Looking for a way to manage downside risk in retirement? If so, an annuity may be an effective strategy. Annuities are products offered by insurance companies for a variety of purposes. With one of those purposes being to manage volatility. They can also be used for tax-deferred growth or to generate a stream of lifetime income.
There are several different types of annuities available, so it’s important you research carefully and choose the option that best meets your needs and goals. Below are three of the most common types of annuities and how they may benefit you in retirement.
Single Premium Immediate Annuities (SPIA)
Single premium immediate annuities are an effective and popular way to create lifetime income. They require a lump sum of cash as a contribution. In return for this one-time premium, the insurance company will make periodic, regular payments for a predetermined amount of time, often for life. The payment amount is determined by a variety of factors, including the premium amount, the duration of the payment period and prevailing interest rates.
In most SPIAs, you are unable to access your premium once payments have started. While you may receive a guaranteed stream of lifetime income, you could lose liquidity and access to your funds. That’s an important consideration that shouldn’t be overlooked.
Fixed Deferred Annuities
A fixed deferred annuity, often referred to as simply a fixed annuity, is one in which you don’t receive annuity payments immediately. As the name suggests, those annuity payments are deferred to a later date, and they may not even happen at all.
Instead, your premium accumulates a fixed rate of interest over a predetermined period. The interest grows tax-deferred, meaning it isn’t taxed until you withdraw money from the contract.
Often, fixed annuities have interest rates that are locked-in for a set period of time. At the end of that period, the interest rate may be adjusted up or down, depending on a number of factors. However, most fixed annuities will have guaranteed minimum interest rates, so you always know the least amount of interest you can receive.
Fixed Indexed Annuities
Fixed indexed annuities have much in common with fixed deferred annuities. You receive annual interest that accumulates within the contract. Your earnings are tax-deferred, so you don’t pay taxes until you make a withdrawal. And, they eliminate much of the downside volatility that can come with investments in the stock market.
However, there is one major distinction between fixed indexed annuities and fixed deferred annuities. With a fixed indexed annuity, your interest rate is linked to the performance of a market index, such as the S&P 500. If the index performs well, you receive more interest. If it performs poorly, you receive little or no interest.
One appealing aspect of a fixed indexed annuity is that the minimum interest is often between 0 and 3 percent. That means even if the index has a bad year, you won’t lose money. In fact, you may even earn a modest amount of interest. That allows you to get returns that are linked to the market without being exposed to potential market losses.
Is an annuity right for you? That all depends on your unique retirement income goals and needs. An annuity may be a good strategy if you want to limit downside risk or generate a stream of retirement income. However, you may want to consult with a financial professional and review your financial situation before committing to an annuity. They can help you determine which type of annuity is best for you.
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