What is the Best Type of Annuity for Retirement?
Updated on Jul 17 2019
Diversifying your investment portfolio with a range of investments is one of the best things you can do to ensure financial freedom in retirement. Annuities can be an instrumental part of a robust retirement plan but many people are confused about what they are and how they work. Learn more about annuities for retirement.
Major Types of Annuities For Retirement
An annuity is essentially a contract between an individual and an insurance company. After investing in the annuity, the insurance company agrees to make a series of payments (or a lump sum) beginning on a future date. Annuities are a great retirement planning tool because you can turn a lump sum of money into a steady income stream for years to come, especially as company pensions disappear.
One of the biggest benefits of annuities for retirement planning is its tax advantages. Similar to a 401(k) or IRA, the growth on annuities is tax-free until funds are withdrawn. Additionally, there are no annual contribution limits which allows individuals to save more and those nearing retirement to increase contributions.
There are several different types of annuities for retirement and each type has unique benefits for retirement. When choosing the best type of annuity for retirement, it’s important to consider your own needs and financial circumstances. Types of annuities for retirement include,
In a fixed annuity, an individual deposits a lump sum of money, or makes a series of payments, and the insurance company will pay a guaranteed rate of interest that compounds on a tax-deferred basis. This is a popular annuity for retirement because it promises a fixed interest payment over a specified period of time and can supplement other forms of retirement income.
An indexed annuity is a type of fixed annuity that issues interest payments based on the movements of the stock market in the Standard & Poors 500 Index. The actual percentage applied to the credit rate is based on the average monthly gain over a 12-month period or the year-over-year gain in the index. This allows individuals to earn more money on market upswings and limits the risk if the market turns downward. Because an indexed annuity yields returns on a contributions based on a specified equity-based index, there is the opportunity to earn higher returns based on stock performance.
A variable annuity places money in investments that individuals select from a list issued by the insurance company. Typically, these investments are a variety of portfolios that include stocks and bonds. Some variable annuities also offer a death benefit that guarantees beneficiaries receive back an amount no less than the original investment, no matter how the funds perform over time. Different from a fixed annuity, payments in retirement are determined by the performance of the investments you choose.
Get Expert Advice on Annuities
Every retirement plan and investment portfolio is unique. Deciding the best annuity for retirement will make different financial sense for each person. Contact a fiduciary financial advisor who can help you conduct a comprehensive financial assessment and decide which annuities are best for your unique retirement plan.
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