Types of Annuities: Which One Fits Your Retirement Goals?

Are you looking for a place to grow money, a paycheck that starts soon, or income you will not need until much later?

Those are different jobs. Yet conversations about the types of annuities often begin with a long list of product names, leaving you to work out which problem each one solves. That makes comparison harder than it needs to be.

A more useful approach is to separate three decisions: when you want income, how the contract’s value should grow, and which benefits matter to your household. Once those questions are clear, the terminology becomes easier to navigate. You can then compare actual contracts without assuming that one category is automatically best.

Reviewing individual contract provisions makes product comparisons more useful.

First decide when you need the money

The beginning of an immediate arrangement is typically one year from the date of purchase. It is usually paid for with one premium and the premiums are usually computed according to terms and conditions of the contract. It could be a strategy for people who have come to retirement age and require a sum of money to generate a regular income stream.^[1]

Deferred arrangement is a scheme that has income delayed. Some deferred contracts just build in value until you determine what you’re going to do next. Others, however, are bought for a specific purpose, which is to serve as an income stream that will start on a future date. Don’t think that all interesting products will provide you the same flexibility as you go along.

Time is one aspect to the decision. Another that is fixed and variable. A product can thus become instant and permanent, or postponed and fluctuating. The labels are overlapping because they have different purposes of asking questions.

A fixed annuity emphasizes contractual interest

A fixed annuity typically pays interest based on terms specified by the insurance company, with a lower limit on the amount of interest that can be paid. With some products, the initial rate lasts for one period and is then reset. Multiyear guarantee design guarantees a fixed interest rate for a certain period of time.^[1]

This can be beneficial for planning when making investment plans in which the capital is not required to be exposed to the fluctuations of the stock market. The guaranteed rate term, allowed withdrawals, and renewal terms can be reviewed prior to purchase. The draw of predictability overcomes the influence of inflation, and finances of the insurer.

The biggest error is to think that a fixed rate is limited access. Your contract can have a short interest promise and a long surrender schedule. This means that cash for immediate needs might be more easily available, even if the offer seems good.

A variable annuity introduces investment risk

A variable annuity provides investment opportunity(s), referred to as subaccounts. They can have a positive or negative impact on the account’s value. There may be insurance benefits with those investments, but no insurance benefits that will stop the market loss.^[2]

It’s important to review the investment costs, insurance costs, optional riders, and surrender terms. Sometimes a benefit that may sound good in isolation isn’t as attractive as it sounds because of the cost and conditions of receiving it. Carefully read through the current prospectus and understand such benefits as they are offered as part of the basic contract.

This category isn’t just a more advanced version of a house-shaped cookie cutter. It goes for different tastes and different doses. Adding insurance jargon to investments in the market will not alleviate that worry if one could not easily stand a fall in the account balance.

A fixed indexed annuity uses a formula

A fixed indexed annuity credits interest based on fixed rules set by a contract that is tied to an index. The contract doesn’t give you an ownership stake in the stocks included in the index. There are limits to what can be credited by participation rates, caps, spreads and measurement methods.^[3]

For instance, if a fund’s index is going up fast, that doesn’t necessarily mean your account is going up as fast. While a zero-index credit could be available in a negative measurement period for a specific strategy, charges and withdrawals could impact the amount you hold. The conditions in the contract always have to be taken into account when interpreting principal protection.

If you are looking for a compromise between the risk and potential of a falling index and rewarding performance, this category might be of interest. It also requires careful reading. An impressive illustration is not a promise of what is illustrated to occur.

Table below summarizes the growth approaches. It is not a substitute for comparing particular contracts.

Three growth approaches at a glance.

Category	Growth basis	Central trade-off
Fixed	Contractual interest	Predictability versus flexibility
Variable	Selected investments	Growth potential versus market losses
Fixed indexed	Index crediting formula	Downside protection versus limited upside

Do not confuse fixed indexed products with RILAs

A registered index-linked annuity, often abbreviated RILA, is a different category. It can provide a roof or a floor but fall short on the investment loss end of things. It is a security registered with SEC and FINRA as well as relevant insurance regulators.^[4]

Due to the common reference to an index, products may appear interchangeable. They are not. Inquire about whether the contract is fixed indexed or registered index-linked, what will occur in case of a drop in the reference index, and if there’s a threat of losing principal due to a drop in the reference index.

Ask for a low-ball estimate. Learning that a product has a buffer is not as helpful as understanding what significant downturn implies for the quantity you invested.

Choose the payment promise separately

A qualified and nonqualified funding and tax structure rather than how a product makes money. A contract in an IRA might therefore enjoy certain growth characteristics that are the same as those of a contract bought with after-tax funds, and withdrawal rules are different. Before comparing expected spending power, determine the type of product and its source of funds.^[6]

For all those who are aware of the contract, up next is someone who will obtain payments and how extended they’ll be. A life-only typically pays out if the covered individual is alive. A joint-and-survivor option is for two lives and the payment of the survivor’s life follows the selection made.^[5]

A period-certain option is paid for a certain amount of time. If the person who is covered dies prematurely, they may get something from a refund feature. These typically involve adjustment of the premium needed or the initial income of the investor. Make comparisons like to like.

An account withdrawal feature is also unique compared to annuitization, which transforms value to a payout stream. Under certain circumstances, certain riders allow riders to take out withdrawals throughout their lives, without the requirement to use them in the traditional way. Ask, what is available, what is consumed in the income calculation, and what happens after an excess withdrawal.

Match the design to an actual household

Think of three possible cases. A newly retired couple has a shortfall in their monthly income and desires payments in the not-too-distant future. Their initial comparison is likely to be about the money they can receive immediately, such as any money left to their surviving spouse.

A worker approaching retirement age has cash that they do not require for several years that they want a specific accumulation rate. They can be talking about a guaranteed period for a contract, and the ramifications of needing the funds early.

There is a large household that has a significant level of accessible savings and is looking at market-based growth and specific insurance benefits. It would have to assess the specific risks, costs, and situations of these products with respect to keeping investments in a separate account. Financial equality doesn’t exist in these three situations if the ages are the same.

There is no single, best example that could point out the best buy for every individual in that situation. The answer can change if a person’s health, pensions, debt, tax status and other assets change. The point is to link features to needs prior to comparing promotional claims.

Five comparisons to make before choosing

Start with access. Look for the money that you can’t afford to limit and read the surrender schedule and any stipulations on withdrawal. When removing funds from an income guarantee, determine if you are reducing it by more than you thought.

Next, compare guarantees. Differentiate between minimum contractual rates, and current declared rates and demonstrated results. Know what are the features that can be changed after and which are set for a certain time by the insurer.

Next make a comparison of the total costs. Include investment expenses where applicable, rider charges, surrender costs, and restrictions that affect potential growth. Product with less apparent charges may have significant compromises nonetheless.

Research the insurance company and the insurance adviser. Use proper state insurance licensing resources and securities professionals FINRA’s BrokerCheck. Inquire about what the seller is getting paid for, and what options were mulled over.^[4]

Last but not least, factor taxes into the account that is providing the funds. Just transferring retirement assets to a contract does not necessarily benefit their tax status. The benefits have to be justified separately from a statement that gives taxpayers the false hope of tax savings.

Bring the decision back to your goals

Once you can verbalize the intended application of the annuity type, it is easier to pick the correct one. You may need income beginning in the coming year, the certainty of a fixed payment for your money or a desired survivor benefit. The comparison should be done based on that description.

Get Money Man 4 Integrity to explain the options in writing relative to that objective. Add your timeline to existing income and required easy to access savings. Ask for examples of good, bad and withdrawal experiences as relevant.

The talking points should be completed with the understanding of how and why a contract might apply and how and why it might be rejected. A name is just the first, and most vital, part of a product. The appeal is in the promise, the price and where this falls into your overall retirement strategy.

General education only; not individualized financial or tax advice. Guarantees depend on the issuing insurer’s claims-paying ability and the applicable contract terms.