If you are thinking about adding an annuity to your retirement investment portfolio, there are a number of types of annuities that you can buy. Which one is right for you completely depends on what type of investor you are, how much you have to invest, when you are looking to begin receiving the annuity payments, and what type of return you are looking for, amongst other criteria. There are a lot of pros and cons of annuities for all of them and the good news is that the options are virtually endless, so Annuities Explained is here to help you find something that fits your needs. Let’s take a look at a few types of annuities.
Deferred annuities are the most common types of annuities, with investors making regular payments in to the annuity until it matures, then receiving payments at a guaranteed rate of return for a specified amount of time. Typically these annuities mature around the time that the investor retires and the payments last until they die, or their spouse dies, according to the terms of the annuity. These annuities offer a rate of return specified in the contract terms and can be fixed or variable (more on these fixed and variable annuities later).
If you have a large amount of money that you would like invested and spread out over time (perhaps you won a lottery or had a large inheritance) then an immediate annuity might be an appropriate investment option for you. Unlike a deferred annuity, immediate annuities are paid in completely up front and payments start immediately (hence the name). Immediate annuities are a good option for investors who are either already retired or are very close to retirement (within a couple of years). Immediate annuities are attractive for investors close to retirement because they provide a guaranteed rate of return rather than risking their nest egg on the open market.
Fixed annuities provide a guaranteed rate of return for an investor over the length of the annuity. Since the rate is guaranteed it typically won’t be as high as it would otherwise be if you were to invest your money in the stock market or mutual funds. The advantage to having a fixed annuity is that the return is guaranteed, and therefore relatively risk free, so most investors who choose this option aren’t looking to strike it rich. Since annuity fees can be high this can eat away at some of the rate of return so be sure to consider all fees when locking in an annuity contract.
Unlike fixed annuities, variable annuities offer the investors an option to invest in a specified type of investment that allows the investor the benefit of a strong stock market. The investment options allowed for your variable annuity will vary by issuer, but typically include mutual funds or stocks. Variable annuities are attractive especially if the market is doing well because locking in to a fixed rate of return is foolish because your money could be earning you more elsewhere.
Equity Indexed Annuities
Equity-Indexed annuities operate as a combination of fixed and variable annuities with a guaranteed rate of return, but also adds in a variable element to allow the investor to take advantage of a strong investment market. Typically the guaranteed rate of return on variable annuities is much lower than their fixed annuity counterparts, but the additional possibility to add some variable income is attractive especially in times of a strong economy. Typically these types of investments are tied to the major stock market indexes such as the S&P 500 or Russell 2000. Equity index annuities are a nice option for the typical investor who isn’t sold on locking in exclusively to a fixed rate of return.