3 Types of Annuities to Consider for Retirement Income Protection

When nearing retirement, it is important to consider how to create reliable income streams that will last throughout your retirement years. Annuities are one of several options that can help provide guaranteed income in retirement.

Annuities convert a lump sum of money or a series of payments into a guaranteed stream of income, essentially creating your own personal pension. Types of annuities include:

1. Fixed annuities

A fixed annuity offers the most predictable and stable income stream of all annuity types. When you purchase this type of annuity, the insurance company guarantees both your principal and a minimum interest rate. This means you’ll receive the same payment amount each period, making it easier to budget for retirement expenses. Fixed annuities are particularly appealing to conservative investors who prioritize safety and predictability over growth potential.

2. Variable annuities

Variable annuities provide an opportunity for higher returns by letting you invest in a variety of sub-accounts, similar to mutual funds. Your eventual payout will fluctuate based on the performance of these investments, which means you could potentially earn more than with a fixed annuity. However, this also means taking on more risk, as poor investment performance could lead to lower payments. Many variable annuities offer optional riders that can provide a guaranteed minimum income benefit, regardless of market performance, though these features typically come with additional fees.

3. Indexed annuities

Indexed annuities represent a middle ground between fixed and variable annuities, offering some growth potential while providing downside protection. These annuities link their returns to a market index, such as the S&P 500, but typically cap the maximum return you can earn in exchange for protecting against market losses. While you won’t capture all of the market’s upside, you also won’t suffer losses when the market declines. This compromise makes indexed annuities attractive to those seeking a balance between growth opportunity and security.

Each type has distinct features that might suit different retirement goals and risk tolerances. Given the complexity of annuity contracts and their long-term implications, it’s important to seek skilled legal and financial guidance when evaluating which option best fits your retirement strategy.