“An annuity is a contract between you and an insurance company,” Eweka said. “You make a lump-sum payment or a series of payments, and in return, you receive regular disbursements, beginning either immediately or at some point in the future. Generally, you have the option to convert to lifetime annuity income in the future but are not required to do so.”
Annuity assets can typically be withdrawn without penalty after age 59 ½. While annuities may be available in your employer retirement plan or IRA, you can also purchase an annuity contract outside of a retirement plan. During your working years, when you’re saving for retirement, annuity earnings accumulate on a tax-deferred basis. During the accumulation phase, you receive regular returns at either a fixed or variable rate. However, once you retire, the focus turns to generating income to help meet your expenses in retirement. That’s the payout phase.
You may choose fixed or variable annuities, or a combination of the two to help meet your income needs in retirement. Fixed annuities provide a guaranteed, fixed amount for life or for a certain period of time that you designate. For those concerned about market risk, fixed annuities offer steady, reliable income regardless of market performance. That makes fixed annuities an appropriate choice for many people seeking to build an income floor to help cover their essential expenses in retirement. However, one disadvantage is that your income payments may not keep up with inflation over time. That’s where variable annuities may be able to help.
One of the biggest differences between fixed and variable annuities is that fixed annuities offer a guaranteed growth rate and income payments, while returns and income payments from variable annuities will fluctuate as market conditions
change over time. They’re designed to help capture market gains, which can help you keep pace with inflation.
“Since the income you receive from the variable annuity will rise and fall with the market, the fixed annuity should be used as part of your stable income floor,” Eweka said.
Variable annuities play an important role as part of a diversified income stream to help pay for discretionary expenses in retirement or help ensure money is available to fund your legacy goals. A strategy that combines both fixed and variables annuities can help secure your retirement in any market environment. 1