If you’re approaching retirement, you may be wondering if you have enough income to support your lifestyle. Social Security payments are unlikely to cover all your essential expenses, so it’s important to create other sources of wealth to see you through this time. 

That’s why annuities can be a valuable part of your retirement strategy, often generating guaranteed income when they mature or enter the distribution phase. Here’s a breakdown of common annuities for seniors and how you could choose the right one for you. 

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What is a retirement annuity and how does it work?

An annuity is a financial product that can allow you to turn your money into a guaranteed income stream, often for retirement. Annuities aren’t liquid investments like cash accounts — their purpose is to build wealth over a long period or create an income stream. Here’s how an annuity investment works:

• Accumulation phase: To buy an annuity, invest a lump sum or series of payments in an annuity for a specified period. The annuity can gain interest according to the terms of the contract — some annuity types have similarities to a certificate of deposit but can have a higher interest rate. Fixed annuities offer a guaranteed rate, while indexed and variable annuities can have fluctuating interest rates. 
• Payout or Distribution phase: When your annuity matures, you can start to receive payments or funds. You may have the option to withdraw money in a lump sum or roll it over into a new investment, but many investors opt to receive monthly payments. With lifetime annuities, you can receive payments until death, offering longevity protection.

For example, let’s say a 65-year-old places $100,000 into a 10-year deferred annuity with a 5% interest rate, compounded annually. Over the next decade, the annuity grows tax-deferred, reaching a cash value of approximately $162,889 at age 75. The investor then begins receiving lifetime monthly payments. Depending on the terms of the annuity, the monthly income might range from $1,250 to $1,350. This is an example of a potential scenario and results will vary. 

5 types of annuities seniors should consider

Annuities can be highly customizable, but different types of annuities vary in how they accrue interest and when they pay out. Here are the five main annuity types to consider. 

1. Fixed annuities

Fixed annuities offer a guaranteed interest rate typically for a set period, offering steady, predictable growth during the accumulation phase. This makes them popular with conservative investors who want to preserve capital and avoid market volatility. 

2. Indexed annuities

Indexed annuity interest rates  can be tied to the performance of a market index, such as the S&P 500. They’re designed to strike a balance between growth potential and downside protection, appealing to investors who want some market exposure without the risk of losing their initial investment or contribution. 

Most indexed annuities offer principal protection and may come with a “floor” and a “cap.” For example, a floor of 0% means you won’t lose money even if the market drops. A cap of 6% means your interest gain is limited even if the index increases by more than 6%. There are other strategies available, so it is important to read the contract terms. 

3. Variable annuities

Variable annuities offer the potential for higher returns by investing your contributions in subaccounts — similar to a mutual fund. These subaccounts can include investment vehicles like stocks and bonds, and their value fluctuates with market performance. Because your returns are tied to the market, you can gain more but also potentially lose value, including part of your principal. This type of annuity could be well-suited for those that have a longer time horizon, and are more aggressive investors.

4. Deferred annuities

A deferred annuity is designed to start paying out at a future date rather than immediately. This gives your investment time to grow, and you typically don’t pay taxes on earnings until you begin withdrawals. This type of annuity comes in a fixed, indexed, or variable format and can be particularly beneficial for long-term retirement planning. 

5. Immediate annuities

Immediate annuities typically start paying out within 30 days to one year of your investment. You contribute a lump sum and receive a guaranteed income stream for a set period or based on your contract. If you retire early and want to delay collecting Social Security benefits to maximize payments, an immediate annuity can help bridge the gap. These can also be helpful if you want an additional income stream to help bridge your overall retirement income gap or you value predictability.

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Benefits of annuities for retirees

Typically, fixed annuities could be good investments for retirees seeking steady income. Here are some of the most significant advantages of buying a traditional individual retirement annuity.

Predictable income

Possibly one of the biggest benefits of annuities is the ability to receive a steady stream of income. Many annuities, especially fixed, offer guaranteed monthly payments, that you could use to cover expenses without worrying about market fluctuations. With a fixed annuity, you’ll know in advance how much income you can expect, making it easier to budget in retirement. 

Tax-deferred growth

You won’t owe taxes on interest or gains while your money grows in a tax deferred annuity. The way your withdrawals are taxed depends on whether the annuity is qualified or non-qualified:

• Qualified annuity: You purchase this with pre-tax dollars and pay tax on 100% of withdrawals when the annuity matures. 
• Non-qualified annuity: You fund these with after-tax dollars and only have to pay taxes on your earnings, not your original investment. 

Protection from market volatility

Unlike stocks or mutual funds, fixed and indexed annuities can shield your principal from market downturns. These annuities can be an attractive choice for retirees who want growth potential without exposing their savings to market losses. 

Longevity protection

A key concern for many retirees is longevity risk — the possibility of outliving their savings. Lifetime annuities address this by guaranteeing income until death, whenever that may be. Some contracts also allow you to add riders, typically for a fee, that continue payments to a spouse or beneficiary after your death, preserving income for loved ones. 

What is the safest annuity to buy in retirement?

There is no one right answer to this question. The best annuity for your retirement depends on your age, career stage, and risk preference. If you’re close to retirement or already retired, your focus will most likely be on reliable growth and capital preservation. In this scenario the best annuity for retirement could be a fixed annuity, offering guaranteed interest and predictable payments. Everyone’s situation is different, so it is important to take your own goals and objectives into mind. 

Create retirement income you can count on with Gainbridge

Gainbridge offers a range of top-rated annuities that can fit into your retirement plan, whether you’re looking for immediate income or want time to grow your savings. Our annuities come with no hidden fees and a 30-day free look period. Start planning for retirement and contact Gainbridge today.

‍This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional.  The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.