Retirement. Can you feel the sunshine on your face and hear the waves in the distance?
There’s something so exciting about the prospect of being able to move forward into a new phase of life. The idea of letting go of the work you’ve dedicated yourself to, and instead, focusing your energy on those hobbies and activities you’ve always loved, can be invigorating.
What’s a little less dreamy to consider is the financing behind your plans for retirement. Yes, your retirement is something to look forward to, but to make it happen, it will take some savvy planning.
While many Americans will eventually retire with a Social Security benefits check in hand, it’s typically not enough to bring all of those golden year visions to fruition. Oftentimes, there’s an immediate need to establish additional cash flow before you can put a deposit down on that sun-soaked beach house. That’s where annuities can help.
Not to fear! The word sounds complicated, but once you break it down into its parts, fixed annuities are not only beneficial but they’re manageable, too.
There are several different types of fixed annuities and understanding the differences is the first step in selecting an option that’s going to make retirement as sweet as it should be.
What Do They All Have in Common?
Fixed annuities come in many different forms, but the one thing that’s the same is they’re all issued through insurance companies. What is an annuity? Annuities are contracts that require a one-time, lump-sum, upfront fee in exchange for a steady stream of income that can supplement funds already in place.
Unlike stocks and bonds, annuities are not measured daily on the open market, so those who invest in them can count on a bit more financial certainty than they’ll see from other components in their financial portfolio. Annuities are a great choice for those heading into retirement because they guarantee consistent income for life.
Standard Fixed Annuities
For retirees who value consistency over significant growth prospects, a fixed annuity is often a great choice. Much as the name indicates, fixed annuities come with the benefit of a fixed interest rate on money that’s contributed to the account.
People who opt for fixed annuities like the idea of being able to immediately withdraw income. This type of annuity also provides a bit more flexibility upfront. Buyers can either purchase their annuity with a lump-sum payment or spread those payments out over time. This can be very helpful for new retirees who are just getting their financial footing in place.
Tax-deferred growth and guaranteed minimum rates are both highlights of fixed annuities that make them extremely attractive. While they may pay out less overall, they’re consistent and they don’t come with any surprise fees.
Fixed Indexed Annuities
Let’s say that you love the idea of guaranteed income, but you have a little more room for risk in your financial portfolio. Perhaps the idea that your annuity payout may increase slightly with a strong market gets your heart pounding. If this sounds like you, then a fixed indexed annuity may be the way to go.
Fixed indexed annuities are very similar to fixed annuities, with the exception that they come with a variable rate of interest. The guaranteed minimum income benefit remains firmly in place, but the contract linked to fixed indexed annuities allows for growth in a positive marketplace.
That being said, you can expect the growth to be limited. Returns are capped, which means that people who hold fixed indexed annuities are still considered to be conservative participants in the marketplace. There are some fees associated with fixed indexed annuities, but the highlight is the option to participate in the market without any daunting risks.
Deferred Annuities
The reality of retirement is that it’s not always straightforward. While the idea is appealing, some retirees find that they aren’t ready to let go of the workforce entirely just yet.
If you’re of the mindset that someday soon, you’ll want to retire, but for now, you’re happy keeping pace with the grind, deferred annuities are a nice option. This version of guaranteed income lets buyers purchase their fixed annuity contracts at a lower rate with the understanding that funds will only be accessible when full retirement is embraced.
The lower rates stem from the fact that the issuing insurance companies know that they don’t have to worry about those fixed payouts right away. There’s simply more time to grow and adjust the funds, so there’s more flexibility with payments, too.
Immediate Annuities
If you have big retirement plans and require an above-average monthly income to make it all come together, immediate annuities offer the biggest payout by far. With that said, people who invest in these annuities should expect to pay significantly more.
Immediate annuities require payments of both principal and interest to be made. While this can make quite a dent in the wallet, it comes with the benefit of higher and more regular payouts for the remainder of a lifetime.
People who collect on immediate annuities can begin to access their funds as soon as a month after the initial investment. This puts you well on your way to living your best retirement life, as long as you’re comfortable keeping up with the payments, too.
Variable Annuities
Some retirees head into their new phase of life with plenty of marketplace experience to their name. If you’re the type of person who’s comfortable with maximum market exposure in the name of potentially increasing principal over time, variable annuities are designed for you.
Yes, the fees on variable annuities are high, but there’s also the thrill of seeing your account value soar when subaccounts are performing well. Many people choose to purchase an additional rider with variable annuities, ensuring that if things go sideways, that fixed, guaranteed income stream will still remain in place.
Your retirement is bound to be as unique as you are, so your fixed annuity options should be customizable as well. There’s no reason to settle for just one income stream when annuities provide various routes to making those retirement dreams come true.
Annuities are a simple and effective way to add a financial cushion to your plans. Even better, they can be tailored to fit the budget you already have in place. Don’t miss out on added income that could maximize your well-deserved time on the sand and in the sun.
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