What type of annuity is right for me?

With the length of retirement continuing to grow, many people may face a savings gap that could leave them without enough assets for the future. Research suggests that with pensions disappearing, future retirees will likely have to rely primarily on their personal retirement savings to fund their retirement. Building a financial plan that helps ensure reliable income in retirement is more important than ever. Incorporating an annuity into a comprehensive financial strategy can help grow and protect retirement savings while securing a steady income stream for the future. Here's an overview of the different types of annuities and how to choose the one that might align with retirement goals.

What are annuities?

An annuity is a long-term contract between a person and an insurance company where in exchange for lump-sum or periodic payments, they could receive an income stream in retirement. These products are specifically designed to help retirees address the risk of outliving their retirement savings and offer more financial security to a retirement plan.

What might be the benefits of annuities for retirement?

Designed to turn retirement savings into retirement income, annuities can potentially help supplement income from pensions, investments, 401(k)s, Social Security benefits, and other personal assets. They can be customized based on a person’s retirement timeline, financial goals, and risk profile. Benefits of annuities include:

Tax-deferred growth

Income taxes on any earnings from an annuity are paid once a person begins taking withdrawals.

Possible downside protection

Fixed Index annuities offer growth potential without the direct risk of losing premiums due to market downturns while not being directly invested in the stock market.

No annual contribution limits

Unlike some other retirement savings vehicles, some annuities may not have a limit on the amount of money you can put into it every year. Certain restrictions may apply based on the annuity contract.

Lifetime income benefits

Certain annuities offer a guaranteed income option to help provide income you can count on for the rest of retirement.

Legacy benefits

Some annuities offer a death benefit that could maximize the legacy a person passes to their beneficiaries.

How do annuities generally work?

Annuities generally consist of two phases: the accumulation phase and the payout phase. During the accumulation phase, payments made to fund the annuity grow on a tax-deferred basis, ideally to help build cash value. Once retirement begins and income payments are needed, the annuity transitions into the annuitization phase, or payout phase. The amount and duration of payments depend on the specific terms of the chosen annuity.

Different kinds of annuities

An annuity can be a valuable addition to a financial strategy to meet retirement income needs. Depending on age and retirement goals, different types of annuities can be tailored to suit specific financial objectives.

Immediate vs deferred annuities

The key difference between immediate and deferred annuities is in the timing of income payments. Immediate annuities do not have an accumulation period and typically begin payouts shortly after purchase. Income payments from a deferred annuity are typically delayed until a future date and can allow savings to grow on a tax-deferred basis. Once the deferral period ends, the annuity enters the payout phase, providing regular income for the annuitant, often during retirement.

Immediate annuities

May provide steady retirement income and are funded by a lump sum payment where withdrawals begin within 30 days to one year.

Single premium immediate annuity (SPIA)

Purchased with a single lump-sum payment, a SPIA does not have an accumulation phase but begins paying out guaranteed income soon after purchase. Often people approaching retirement age may choose this type of annuity to help supplement their pension, Social Security, and other retirement income.

Deferred annuities

Pay a lump sum or income payments at a later date. There are several types of deferred annuities that offer optional add-ons to turn your retirement savings into income for the future.

Variable annuity

With a variable annuity, you choose investment subaccounts to invest the funds. Your premium is then invested in different assets like money market funds, stocks, and bonds. The value of a variable annuity will vary over time based on the performance of the investments you choose. While this type of annuity may offer greater growth compared to others, there is also a risk of losing money during market downturns.

Fixed annuity

With a fixed annuity, your contributions grow at a guaranteed specified interest rate for a certain period of time. A common type of fixed annuity is a multi-year guarantee annuity (MYGA) which guarantees an interest rate for a specific period of time. A key difference between a MYGA and traditional fixed annuity is the length of time the interest rate is guaranteed.

Fixed index annuity

Helping to balance growth and principal protection, a fixed index annuity is designed to grow retirement savings while protecting the premium from market volatility. Since the premium is not invested directly in the market, the interest credited will never be less than zero, even when there are fluctuations. Many fixed index annuities also offer guaranteed income options that may provide income payments for the rest of your life.

Fixed vs variable annuities

Fixed and variable annuities are both designed to provide retirement income but differ on their level of risk and growth potential. A variable annuity has subaccounts that are invested in the stock market, allowing for higher returns but also exposing the annuitant to market risk. The value of the annuity and the payouts depend on the performance of these investments. A fixed annuity guarantees a minimum interest rate where growth is not directly tied to market performance. Understanding these differences is important when choosing between types of annuities and creating a financial plan that helps meet retirement goals.

What type of annuity might be right for me?

When exploring the different types of annuities to supplement a retirement plan, key considerations include your retirement timeline, financial goals, and risk tolerance. For those with a longer time horizon, an option that supports growth while potentially protecting assets from loss may be preferable. For those nearing retirement, a guaranteed income stream may offer more stability and security.

A financial professional can help you to explore the benefits and limitations for annuities and their features to determine which one may be right for you. Together you can discuss whether incorporating an annuity into a retirement income plan makes sense and ways you can enhance future financial security and build savings that will last throughout retirement.

Under current law, annuities grow tax deferred. An annuity is not required for tax deferral in qualified plans. Annuities may be subject to taxation during the income or withdrawal phase. Neither Midland National® Life Insurance Company, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax or investment advice. You should consult with and rely on your own qualified tax professional.

Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation. Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from the accumulation value for optional benefit riders or strategy fees or charges associated with allocations to enhanced crediting methods could exceed interest credited to the accumulation value, which would result in loss of premium. They may not be appropriate for all clients. Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

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