Which Type of Annuity Is the Right One for You?

As you’re looking to grow your wealth and find a steady stream of reliable, passive income, annuities may have entered your radar. Many annuities offer steady income, low-risk financial growth, and tax-deferred earnings. Finding which annuity works best for you can be a challenge as each has its own unique advantages and works best for different financial situations, but understanding more about each type of annuity can help you narrow your focus. Keep on reading to learn about four of the popular annuity options to find which one works best for you.


Fixed Annuities

Offering the lowest risk and most predictability when it comes to interest rates and payments, fixed annuities are a great financial option if you’re looking for a boost in your monthly income that you can count on time and time again. With a fixed annuity product, you know the interest rate from the start—but it’s important to note if the interest rate resets after a certain amount of time. By knowing this rate, you can plan your financial assets and income to cover your monthly expenses. Some key advantages to purchasing a fixed annuity include:

  • Premium payment protection
  • Guaranteed minimum interest rate
  • Tax-deferred earnings
  • Reliable retirement income
  • Simple to understand compared to other annuity options

Another type of fixed annuity is a multi-year guaranteed annuity (MYGA). The benefit of purchasing this type of fixed annuity is that it offers a fixed interest rate for a set number of years. With interest rates lasting typically from three to 10 years, this option is ideal for people nearing retirement and wanting to find a way to defer taxes on their investments while still getting a return on that investment.

Variable Annuities

If you want an annuity with a higher growth potential, variable annuities might be the right choice for you. With greater potential for returns, contract holders can purchase this type of annuity to capitalize on market fluctuations. Although somewhat more risky and expensive than fixed annuities, there are some unique benefits afforded by this annuity product. Key advantages include:

  • Greater return potential
  • Two income distribution options
  • Optional lifetime income guarantee
  • Additional control over investments
  • Unlimited contributions

Deferred Annuities

If you’re not quite ready to start receiving payments yet or want to stretch your retirement income, purchasing a deferred annuity enables you to receive payments in the future rather than immediately. Opting for this annuity helps your annuity investment grow on a tax-deferred basis, which can increase your future annuity payments when compared to receiving immediate ones. Another useful benefit of this annuity type is that you can specify how long you want to receive these payments. Here are the specific benefits of choosing this option over other annuity types:

  • Boosts compound interest rates
  • Higher payout potential
  • Flexible payout options

Immediate Annuities

Also known as an income annuity, this type of annuity allows you to start receiving annuity payouts after one year of purchase. This can help those entering their retirement years get another stream of income fast, which can help them better cover living expenses and other costs during their retirement. Some of the unique benefits afforded by immediate annuities include:

  • Assured for life
  • Short waiting period until withdrawals

How To Choose What Annuity Is Right for You?

Choosing the right annuity for you involves considering many crucial factors. For one, your financial goals are a major component and can quickly narrow down your list of potential annuity options. Other factors that can help you sort out which annuity to choose include your willingness to accept risk, how close you are to retirement, and what your monthly expenses might look like during your retirement. Another important thing to consider is if you want to add any annuity riders to your preferred annuity choice, which can further customize your product and better meet your specific financial needs.

Annuities are a great layer of financial protection that offers another stream of income as you get closer to your retirement years—or even if you are already in retirement. It’s an appealing tool to help offset the cost of living inflation and help you cover expenses no matter the market fluctuations. It can even bridge the gap between receiving other income streams (like Social Security payments and pensions) and waiting for other investments to mature (like long-term stock investments or CDs). If you’re ready to take control of your retirement assets, consider one of the many annuity options out there.

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Author: Sanjib SahaSanjib is a finance based writer who has a deep knowledge in stock market, cryptocurrency and mutual funds. He is also a co-founder of Financesrule.com

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