There are a lot of different financial vehicles you can use to save for your retirement, including employer-sponsored retirement plans, traditional investments, life insurance, and more. One popular choice that many people simply don’t understand is annuities.
Annuities are offered by insurance companies. Instead of providing a lump-sum death benefit when you die, as is the case for life insurance policies, annuity contracts can provide a fixed income stream during your retirement years.
Understanding Different Types of Annuities
There are several different types of annuities to choose from:
- Deferred Annuities: You can put money into a deferred annuity at any time, with a lump-sum payment, regular contributions, or a combination of the two. Your money then grows tax-deferred until you reach retirement.
- Immediate Annuities: With an immediate annuity, you deposit a lump sum into the annuity contract. After that, the contract is immediately “annuitized” and you start receiving regular payments from the annuity.
- Equity Indexed Annuities: This type of product earns a fixed guaranteed rate of return but also includes the potential to earn higher interest because the interest rate is tied to a market index.
Why Consider Annuities?
Money you put into an annuity contract earns a guaranteed, fixed minimum interest rate which is often higher (and in some cases quite a bit higher) than the interest rate you could earn on your money in other fixed savings vehicles.) That money also grows on a tax-deferred basis, helping you accumulate more retirement savings until you withdraw the funds.
For many people who choose annuities, the biggest benefit is the fact that they can count on extra money in their bank accounts every month, supplementing what they receive from Social Security and any pension payments. This can relieve stress about how to meet regular monthly expenses during retirement and can provide extra funds so you can make the most of your retirement years.
In fact, depending on what option you choose when you decide to turn your annuity into an income stream, the insurance company that issued the contract may continue making your monthly payments for your entire lifetime – even if that means you end up getting back more money than you put into the annuity in the first place.