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Different types of annuities and examples
An annuity is an insurance product that helps provide income, often guaranteed, in retirement. Since different types of annuities meet different needs, understanding the available options and the circumstances where each is most beneficial can help you prepare for the years ahead. Please note that the guarantees associated with annuities are based on the claims-paying ability of the issuing company.
How many different types of annuities are there?
Ensuring that your retirement savings go the distance is important, especially as lifespans are increasing due to better fitness and advances in medicine. Annuities provide several options that can help you implement your financial strategy and ensure that you have a source of income in retirement that lasts. There are essentially two main types of annuities that have very different use cases:
- Immediate annuities are usually purchased at or near retirement and funded with a lump-sum payment. They provide an income stream as soon as the annuity is established.
- Deferred annuities are purchased during your savings years and can be funded with periodic payments. They provide guaranteed payouts starting at a specified future date and can help you save in your preretirement years.
Aside from that major distinction, you’ll also find a range of options and customizations for each, including guaranteed income, tax advantages, market exposure, and more.
Immediate annuities
With immediate annuities, you pay a lump sum to establish the fund and start taking guaranteed income payments right away. Payout options vary. You can choose monthly payments for life or larger payments over a shorter duration, like 10 years.
Immediate annuity example:
If you’re in your 60s and are about to retire with a moderate nest egg, but want to make sure you have enough cash to keep up with essential needs, an immediate annuity might be helpful. You can establish the annuity with a lump sum from your 401(k) and enjoy guaranteed income payments for the rest of your life, offering peace of mind in knowing that you won’t outlive your savings.
Deferred annuities
Deferred annuities are, in a sense, more similar to the retirement savings vehicles you’re used to, such as IRAs and 401(k)s. You contribute to them over time combined with any earnings in an account until you’re ready to access them later. With deferred annuities you also have an option on how you want your savings to grow over time. You can choose a fixed rate, which offers steady, predictable growth. Or you can choose variable growth that’s tied to investment choices you make. Here’s more on those differences:
Deferred fixed annuities
Deferred fixed annuities are an attractive option because they grow tax deferred at a guaranteed rate. You don’t have to worry about market fluctuations, and there are no contribution limits (as there are with 401(k)s and IRAs). Then, when you’re ready to start collecting payouts, they provide a steady income stream. Keep in mind that fixed-interest products can be susceptible to inflationary risks.
Deferred fixed annuity example:
Let’s say you’re in your prime earning years and already setting aside money for retirement in a 401(k) and an IRA. If you’ve reached the maximum contribution limits for those accounts, a deferred fixed annuity will allow you to set aside additional tax-advantaged money for retirement that will eventually yield a guaranteed income stream for the rest of your life. Withdrawals from annuities are subject to ordinary income tax treatment and if made prior to age 59 and ½ may be subject to an additional 10% income tax penalty.
Deferred variable annuities
Deferred variable annuities combine a future income stream with the opportunity for more growth through investing in “mutual fund like” investments called variable investment options.. Any earning are tax deferred, but as with any investment in the market, your returns aren’t guaranteed, they are subject to market risk and possible loss of principal.
Deferred variable annuity example:
If you’re getting closer to retirement and looking to make up for a slow start in your savings, the opportunity for more growth may be appealing. If you’re comfortable with risk that market exposure brings and don’t anticipate needing the money before the designated payout period, a variable annuity may be the right choice for you. It’s a good idea to consider your entire retirement plan when deciding whether you can withstand the potential losses that can come with market volatility.
How to pick an annuity product
When picking an annuity product, there are a few critical points to consider:
- Your overall goals and needs
- When you need the income stream to begin
- How much market exposure you’re willing to face
It’s best to consult a financial professional to help you choose an annuity that meets your individual needs.
Interested in how annuities may be able to strengthen your retirement plan?
A New York Life financial professional can help you weigh the options and determine what’s best for your needs.
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Please consider the charges, risks, expenses, and investment objectives carefully before investing in a variable annuity. The product and fund prospectuses contain this and other information and can be obtained from an agent. Read the prospectuses carefully before you invest or send money.
New York Life Annuities are issued by New York Life Insurance and Annuity Corporation (“NYLIAC”), a Delaware Corporation or by New York Life Insurance Company. Variable annuities are offered by registered representatives of NYLIFE Securities LLC, Member FINRA /SIPC. Both NYLIAC and NYLIFE Securities LLC are wholly-owned subsidiaries of New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010.