The desire for a steady income stream in retirement and the fear of outliving or depleting hard-earned savings have made annuities a very popular investment tool. If you are seeking a reliable and secure income in your later years, annuities can be a beneficial addition to your financial plan.

What is an annuity, and how does it work?

A annuity is a contract between you and an insurance company. In exchange for a lump sum payment or monthly premiums, the insurance company agrees to issue guaranteed income payouts at regular intervals after you retire.1

The money you deposit into a guaranteed income annuity grows on a tax-deferred basis, which means you don’t pay taxes on the money until you withdraw the funds

There are two types of annuities: immediate and deferred. An immediate annuity pays shortly after you purchase the contract, whereas a deferred annuity pays after a future date.

The payment schedule for annuities depends on the type of annuity you choose. Income payouts can be issued over a fixed period or until you pass away. You can also pick the interval for payment (monthly, quarterly, semi-annually, or annually).

How Annuities Can Help You Build Guaranteed Income for Life

Types of annuities

Three main types of annuities can provide guaranteed income: fixed, indexed, and variable.

Fixed annuity

A fixed annuity is a type of insurance contract where the money you deposit into an annuity grows at a fixed interest rate, with a guaranteed minimum rate of return.2 The annuity payments you receive will be the same amount each month. Fixed annuities are considered less risky than variable annuities, but there’s less growth potential.

Indexed annuity

An indexed annuity combines features of fixed annuities and variable annuities. Your monetary contributions grow at an interest rate that’s tied to the performance of a stock market index, like the S&P 500. Because the money isn’t invested, indexed annuities have less risk than variable annuities, but more growth potential than fixed annuities. There’s typically a maximum amount of interest you can earn.

Variable annuity

With a variable annuity, the money you put in gets invested into sub-accounts of your choosing. Variable annuities have greater growth potential than fixed annuities, but there’s no guaranteed minimum rate of return. The monthly payouts from a variable annuity can fluctuate based on your investment’s performance, so retirement income is less predictable.

Who should consider an annuity for guaranteed income

Guaranteed income annuities can be a great option for some people during retirement. It provides a consistent stream of income that can be used for any purpose. Annuities can allow you to continue living your current lifestyle in the absence of a traditional income.

Best of all, you don’t have to worry about outliving your savings. Unlike a 401(k) or your bank accounts, a guaranteed income annuity can never run out of money.*

*Guarantees are subject to the claims-paying ability of the issuing insurance company.

However, annuities aren’t the best option for everyone. Annuities may have higher fees and less earning potential than other financial products, like money market accounts and dividend-paying stocks.

Liquidity can also be a concern. Like most financial planning solutions, withdrawing money from an annuity early may cause a penalty fee. It's important to understand the rules and limitations of withdrawing money from the annuity outside of the scheduled payments so that it matches your future needs.

How to add an annuity to your retirement plan

Creating a financial plan before retirement is essential, and an annuity can be a great addition to your retirement portfolio. Purchasing an annuity is relatively simple, but before you do that, there are a few things you should consider.

First, think about your income needs and desired payout structure. Decide whether you want your payments to start immediately or after a certain date. You’ll also need to choose the type of annuity that’s best for your financial goals and risk tolerance.

A fixed annuity is typically the safest option. An indexed annuity has more growth potential, but there's some risk involved. A variable annuity is the riskiest option, but it has the highest growth potential of all three types.

If you’re interested in getting a guaranteed income annuity for retirement, a Mutual of Omaha financial representative can help. Submit this form with your information, and a financial representative will reach out to discuss your options

Frequently Asked Questions

Does an annuity have a death benefit?
Many annuity contracts include a death benefit, which gets paid to a beneficiary after the annuitant passes away. The death benefit can be either a predetermined amount of money or the remaining value of the annuity.
Does an annuity count as income?
Whether an annuity counts as income depends on the tax qualification of the money that was used to purchase the contract. If you're not sure if your annuity payments are taxable income, you should talk to a financial representative.
Is an annuity the same as a pension?
Annuities and pensions can both provide guaranteed income for life, but they're different things. Pensions are typically funded by an employer, with supplemental contributions from an employee. An annuity is purchased and funded by an individual.
Sources
  1. https://www.ncoa.org/article/what-is-an-annuity-and-how-does-it-work
  2. https://www.iii.org/article/what-difference-between-fixed-and-variable-annuity
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