An annuity can help secure a stream of payments to use as a form of retirement income. When you purchase an annuity, you may get tax breaks or be able to receive income at regular intervals in exchange for a one-time lump sum payment to an insurance company.
Types of Annuities
There are three main types of annuities:
- Fixed annuities pay a guaranteed amount during each payment period. Fixed immediate annuities start paying right away, while fixed deferred annuities start paying at some pre-determined point in the future. In general, fixed annuities have a moderate rate of return.
- Variable annuities allow the account owner to choose from a menu of mutual funds and can produce a higher return. Payments are based on the performance of the mutual funds. There is some risk associated with variable annuities.
- Indexed annuities generally provide a higher return than fixed annuities but are less risky than variable annuities. There’s a guaranteed minimum payout, and a portion of the interest earned is tied to a market index, such as the S&P 500.
The amount of money you receive from an annuity is based on the type of account you choose, the insurer’s terms and the amount of money you invest.
The best way to determine how much income your annuity investment may generate is to get an individualized quote from your insurance agent.