Annuities Explained: What They Are and Why They Might Belong in Your Retirement Plan

Retirement planning often comes down to a practical question: How can you make your savings support you for as long as you need them? An annuity may be one option to consider. It can turn money you set aside into a stream of payments, sometimes for the rest of your life.

Annuities can also be complicated. Different contracts come with different guarantees, fees, withdrawal rules and risks. Here’s a plain-English look at how they work and what to consider before deciding whether one belongs in your retirement plan.

What is an annuity?

An annuity is a contract you buy from an insurance company. You pay the insurer either a lump sum or a series of payments. In return, the contract may grow your money, provide income later, or both.

Some annuities begin paying income soon after you buy them. Others are designed to grow for a while before payments begin. Depending on the contract, you might receive payments for a set period, for your lifetime, or for your lifetime and a spouse’s lifetime.

An annuity can help make part of your retirement income more predictable. It does not replace a full retirement plan, and it isn’t the right fit for everyone. Think of it as one potential piece alongside savings, Social Security, a pension and other income sources.

The main types of annuities

Annuities come in several categories. This article covers fixed and indexed annuities; variable annuities are securities sold only by prospectus through a registered broker-dealer and are not discussed here.

The contract’s type can affect how your money earns interest, what guarantees may apply and how much risk you take on. The terms vary by insurer and product, so review the contract itself.

Fixed annuities

A fixed annuity offers interest or payments set according to the contract. Your account value generally isn’t tied directly to daily stock market performance. Depending on the product, the interest rate may be guaranteed for a set period and then change.

May be worth exploring if: You value more predictable interest crediting and understand how long the rate is guaranteed.

Consider: A fixed payment may buy less over time if prices rise. Also, check what happens to the rate after any introductory period.

Indexed annuities

An indexed annuity credits interest using a formula tied to a market index. That doesn’t mean you own the index or receive its full return. The contract may use limits, such as caps or participation rates, to determine how much interest is credited. It may also include a minimum guarantee, subject to contract terms.

May be worth exploring if: You want to understand how the contract balances index-linked interest with its stated protections.

Consider: The formula can be hard to compare at a glance. Ask how interest is calculated, what limits apply, and what happens if you withdraw early. FINRA explains indexed annuity features and risks.

Immediate or deferred: When income starts

“Immediate” and “deferred” describe the timing of payments, not how an annuity earns interest.

• An immediate annuity generally starts making payments soon after you purchase it.
• A deferred annuity is designed to accumulate value before income payments begin, or before you choose whether to take income.

Payment timing, payout choices and access to your money depend on the contract. Ask the insurer to show you how each choice affects your income and beneficiaries.

What benefits might an annuity offer?

A possible income stream for retirement

Some annuities can provide payments for your lifetime. That may help if you’re concerned about outliving your savings. It’s important to understand exactly what the contract guarantees, when payments start and whether payments continue to a spouse or beneficiary after your death.

A way to plan around essential expenses

You might compare expected annuity income with monthly costs such as housing, utilities and groceries. An annuity may complement Social Security, a pension or savings withdrawals. The goal is to see whether the combination fits your needs, not to assume one product should cover everything.

Tax-deferred growth in some situations

With a nonqualified annuity bought using money you’ve already paid tax on, earnings generally aren’t taxed until you withdraw them. Tax-deferred doesn’t mean tax-free. A withdrawal may include taxable earnings, and the rules depend on how the annuity is set up.

If an annuity is held inside an IRA or another qualified retirement plan, the account’s existing tax rules generally apply. Putting an annuity inside that kind of account doesn’t create an additional tax-deferral benefit by itself. See the IRS guidance on pensions and annuities, and speak with a tax professional about your circumstances.

Optional features, depending on the contract

Some contracts offer choices related to income guarantees, death benefits or inflation protection. These features aren’t standard across all annuities, and they may increase costs or limit flexibility. Ask what the feature does, what it costs and what conditions apply before you count on it.

What should you weigh before buying?

Annuities trade some flexibility for the benefits they may provide. Before you commit, consider:

• Access to your money: Many contracts have a surrender period. Taking out more than the allowed amount or ending the contract early may lead to a surrender charge.
• Fees and expenses: Look for administrative costs, charges for any optional features, and any other fees described in the contract. Ask for a clear explanation of all costs.
• Inflation: A level payment may not stretch as far if everyday costs rise. Ask whether payments can increase and what that option costs.
• Contract terms and limits: Fixed and indexed annuities both come with terms to understand, such as how interest is credited and what happens if you need your money early.
• The insurer’s financial strength: Guarantees are backed by the insurance company that issued the contract, not by the federal government. Annuities are generally not FDIC-insured bank deposits.
• Beneficiaries and payout choices: Ask what happens to remaining value or payments if you die, and how your choices affect a spouse or beneficiary.

A useful starting point is the contract’s surrender schedule, fee details, payout options and any product disclosure documents. FINRA’s annuity overview offers more questions to consider.

Could an annuity fit your plan?

An annuity may be worth exploring if you have savings you don’t expect to need soon and want to consider a predictable income stream. It may be less suitable if you need easy access to the money, are uncomfortable with the fees or rules, or don’t understand how the proposed contract works.

Before making a decision, try asking:

• What income is guaranteed, and when would it start?
• How long does the surrender period last?
• What fees or charges apply?
• Can payments change over time?
• What happens to the contract if I die?
• How does this option compare with other ways to use the same money?

You don’t have to sort through every term alone. Shingledecker Insurance Agency LLC helps people compare insurance options and understand how coverage choices differ. If you’re considering an annuity, our team can help you compare annuity options and understand how the terms differ. Product availability and features vary, and an annuity should be considered as part of your overall retirement and financial picture.

As an independent agency, we may receive compensation from insurance companies whose products we place. This does not change the premium or contract terms you’re offered.

This article is general educational information only. It is not financial, investment, tax or legal advice, and it is not a recommendation or an offer to buy or sell any product. Annuity features, fees and availability vary by insurer and by state, and not all products are available in every state. Any guarantees are subject to the claims-paying ability of the issuing insurance company. Please consult a licensed professional about your own situation.

Shingledecker Insurance Agency LLC is a licensed insurance agency in Pennsylvania, Ohio, Maryland and West Virginia.

HAVE QUESTIONS ABOUT ANNUITIES? Talk with our agency or get in touch to explore your options. We’ll help you take the next step with a clearer view of what to ask and compare.