Whether retirement is decades away or right around the corner, you may be wondering if there’s a way to create predictable income once you stop earning a paycheck. It’s a natural question, especially considering you may not be able to rely solely on Social Security or pensions in the future. Your answer may be an annuity.

So, what is an annuity? Annuities come in many forms, but generally they fall into two main categories: annuities that help you save for retirement and annuities that provide guaranteed income in retirement.

ANNUITIES THAT HELP YOU SAVE FOR RETIREMENT

Accumulation annuities help you accumulate funds for retirement and are designed to grow in value either at a fixed or variable rate. With these annuities, you could decide to withdraw your money in the future and use it for something else, or you could convert the value of your annuity into an income stream when you retire.

In a fixed annuity, your money grows at a fixed rate. A fixed annuity is a good option if you want to be certain about how much your money will grow and you think you may want to turn it into guaranteed income in retirement.

A variable annuity is also just like it sounds: Your returns can vary. That means you could make more than you would with a fixed annuity. But you might also make less. With a variable annuity, you invest in one or more investment sub-accounts. This means the value of your annuity may rise and fall with the markets, which can make variable annuities a good option if you’re okay with taking on more risk for the potential of more reward.

If you don’t elect to convert an accumulation annuity into income upon retirement, you can take all your money out and do whatever you want with it. However, if you do it before certain milestones, you may owe surrender charges. In addition, you would owe income taxes on any gain and if taken out before age 59 1/2, and you may be subject to 10 percent IRS penalty.

ANNUITIES THAT PROVIDE GUARANTEED INCOME IN RETIREMENT

Income annuities provide a predictable stream of income for life and are often purchased upon retirement or in the years leading up to retirement. The amount of the income payments you receive will depend on a number of factors, including, but not limited to, when you buy the annuity, how much money you pay into the annuity and how long you’re expected to live once you start taking payments. (If you buy a deferred income annuity at 55 and don’t start income payments until 65, you will likely get a higher monthly payment than if you wait until you’re 65 to buy the immediate annuity for the same amount.) There are two different types of income annuities: immediate and deferred.

Immediate income annuities take a lump-sum payment from you with a promise to make payments back to you for the remainder of your life. You can also add guarantees that payments will continue to a beneficiary for a certain number of years, even if you die. Immediate income annuities start paying out soon after you make your payment, which is why they are often considered by people who are close to or in retirement and looking for a more immediate, reliable source of income.

Deferred income annuities are very similar, but are designed for those who are looking to receive income at a later date. They also provide income for life, except deferred income annuities also have a deferral period before income starts. This deferral period provides the benefit of growth in the form of future income payments that are higher than what you would get by spending the same amount to purchase an immediate income annuity when you retire. A deferred income annuity may be a good option for someone a few years out from retirement who wants to use some of their savings to lock in retirement income for the future.

Remember that with an income annuity, typically you can’t take back the money you pay in. That’s a key difference from accumulation annuities, which provide options to take out what you paid in.

Guarantees in an annuity are backed solely by the claims-paying ability of the issuer.

Income annuities (either immediate or deferred) have no cash value and once issued they can’t be terminated (surrendered). The original premium paid is not refundable and cannot be withdrawn. With any annuity, distributions may be subject to ordinary income tax and a 10 percent IRS penalty if taken prior to age 59 ½.

No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.

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