An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement.
You can opt to receive payments for the rest of your life, or for a set number of years. How much you receive depends on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity’s underlying investments (variable annuity).
There are two basic types of annuities: deferred and immediate.
Within these two categories, annuities can also be either fixed or variable depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two.
Fixed annuities are essentially CD-like investments issued by insurance companies.
Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs.
Variable annuities are tax-deferred retirement vehicles that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose.
Equity-indexed annuities is a combination of a fixed and a variable annuity. Equity-indexed annuities give you the best of both worlds.
Immediate annuities (sometimes called income or payout annuities), are pretty straightforward – basically a mirror image of a life insurance policy. Instead of paying regular premiums to an insurer that makes a lump-sum payment upon your death, with an annuity you give the insurer a lump sum of cash in return for regular income payments until you die.
Longevity annuities provides protection against outliving your money late in life. Also known as an advanced life delayed annuity, this type of annuity requires you to wait until you reach age 70 or so to begin receiving a payout. Once the payout begins, the annuity provides a guaranteed, regular amount of income for the rest of your life.