An annuity is a contract with an insurance company that can help your savings grow and turn them into a dependable stream of income, even one that lasts for life.
How it works
You give the insurance company money, either as a lump sum or over time. In return, the insurance company promises to grow it and, if you choose, pay it back as income. Growth inside an annuity is generally tax-deferred until you withdraw.
The main types
- Fixed annuities pay a guaranteed interest rate for a set period, similar in concept to a CD.
- Fixed indexed annuities credit interest based partly on a market index, with a floor that protects you from index losses and a cap or participation rate that limits gains.
- Income (immediate) annuities turn a lump sum into guaranteed payments that can last for life.
- Variable annuities are invested in market subaccounts and can lose value. They’re securities sold by prospectus.
Many annuities also offer optional income riders, usually for a fee, that guarantee a level of lifetime income.
Who it may suit
- Pre-retirees and retirees who want guaranteed income to cover essential expenses
- Conservative savers who want protection from market losses
- People who worry about outliving their savings
What to watch for
- Surrender charges if you withdraw more than allowed during the early years
- Withdrawals before age 59½ may face a 10% IRS penalty in addition to income tax.
- Fees for optional riders, and complexity that makes comparing products hard
The bottom line
Annuities are designed for long-term goals, especially reliable retirement income. They shouldn’t hold money you may need soon.
Wondering if guaranteed income fits your retirement plan? Get your Wealth Report Card.
For educational purposes only. Guarantees are based on the claims-paying ability of the issuing insurance company. Annuities are long-term products; surrender charges and fees may apply. Variable annuities are securities and are not offered by Workable Financial Solutions.