Saving for Retirement with Annuities

August 8, 2014

Now, let's discuss another potential retirement option. Annuities are insurance and investment products that help you save, protect what you've saved or produce a steady stream of income.

There are two basic types:

  • Deferred
  • Immediate

Think of the deferred annuity as the "retirement annuity." It offers a good way to boost retirement savings once you've made the maximum allowable contributions to an IRA or a 401(k). There are no taxes until the funds are withdrawn. Deferred annuities can be either fixed or variable.

  • Fixed deferred annuities offer a guaranteed rate of return for a number of years. Because they help protect your assets from market volatility, fixed deferred annuities are often preferred by conservative investors close to retirement age.
  • Variable means the rate is subject to change. Variable deferred annuities allow you to take advantage of potential growth opportunities. This type involves some risk, however, and could even lead to losses if the underlying investment underperforms. The variable-rate annuity is better for those who have time to recoup potential losses before retiring.

Immediate annuities are good for investors at or nearing retirement age because they offer guaranteed income for life or a set period of time. The idea behind an immediate (or "income") annuity is pretty simple: you pay a lump sum of money and the annuity pays you every month for as long as you live. Immediate annuities can be either fixed or variable.

  • A fixed-income annuity offers a guaranteed, fixed payment for life or for a certain period of time. Your guaranteed payment is not affected by market fluctuations, which helps you shield your income from market risks.
  • A variable immediate annuity gives you a guaranteed stream of income for life. However, the amount of the payment is not guaranteed. The amount of each payment will vary based on the performance of the underlying investment.