Back to all education posts

 How to Buy an Annuity: Types, Rates & Retirement

Key Takeaway

To buy an annuity, one should understand the various annuity types, assess annuity rates, and select payout options suitable for their retirement income objectives. Consulting a financial advisor and understanding tax implications, fees, and annuity contract terms are important to help secure a sound retirement.

Share:
Annuity buying umbrella image
1/27/2025

Introduction to Annuities


What Is an Annuity?


Planning for retirement can be both exciting and overwhelming. One financial product that often comes up in retirement planning discussions is an annuity. But what exactly is an annuity?

An annuity is a contract between you and an insurance company. In exchange for your payment—either a lump sum or a series of payments—the insurer agrees to provide you with regular disbursements, starting either immediately or at some point in the future. Annuities are designed to help manage your income in retirement and can provide a steady stream of income for life or for a specific period.

Why Consider an Annuity?


Annuities can offer several potential benefits:

  • Guaranteed Income: They can provide a reliable source of income, helping to cover your essential expenses in retirement.
  • Tax-Deferred Growth: The money you invest in an annuity grows tax-deferred until you start receiving payments, which can help your savings grow faster.
  • Longevity Protection: Annuities can help protect against the risk of outliving your savings, providing income no matter how long you live.


However, annuities can be complex, and they may not be suitable for everyone. It's important to understand how they work and whether they fit into your overall retirement plan.

Identifying Your Retirement Objectives


Before purchasing an annuity, it's crucial to clarify your retirement goals. Here are some questions to consider:

  • Income Needs: How much income will you need in retirement to cover your living expenses?
  • Risk Tolerance: Are you comfortable with investment risks, or do you prefer guaranteed returns?
  • Legacy Planning: Do you want to leave assets to your heirs?
  • Flexibility: How important is access to your funds in case of emergencies?


By answering these questions, you can better determine whether an annuity aligns with your financial objectives.

Annuity Comparison Table

Type of Annuity

Fixed Annuities

Key Features

  • Guaranteed interest rate
  • Predictable payments

Best For

  • Risk-averse individuals
  • Retirees seeking stable income

Growth Opportunity

  • Low: Interest rate is fixed

Risk Level

  • Low

Type of Annuity

Variable Annuities

Key Features

  • Payments linked to investment performance
  • Potential for higher returns

Best For

  • Individuals comfortable with market risks
  • Those seeking growth potential

Growth Opportunity

  • High: Depends on investment performance

Risk Level

  • High

Type of Annuity

Indexed Annuities

Key Features

  • Returns tied to market indices (e.g., S&P 500
  • Guaranteed minimum return

Best For

  • Those seeking a balance of growth and stability

Growth Opportunity

  • Moderate: Index-linked growth with safeguards

Risk Level

  • Moderate

Type of Annuity

Multi-Year Guaranteed Annuities (MYGAs)

Key Features

  • Fixed interest rate for a specific term
  • Similar to Certificates of Deposit (CDs)

Best For

  • Those wanting higher returns than traditional savings without market exposure

Growth Opportunity

  • Low: Fixed rate locked in for term

Risk Level

  • Low

Type of Annuity

Immediate Annuities

Key Features

  • Payments start immediately after investment
  • Provides income right away

Best For

  • Retirees needing immediate income

Growth Opportunity

  • Minimal: Focused on income distribution

Risk Level

  • Low

Type of Annuity

Deferred Annuities

Key Features

  • Payments start at a future date
  • Allows for tax-deferred growth

Best For

  • Individuals in the accumulation phase
  • Those planning for future retirement income

Growth Opportunity

  • Moderate to High: Dependent on annuity type

Risk Level

  • Varies (based on type selected)
This is normally a comparative table on desktop, but is in a custom view on mobile.

Types of Annuities Explained


Annuities come in different forms, each designed to meet specific needs. Understanding these types is key to making an informed decision.

Fixed Annuities


A fixed annuity offers a guaranteed interest rate and predictable payments. This makes them a popular choice for those who prioritize stability over growth. With a fixed annuity, you know exactly how much income you’ll receive, which can simplify your financial planning. They’re especially suited for individuals who are risk-averse and want to avoid the uncertainty of market fluctuations.

For example, if you invest $100,000 in a fixed annuity with a 3% guaranteed annual return, you’ll receive steady income payments based on this rate, regardless of what happens in the broader economy.

Variable Annuities


Variable annuities, on the other hand, allow your payments to grow based on the performance of investments like mutual funds. While this offers the potential for higher returns, it also comes with greater risk. Your payouts can fluctuate depending on how well your chosen investments perform, making these annuities more suitable for individuals who are comfortable with market volatility.

Indexed Annuities


If you’re looking for a middle ground between fixed and variable annuities, an indexed annuity might be the answer. These annuities tie your returns to the performance of a market index. While they offer a guaranteed minimum return, their growth potential depends on how well the index performs. Indexed annuities are often chosen by those who want a balance of safety and growth potential.

Multi-Year Guaranteed Annuities (MYGAs)


MYGAs are a type of fixed annuity offering a guaranteed interest rate for a specific term, similar to a Certificate of Deposit (CD). MYGAs have a locked-in interest rate for several years. They are ideal for those looking to earn a higher rate than traditional savings accounts without market risk.

Immediate vs. Deferred Annuities


Timing is another important factor to consider. Immediate annuities start payments almost right away, making them a great option for retirees who need income now. Deferred annuities, by contrast, allow your money to grow tax-deferred over time, providing income in the future. This makes them ideal for individuals still in the accumulation phase of their retirement planning.

Here’s a quick comparison:

Feature

Payments Start

Immediate Annuities

Immediately after investment

Deferred Annuities

At a future date

Feature

Growth Opportunity

Immediate Annuities

Limited growth, focus on income now

Deferred Annuities

Tax-deferred growth until payouts begin

Feature

Best For

Immediate Annuities

Retirees needing income immediately

Deferred Annuities

Individuals saving for future retirement

This is normally a comparative table on desktop, but is in a custom view on mobile.

Annuity type image
Annuity type image

How to Start the Annuity Buying Process


Buying an annuity involves several key steps:


Assessing Annuity Rates

  • Compare Rates: Look at rates from multiple insurance companies to find the best offer.
  • Use Online Tools: Annuity calculators can help estimate potential payouts.
  • Consider Financial Strength: Choose a reputable insurance company with strong financial ratings.


Consulting a Financial Advisor

  • Professional Guidance: An advisor can help you understand complex terms and features.
  • Personalized Advice: They can assess your financial situation and recommend suitable options.
  • Fee Transparency: Ensure you understand any fees associated with their services.


The Annuity Application Process

  • Provide Personal Information: You'll need to supply details about your finances and retirement goals.
  • Choose Features: Select payout options, beneficiaries, and any riders or additional benefits.
  • Review the Contract: Carefully read the terms before signing.



Securing Your Retirement Income with Annuity Payout Options


When it comes to payouts, annuities offer a range of options. For example, you can choose a life-only payout, which provides income for as long as you live. Alternatively, you might select a period-certain payout, which guarantees payments for a specific number of years. Joint annuities are another option, ensuring that a spouse continues to receive income after your death.

It’s also worth considering inflation protection. Some annuities offer riders that adjust your payments to keep up with rising costs, ensuring your income maintains its purchasing power over time.

Factors to Consider When Buying an Annuity

Factors to Consider When Buying an Annuity Chart
Factors to Consider When Buying an Annuity Chart

1. Fees and Surrender Charges
Annuities often come with fees that can impact your returns. You might also face surrender charges if you withdraw funds too early.

2. Inflation Protection
Some annuities let you add inflation protection riders, helping ensure your payments keep up with rising costs. This is especially useful for long retirements.

3. Financial Strength of the Insurer
Always check the insurer’s rating from agencies like A.M. Best or Moody’s. A strong rating indicates they’re more likely to meet their obligations than a lower-rated company.

4. Optional Riders
Riders can enhance your annuity by adding benefits like death payouts or cost-of-living adjustments. But remember, they often come at an extra cost.

Final Steps Before Signing Your Annuity Contract


Reviewing Your Annuity Contract

  • Read Thoroughly: Ensure you understand all terms and conditions.
  • Seek Professional Advice: Consider having a lawyer or financial advisor review the contract.
  • Confirm Details: Verify that all verbal promises are included in writing.


The Free-Look Period

  • What It Is: A set period during which you can cancel the contract without penalty.
  • Use This Time: Review the contract again and make sure it meets your expectations.


Annuity Withdrawal Rules and Regulations

  • Understand Penalties: Be aware of any fees associated with withdrawals.
  • IRS Regulations: Early withdrawals may incur taxes and penalties.
  • Required Minimum Distributions (RMDs): Certain annuities may be subject to RMD rules starting at age 73.



Conclusion: Securing Your Financial Future with Annuities


Purchasing an annuity can be a valuable component of a comprehensive retirement plan. By providing a steady stream of income and offering various features to suit individual needs, annuities can help bring financial stability in your retirement years. It's essential to educate yourself, compare options, and consult with professionals to help ensure that the annuity you choose aligns with your retirement goals.

Frequently Asked Questions - Buying an Annuity

What are the main types of annuities?


Fixed, variable, indexed, immediate, and deferred annuities are the primary types.

How do I compare annuities effectively?


Look at rates, fees, company ratings, payout options, and additional features.

Are there penalties for withdrawing from an annuity early?


Yes, early withdrawals may incur surrender charges and tax penalties.

What are MYGAs, and how do they differ from traditional annuities?


MYGAs are multi-year guaranteed annuities offering a fixed interest rate for a set term, similar to CDs.

How can I ensure my annuity contract is secure?


Choose a reputable insurance company with strong financial ratings and thoroughly review the contract terms.

Can I access my annuity funds in an emergency?


Some annuities allow for partial withdrawals, but they may come with fees and penalties.

Do annuities adjust for inflation?


Some annuities offer inflation protection riders, but they may reduce initial payouts.

How are annuities taxed?


Earnings grow tax-deferred, but withdrawals are taxed as ordinary income.



EL01603A120 (12-24)

This article was generated with the help of artificial intelligence (AI). AI-generated content may occasionally contain errors or misleading information. The information above is for educational use only and does not represent insurance, tax, or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.

Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.