In the world of retirement investments, annuities may be one of the best-kept secrets. As the Retirement Living Information Center notes, annuities can provide you with a steady income throughout your retirement years. Use this quick guide to understand what to look for in annuities.
Retirement Annuities Explained
Annuities are a unique investment because insurance companies issue them as long-term contracts. Many companies provide the option to invest a large sum all at once or to invest over time. You might start getting payments right away or at a later date, according to Nationwide. Like 401Ks and IRAs, annuities are an option for retirement planning. The Motley Fool points out that these insurance products are often marketed for their similarities to investments.
Types of Retirement Annuities
Fixed annuities give you an alternative to CDs, while immediate annuities can be used for income. Some options provide investment choices within the contract, while others lack any type of investment.
- Variable annuities allow you to choose investments with varying levels of risk and earn your returns based on the performance of your chosen investments.
- Fixed annuities guarantee the principal investment and the earnings, and you’ll receive fixed payments for the entire length of your contract.
- Fixed Indexed annuities are a class that provides returns on your contributions based on a securities index. For example, you might earn based on the performance of the S&P 500.
- Immediate annuities are typically bought with a lump sum. You start receiving guaranteed income right away and building a stream of income.
Best Retirement Annuities
The Retirement Living Information Center researched and evaluated 20 different annuities companies. After comparing their ratings, fees, and financial health, they selected three of the best retirement annuities, which include:
- Fidelity Investments, which has a strong asset accumulation and attractive deferred fixed annuities for long-term retirement planning
- Mass Mutual has one of the best financial strength ratings and a variety of annuity options, including variable, fixed and immediate annuities
- AIG is among the top businesses in the industry for innovative risk management and including analytical tools and annuities like Polaris Variable Annuities, Index Annuities and several deferred and immediate annuities
Annuities and Taxes
You don’t pay taxes until you start receiving payments. If you use pre-tax dollars, like those from an IRA, to buy your annuity, your whole payout will be taxed. If you buy it with after-tax dollars, you only have to pay taxes on the gains, according to the Retirement Living Information Center.
Tips for Choosing Retirement Annuities
The Balance cautions that not all annuities are alike. There are many different options out there, each with its own benefits and drawbacks. To get the most out of your investment, the Retirement Living Information Center suggests these tips:
- To get the best overall value, wait until interest rates increase
- Research the market, the companies issuing the annuities, benefits, risks, fees and commissions before choosing one
- Take note of any annuities contracts with words like “withdrawal rates” and “surrender charges,” which could raise a red flag about some of the possible fees down the line