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What You Need to Know About Annuities

What You Need to Know About Annuities

March 22, 2023

There are many different types of retirement savings accounts, and annuities are one of them. As the economy has had its ebbs and flows over the past several years, looking at your other retirement accounts may have been concerning. Annuities can provide guaranteed income in retirement, which can give you more confidence while you’re saving for retirement. Learn more about what you need to know about annuities.  


By definition, an annuity is an insurance contract that is issued and distributed by financial institutions with the plan to payout invested funds via a fixed income stream when the investor is in retirement.  


Annuities allow you to make a custom contract with the financial institution where you pay premiums on an insurance policy with a lump sum for a specific amount of time which results in guaranteed income for you in retirement.  


There are several different types of annuities:  


  • With an immediate annuity, you immediately turn your lump sum into an income stream.  

  • A deferred annuity will not start paying out until the initial investment is met and you reach the specified age that you decided to begin receiving payments.  

  • Fixed annuities provide routine and regular payouts.  

  • Variable annuities are based on higher risk, higher reward. The annuitant could receive higher payout amounts if the index fund does well, but could also receive smaller payouts if the index fund does poorly.  


One of the major benefits of annuities is how they are taxed. Annuities have tax-deferred growth. When you purchase the annuities, your funds grow tax-free and you will only need to pay taxes on the payouts once you receive them. However, if you already paid taxes on the funds you used to purchase the annuity, you will only have to pay taxes on the earnings when they are disbursed.  


There are also several quirks to annuities:  


  • Free-look periods: Many states require insurance companies to provide a free-look period that allows the annuitant the ability to cancel the annuity without penalty.  

  • Riders: To customize an annuity, you can add riders at an additional cost.  

  • Beneficiaries: You can name a beneficiary to receive a death benefit which will be a portion of the contract value.  


An annuity could be the right choice for you based on your retirement planning goals. While it is most often recommended for people who are closer to retirement, it can be a great option for anyone looking for long-term security and guaranteed income. Beyond that, annuities also offer principal protection, probate-free estate distribution, inflation adjustments, and death benefits for your beneficiaries.  


There are aspects of annuities that can be viewed as disadvantages. There is a lack of liquidity, conservative returns, and loss of potential returns from other investments. Many of these disadvantages are rooted in the trade-off of return potential for a guaranteed return.  


Before purchasing an annuity, consult with a trusted financial advisor to make sure it is the right addition to your retirement savings portfolio.  


Planning and managing your retirement planning yourself can be difficult without the guidance of investment professionals. Our team at Strategic Financial Group aims to help our clients face their retirement planning with confidence. Schedule a consultation with us today to get started.