Annuities 101: Your Guide to Retirement Income

Planning for retirement can feel overwhelming. There are many options to consider, and it’s not always clear which ones might be right for you.

One option that could help you create a more stable financial future is an annuity.

What Is an Annuity?

Think of an annuity like a paycheck you set up for your future self. During the accumulation phase, you put money in and it grows tax deferred. Later, in the annuitization phase, that money turns into regular payments, often during retirement.

This guide will walk you through the basics of annuities, how they work, and how they might fit into your retirement strategy.

How Do Annuities Work?

When you purchase an annuity, you enter into a contract with an insurance company. You provide funds, and, in exchange, the company agrees to make payments to you in the future. These payments can be structured in different ways, depending on the type of annuity and the options you choose.

An example:

As a hypothetical example: Let’s say you’re 55 years old and invest $100,000 in an annuity. For the next 10 years, you’re in the accumulation phase — which means your money is growing tax deferred. You don’t pay taxes on the earnings during this time, so your balance can build faster.

Keep in mind that if you take money out early during the accumulation phase, some annuities have surrender charges, which are fees for withdrawing before the surrender period ends.

At age 65, which is often considered retirement age, you move into the annuitization phase, where the annuity starts paying you a set amount each month. Those payments can help cover your retirement expenses.

Types of Annuities

There are several types of annuities, each with different features. Here’s a brief overview:

Fixed Annuities

• Provide predictable payments
• Offer a fixed interest rate with a guaranteed minimum rate specified in your contract
• Typically lower risk, but may offer lower returns

Variable Annuities

• Payments can vary based on investment performance
• Potential for higher returns, but also more risk
• Often include optional features for added protection

Read More: Understanding Fixed and Variable Annuities

Fixed Indexed Annuities

• Returns are tied to a market index, such as the S&P 500
• May offer a balance between growth potential and protection
• Usually include a guaranteed minimum return

Qualified vs. Non-qualified Annuities

• Qualified annuities are funded with pre-tax dollars, such as from a 401(k) or IRA
• Non-qualified annuities are funded with after-tax dollars

Read More: Qualified vs. Non-qualified Annuities

Each type of annuity has its own pros and cons. The right one for you may depend on your financial goals and comfort with risk.

How Do Annuities Pay Out?

Annuities offer several payout options, which can help you customize how you receive your money:

• Lump sum: You receive your entire payout at once
• Lifetime income: You can receive monthly payments for the rest of your life
• Period certain: Payments last for a set number of years
• Joint and survivor: Payments continue for both you and a spouse

You’ll also choose between:

• Immediate annuities: Begin payments shortly after purchase
• Deferred annuities: Begin payments at a future date, often during retirement

Read More: Immediate vs. Deferred Annuities: Which Is a Better Fit for You?

Who Should Consider an Annuity?

Annuities may be a good fit for people who:

• Are nearing retirement and want more predictable income
• Have already contributed to other retirement accounts, like a 401(k) or IRA
• Are concerned about outliving their savings
• Prefer a more hands-off approach to investing

Is an Annuity Right for You?

Annuities may be a helpful part of your retirement income strategy, especially if you’re looking for more predictable income. Like any financial product, they’re not right for everyone. But with the right information and guidance, you can decide whether an annuity fits your financial goals.

To learn more about WoodmenLife’s retirement options, visit WoodmenLife.org/Retirement.

Written by: Diana Henry, Senior Digital Copywriter

This blog is intended for general educational purposes only and may reference products, features, or options not currently offered by WoodmenLife. Availability of products and features can vary by company and state.
WoodmenLife, its employees, and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

Read More

Understanding Fixed and Variable Annuities

Immediate vs. Deferred Annuities: Which Is a Better Fit for You?

Qualified vs. Non-qualified Annuities

Understanding Annuity Taxes and How They Affect You

Choosing Between Annuities and Life Insurance

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