protection of principal first.
MYGA
A fixed rate guaranteed for a set term, commonly three, five or seven years.
FIA
Interest is credited off a market index, and the principal is protected when that index falls.
Annuities
Immediate annuity Place a lump sum and income can begin the following month, then continue for life.
Fixed-rate annuity (MYGA) A guaranteed rate above a bank CD, growing your retirement money without market exposure.
Buying guide Four steps: settle the goal, compare the carriers, read the conditions, then decide.
Index annuity (FIA) Principal protected when the market falls, index-linked interest when it rises.
Guaranteed income for life The payment continues for life even if the account runs dry. A second Social Security, built for you.