Key Takeaways

  • Annuities are designed to be a long-term component of a financial plan along with other retirement income streams.

  • There are several types of annuities to choose from. Before selecting, consider your financial goals for the future.

  • Consult a tax advisor for more information on the tax structures and implications. 

An annuity is an investment option that can provide a guaranteed income for an individual or their spouse throughout their retirement. They are purchased for a set period and payout a specific amount in retirement based on the investment strategy and amount invested. 

Annuities may be good for people that want the option of a lifetime income during their retirement and may have concerns about outliving their savings. There are other factors that should be taken into consideration before getting an annuity. Annuities are designed to be a long-term component of a financial plan along with other retirement income streams ( subject to the claims paying ability of the issuing insurance company).

How Do Annuities Work? 

  1. Participants select an annuity type and pay into a plan purchased through an insurance company. 
  2. The insurance company invests the payment from the annuitant, so the account earns interest on top of the original amount invested for the duration of the contract. 
  3. Once the annuitant decides to receive payments from the annuity, payments will be made up of a return of the original investment plus interest, minus fees. 
  4. The annuitant receives income during the retirement period. 

In considering an annuity, it is important to understand, other than contractual withdrawal amounts, the money invested usually is not accessible until the annuity payout begins. Furthermore, you may be charged a penalty if you take your money out early, if you're not yet 59½ (additional 10% tax penalty), or both. 

What Are the Different Types of Annuities? 

There are several types of annuities to choose from. Before selecting, consider financial goals for the future, the timeframe for when a payout is desired and fee structure.  If you're unsure of where to start, NCOA offers free, personalized financial guidance through our partnership with licensed professionals that can help you develop plans for short term and long-term financial goals.

  • Immediate Annuity
    Payout starts shortly after a single premium payment is made. 
  • Deferred Annuity 
    Payout starts at a set date in the future. 
  • Fixed Annuity 
    Payout based on an amount guaranteed in the contract. Payments are normally fixed and the insurance company bears the investment risk. 
  • Indexed Annuity 
    Provides a guaranteed return with the option of sharing in investment market earnings. 
  • Variable Annuity 
    Accumulation and payout are variable and not guaranteed, although contracts may offer minimum guarantees as an option at an additional cost. Variable annuities have fees and charges that include mortality and expense, administrative fees, contract fees and the expense of the underlying investment options. When evaluating the purchase of a variable annuity, you should be aware that variable annuities are long-term investment vehicles designed for retirement purposes and will fluctuate in value; annuities have limitations; and investing involves market risk, including possible loss of principal.

Annuities offer tax-deferred earning potential 

Taxes are applied to an annuity when the money is paid out, but not while the money is in the account. The delayed taxation may help account values grow more than if they were subject to ongoing taxation. Annuities vary widely – by terms, fees, structure, payouts, penalties and possible (or acceptable) changes – allowing for customizable plans. A fixed annuity is one of the most predictable financial investments with guaranteed payments and duration. 

If the plan is originally purchased with funds that are not taxed (such as a 403(b) plan), all distributions are taxable. Consult a tax advisor for more information on the structures and implications. 

Annuities have standard fees associated with them that vary from company and annuity type. Fees cover administrative costs and mortality expenses. There may be withdrawal fees if payments are taken before the predetermined period. 

I'm an older adult and have additional questions about annuities and need help. Where can I get more information?

If you need help sorting through your financial options, NCOA's partner offers complimentary access to a team of specialists who are here to listen and learn about your unique financial needs. After discussing your goals and concerns, your specialist will provide personalized information and guidance to help ensure you're protecting your future. Get started by contacting a licensed professional today.