What Are the Four Primary Types of Annuities?

There are many different types of annuities, but most fall under the umbrella of one of four primary categories:

• Immediate Fixed Annuities
• Deferred Fixed Annuities
• Immediate Variable Annuities
• Deferred Variable Annuities

Immediate annuities, sometimes referred to as income annuities, start paying out quickly – typically no more than a year after purchase. This type of annuity can even be funded by a retirement account in order to provide a steady stream of retirement income.

Deferred annuities can be purchased at a fairly young age but won’t start paying out until the holder reaches retirement. Any growth of the money invested into the annuity will experience tax-deferred growth, similar to a 401(k).

When it comes time for the annuity to start paying out, the holder usually gets to decide for how long they want the annuity to run. The length of the payout will directly correlate to the amount of regular income payments. For example, your monthly payments will be twice as high if you decide to receive payment for the next 10 years instead of the next 20 years.

Immediate annuities can also be used as a replacement for a pension and provide a moderate stream of income for the remainder of the owner’s life. The total amount of each monthly payment will be based on factors like health and projected longevity.

One of the downsides of annuities is the money you invest into a lifetime guaranteed annuity may be less accessible than some alternative savings options. 

Some lifetime annuities offer the option of having payments continue to a spouse or dependents for a specified amount of time after your death. However, those extensions will impact the amount of income you receive while you live.

Fixed Annuities Versus Variable Annuities

Annuities are typically sold by insurance companies, even though they are technically investment or savings products. Fixed annuities are more like a bond or certificate of deposit (CD), while variable annuities are more like investing in a 401(k).

The money you invest in a fixed annuity earns a guaranteed rate of interest for a specific length of time stipulated in the contact. The guarantee period can vary greatly and range from as little as a year to the full length of the annuity.

For retirees who are worried about market volatility and how it may impact their retirement savings and income, fixed annuities may make a lot of sense. Your money won’t be affected by market downturns, although your purchasing power may still be impacted by inflation.

Variable annuities are not entirely dissimilar from 401(k)s. The money you put in the annuity is invested into specific funds. The valuation of a variable annuity will be directly tied to the market, meaning your savings will be significantly impacted by market changes and volatility.

People invested in variable annuities sacrifice safety for the potential for far more growth during the life of the annuity. Retirees who chose fixed annuities sacrifice growth potential for stability and are insulated from potential market downturns.

Fixed-Period Versus Lifetime Annuities

Annuity purchasers must also choose an appropriate annuity payment period length. A lifetime annuity will guarantee a stream of income for the remainder of your life. The good news is you can rely on that money entering your bank account until you die, providing some peace of mind in retirement. However, the insurance company will pay you significantly less each month than they would with a fixed-period annuity.

This reduced payment is to insulate the insurance company from the risk that you live a lot longer than expected. If you had enough saved for 20 years but you live for 30, the insurance company will end up paying out far more than you put in. To counter that risk, insurance companies pay less income each period. Insurance companies will consider your health and life expectancy when deciding on the payments you’ll receive.

With a fixed-period annuity, the money in the annuity will essentially be divided out by the number of pay periods. You’ll be paid more each month if you choose a fixed period of 20 years instead of a fixed period of 30 years. If you choose a fixed-period annuity, your age and health will not factor into your payments each period – payments will be determined based on the money you have in the annuity.

Are Annuities the Right Retirement Income Solution for Phoenix Retirees?

For retirees who are looking for a retirement savings solution that doesn’t cap investments but still maintains some of the features of an IRA or 401(k), variable annuities may be a great idea. Retirees seeking guaranteed income for as long as they need it may want to consider lifetime annuities. The best option will depend on your situation.

Talk with our retirement planning team about annuities and whether they make sense for your plan. Call (623) 974-0300 to learn more.