June 25, 2024

An annuity is a kind of funding account that may present supplemental revenue upon retirement. Like different sorts of funding accounts, annuities have their advantages and downsides. Be taught extra about how annuities work, their predominant execs and cons, which sorts to think about, and who can profit essentially the most from an annuity.



Retirement planning, budgeting, wealth administration, with 24/7 assist and entry to a group of economic advisors.


14-day free trial for first-time prospects, then $8 auto-recurring month-to-month subscription price.

Empower Private Wealth, LLC (“EPW”) compensates TIME Stamped for brand new leads. TIME Stamped shouldn’t be an funding shopper of Private Capital Advisors Company or Empower Advisory Group, LLC.

How annuities work

Annuities are sorts of contracts between the investor and the insurance coverage firm. You can begin an annuity with a lump sum of money after which add contributions as you want. Relying on the kind of annuity you select, you’ll be able to count on mounted or variable returns in your funding. Listed here are some particulars on the three sorts of annuities.

  • Mounted annuities: Such a annuity affords a hard and fast return, which might be useful for budgeting throughout retirement, however can restrict the returns in your cash.
  • Variable annuities: Such a annuity invests your cash in shares and bonds, which might lead to increased total returns over time—however this additionally means your cash is weak to market fluctuations and will have a decrease return than anticipated.
  • Listed annuities: Such a annuity invests your cash in a inventory market index, such because the S&P 500 or the Dow Jones. This could be a much less risky technique than investing your cash in shares and bonds, however nonetheless isn’t as secure as a hard and fast annuity.

Advantages of annuities

Annuities have many advantages. They may also help you reside extra comfortably and predictably throughout retirement. Additionally they are an ideal choice for high-income people who could max out their contribution limits on different sorts of retirement accounts.

Assured revenue

Annuities present revenue while you retire. This cash can be utilized to complement your retirement revenue from sources reminiscent of Social Safety, a 401(ok), or an IRA. Having assured revenue from an annuity may also help you be extra financially secure upon retirement, permitting you to get pleasure from these years slightly than spending them worrying about cash.

RELATED: Greatest Roth IRAs 2023

Mounted returns

Mounted annuities provide a hard and fast return that lets you calculate precisely how a lot cash you’ll have upon retirement. This may also help you price range extra simply and reside extra comfortably throughout retirement.

No contribution limits

Not like 401(ok) plans or IRAs, which have IRS-imposed annual contribution limits, annuities don’t restrict how a lot cash you’ll be able to contribute. This makes them splendid for high-income people who could need to save extra for retirement than their different plans allow. With an annuity, it can save you as a lot or as little as you need (inside cause, as many annuities have a minimal contribution required to open).

Disadvantages of annuities

Annuities normally include annual charges, and withdrawing cash earlier than retirement can lead to a hefty penalty. The cash in an annuity can also be inaccessible through the contract interval, which could be a drawback if you happen to’re going through an surprising expense. What’s extra, relying on the kind of annuity you choose, it’s possible you’ll find yourself giving the insurance coverage firm greater than you—or your heirs—obtain in funds.


Many annuities impose annual charges reimbursing the issuer for investing and managing the cash in your behalf. The charges might be round 2% or 3% per 12 months—increased than for a lot of different sorts of investments. Moreover, annuities are topic to a ten% penalty tax if you happen to withdraw funds earlier than age 59½; this penalty is imposed by the IRS and is just like the penalties for 401(ok) early withdrawal. Nonetheless, there are normally fewer exceptions for early withdrawal from an annuity than from a 401(ok).

Inaccessible funds

When you’ve contributed funds to an annuity, they’re not accessible till you attain age 59½. For some buyers, this isn’t a difficulty—however if you happen to’re confronted with a big and surprising expense, it’s possible you’ll discover that you simply all of a sudden want that cash, which implies you’ll be topic to the ten% penalty. That’s why it’s a good suggestion to have an emergency financial savings fund in place, in addition to different funding choices that assist you to entry funds as wanted.

Doubtlessly variable returns

A set annuity has a assured fee of return, however variable and listed annuities have extra variable returns. That’s as a result of the contributions to these kinds of annuities are invested in shares, bonds, or mutual funds, that are weak to market fluctuations. If the market experiences losses, so too will the annuity. Nonetheless, on the flip facet, market beneficial properties will lead to a better fee of return for a variable or listed annuity, whereas a hard and fast annuity received’t be affected both means.

Might go away no inheritance for heirs

With some sorts of annuities, you’re taking a big gamble: Should you reside a very long time, it’s possible you’ll obtain greater than you paid in. Should you die youthful, you can obtain lower than you paid in, with presumably nothing left on your beneficiaries. Nonetheless, as Northwestern Mutual factors out, there are 4 methods to construction annuities that can lead to completely different payouts, and a few types do go away cash for beneficiaries. The annuity construction you select impacts how giant your month-to-month fee will probably be, with some variations offering increased quantities than others.

  • Life-only annuity. Funds cease while you die—or, in joint-life, when a second individual dies. Any steadiness stays with the insurance coverage firm.
  • Life with refund. Funds are for all times. However if you happen to die earlier than the quantity you paid in has been spent, your beneficiary will get the steadiness.
  • Life with interval sure. Funds are for all times (or joint life). However you choose a sure interval (say 10 or 20 years), and if you happen to die earlier than then, your beneficiary will get the funds by the top of the interval.
  • Interval sure solely. Funds proceed for a specified time frame. Should you die earlier than the interval ends, your beneficiary will get the remainder of the funds. Should you reside past the required interval, the funds finish.

Who can profit from annuities?

Regardless of their many advantages, annuities aren’t for everybody. Nonetheless, some buyers will discover them very helpful in constructing wealth that they will use throughout retirement. The next are some eventualities the place it’s possible you’ll profit from an annuity.

  • Excessive-earners. In case your wage is on the excessive finish and also you’re already maxing out your contributions to your different retirement financial savings accounts, an annuity supplies an extra choice that can assist you save much more for retirement.
  • Retirees. Should you’ve already retired and desire a option to complement your retirement revenue, an annuity could possibly be a great choice. Should you go for an instantaneous annuity, you’ll begin receiving funds straight away, which may also help you cowl your common residing bills while you’re not working and may substitute your common paycheck.

TIME Stamp: Annuities can complement retirement revenue, however they may also be risky and tie up your cash.

An annuity is a stable choice so as to add to your retirement revenue, however that doesn’t imply it’s the only option for everybody. Weigh the professionals and cons of an annuity earlier than deciding to take this route on your retirement. A monetary advisor may also help determine if an annuity is an efficient selection for you.

Steadily requested questions (FAQs)

Why are annuities a poor funding selection?

Annuities could be a dangerous selection for some folks—they’ve increased charges and fewer flexibility than some financial savings choices. And relying on the kind you select, your heirs could get nothing after you die even when far much less was paid out than you had contributed. however for others they’re an ideal choice to assist save for retirement. Nonetheless, it’s inadvisable to make use of an annuity as your solely supply of retirement revenue. Slightly, annuities could be a good choice for retirement contributions when you’ve maxed out your allowable contributions for a 401(ok) or IRA.

What is best than an annuity for retirement?

Annuities are good choices for some folks—particularly these with excessive incomes—however for others, an employee-sponsored retirement plan reminiscent of a 401(ok) is normally the best choice. You may also open a person retirement account, or IRA, to avoid wasting much more cash on your golden years. Should you make sufficient cash that you could max out your contributions to different sorts of retirement accounts, then an annuity is an efficient choice to proceed saving for retirement.

What’s annuity revenue?

Annuity revenue is the cash you obtain as soon as you choose into annuity disbursements after age 59 ½. You should utilize that revenue to complement your different retirement revenue, reminiscent of Social Safety, your 401(ok), and an IRA. This may also help make sure you have the funds for to reside on when you’re able to cease working.

Are annuities taxable?

Sure, annuities are taxable—however solely when the funds are withdrawn at retirement. If you begin receiving disbursements, the cash will probably be taxed utilizing your pre-retirement revenue tax bracket. Nonetheless, in case your annuity contributions are post-tax, your withdrawals will probably be tax-free. Nonetheless, your returns will nonetheless be taxable.