Is a Retirement Annuity Right for You? 6 Benefits to Know

Are you looking to create a solid foundation for your retirement? If so, look no further than a retirement annuity. These products are the only financial vehicles that can guarantee retirement income for life! This article describes retirement annuities, including their major benefits and features, and who can profit from purchasing these products.

What Is a Retirement Annuity?

A retirement annuity is a product issued by an insurance company that can help prevent you from outliving your money. By the way, we’re using the term “retirement annuity” but really we could just say annuity. Although you can purchase an annuity prior to retirement, the real benefits of annuities are found when they’re used as a retirement savings vehicle.

Simply put, an annuity allows you to set aside a portion of your money that you want to save for retirement. Then, at the time of your choosing, you begin receiving regular payments that last forever or for a designated period of time. It’s like getting a monthly paycheck after you retire!

There are many different kinds of annuity contracts. Before buying, you’ll want to understand how annuities work and how to choose the best retirement annuity for your unique needs.

Types of Retirement Annuities

Most life insurance companies feature a menu of annuity products and life insurance retirement plans to choose from. To get an in-depth look at the various annuity types, check out our guide on the different types of annuities.

There are several types of annuities that can help support you in retirement. Each features a different method of providing returns:

Fixed annuities: Fixed annuities provide a guaranteed rate of return throughout retirement or over a set period of time before you retire.

Variable annuities: Variable annuities allow you to choose from a selection of stock market investments that drive the rate of return. Your retirement payouts vary based on the performance of the underlying investment options.

Fixed-indexed annuities: Fixed-indexed annuities are a hybrid of fixed and variable annuities. Being a fixed annuity, they have a guaranteed minimum interest rate but they also have an opportunity for gains as your annuity tracks an index, like the S&P 500. Retirement annuities also vary based on when you want the annuity to payout.

Deferred annuities: A deferred annuity helps you accumulate money before retirement. With this type of annuity, you contribute to the annuity (either in a lump sum, via monthly payments, or some combination of the two) and let it grow. Then, after you turn 59½ (the age you can withdraw without IRS penalties), you can annuitize your annuity. This creates a stream of income payments to build a financial foundation for your retirement.

Immediate annuities: An immediate annuity can support your retirement plan if you are very close to or are already in retirement. With this type of annuity, you make a lump sum payment to an insurance company to fund the annuity. Almost immediately after the payment, you start receiving regular income payments. These payments can last for the rest of your life or a time period that you choose.

Now that we've described what retirement annuities are, let's review their benefits.

Key Benefits to Retirement Annuities

Annuities are a great product to support your retirement for a few key reasons. The following are the top 6 reasons to purchase a retirement annuity.

1. Guaranteed Income for Life

The most compelling case for buying a retirement annuity is that it can provide guaranteed lifetime income—that is, income for the rest of your life. That's a big deal! Unless you’re a multimillionaire, this could likely benefit you.

The lifetime income feature is not available with traditional investments. A retirement annuity with guaranteed annuity payments, along with Social Security, can ensure you’ll have a solid foundation for your retirement plan. This allows you to be creative with other investments you may have.

2. Deferred Distributions

Another nice feature of retirement annuities is their tax-deferred status. With other traditional retirement products, such as Certificates of Deposit (CDs), you have to pay federal income tax on gains every year, even if you can’t take the gains from the CD without penalty. With annuities, you don’t owe any taxes on annual gains. Instead, you only pay taxes when you decide to take distributions. That aspect gives you some control over when you pay taxes.

Leaving money in a deferred annuity can also help reduce the amount of taxes you’ll pay. Since most people are in a lower tax bracket when they retire, the income you receive from an annuity will be taxed at a lower rate. e. That way, you end up paying less in taxes on the same amount of income.

3. Guaranteed Rates

As we mentioned before, growth from fixed-indexed and variable annuities depends on how your chosen market index performs. But with fixed annuities, you know exactly how much your annuity will grow because the insurance company guarantees your rate of return.

Canvas annuities are fixed annuities that have this fixed-rate feature for a set number of years and offer very competitive rates. If you are looking for a predictable income stream, a retirement annuity may be a better alternative than putting money into equities or even corporate bonds.

4. Flexible Funding

You can buy an annuity using your existing savings or rollover your IRA, 401(k), 403(b), or lump sum pension payment into an annuity without being taxed on the money you’re rolling over. Annuities funded with an IRA or 401(k) rollover are "qualified" plans. With these, the insurance company creates an "IRA annuity," which you can deposit your retirement funds into directly. Flexibility is a great perk because it gives you options for how you fund your retirement annuity.

5. Immediate and Deferred Options

Retirement annuities provide the flexibility of buying now and building the value of the annuity (a deferred annuity) or making a deposit and starting to receive lifetime payments right away (an immediate annuity). Typically, people who purchase deferred annuities have not yet reached their 60th birthday and would like to build tax-deferred money in preparation for retirement. Immediate annuities are purchased after (or close to) retirement and provide solid, guaranteed regular income payments, which can greatly benefit a retirement plan.

6. Safe Legacy Planning

We have discussed how a retirement annuity can provide financial security for the purchaser, but most annuities also have provisions for taking care of survivors after the owner's death. These death benefits can continue to provide financial security to beneficiaries.

Annuities are backed by the financial strength of the insurance company that sells them. This means you should do your research on insurance companies before purchasing. If your insurance company becomes insolvent, your annuity may be covered by your state’s State Guaranty Association.

Is a Retirement Annuity Right for You?

While retirement annuities have many benefits, you should be aware of some potential drawbacks:

Fees and Expenses: Some annuities have significant charges, including surrender fees that may apply to early withdrawals. Remember that annuities are long-term products; they’re not meant to provide short-term liquidity. Consult with your annuity company and ask to see the fee and surrender charge schedule before buying.

Primarily for non-millionaires: Retirement annuities are for those who want the peace of mind of guaranteed income. The very wealthy would likely not see any benefit in the product since they have sufficient assets to provide for a comfortable retirement. So if you want a product that will help you sleep better during your golden years, then a retirement annuity could be just the remedy. Its guaranteed income features make it a great product to anchor your retirement. Canvas Annuity provides fixed retirement annuities that have best-in-class rates, the ability to buy online, and generous withdrawal features.