Most annuities offer the potential for guaranteed income in retirement and could provide higher returns than traditional fixed-income investments.
For example, if you purchase an annuity with a guaranteed lifetime withdrawal benefit rider, you’ll receive a guaranteed payout each year for the rest of your life — or, depending on the rider, for the rest of your life and your spouse’s life — even if the account balance falls to zero.
Before deciding on an annuity, here’s a rundown on the types of annuities, along with advantages and drawbacks.
Single-premium immediate annuity. You typically give an insurance company a lump sum in exchange for monthly payments for the rest of your life, or a specified period.
PROS: It’s easy to compare payouts from these products at websites like www.immediateannuities.com. You can find a monthly payment that covers your fixed expenses, such as your mortgage.
CONS: With some exceptions, you can’t access the money you invested for unexpected costs, which is why most planners recommend investing no more than 25% to 30% of your savings in an annuity.
Deferred-income annuity. In exchange for a lump sum (or multiple purchases), an insurance company will provide you with guaranteed payments when you reach a certain age.
PROS: These are much less expensive than immediate annuities. By locking in a guaranteed monthly payment for your later years, you may feel more comfortable spending during the early years of retirement.
CONS: If you die before payments start, you — and in most cases, your heirs — receive nothing from your investment.
Multi-year guaranteed annuity. Provides a fixed rate of return over a specific period of time .
PROS: They typically pay a higher yield than certificates of deposit.
CONS: Most multi-year guaranteed annuities come with surrender charges of up to 15% if you withdraw the money before a specified period of time.
Fixed-index annuity. Your returns are linked to an index.
PROS: Depending on how the market performs, you could earn more than you would from a multi-year guaranteed annuity, and your investment is protected from losses.
CONS: There’s a limit on how much you can earn, even when the market is going gangbusters.
Buffered annuity. A buffered annuity has a floor that limits how much you can lose.
PROS: Buffered annuities offer the potential to earn higher returns on the upside but limit losses on the downside.
CONS: You can still lose money. And like other types of indexed annuities, these products are sometimes loaded with fees that will depress investment returns.
Variable annuity. A type of deferred annuity that invests in mutual-fund-like subaccounts to create future income .
PROS: Earnings accumulate tax-deferred, which is appealing to investors saving for retirement who have already maxed out on tax-deferred retirement plans.
CONS: You could lose money on your investments.