How deferred annuities support your retirement plan

by
Brandon Lawler
,
RICP®, AAMS™

A deferred annuity allows your savings to grow tax-deferred, ultimately creating a reliable income stream for your retirement years. 

Read on to learn what a deferred annuity is and why it might be the right choice for your financial goals.

What’s a deferred annuity?

A deferred annuity is an insurance product designed to increase your savings over time. These insurance contracts allow your funds to grow tax-free for a specified duration. After the defined period, your provider allows you to converts your funds into guaranteed income payments during retirement or make a lump sum withdrawal.

A deferred structure lets you build a stable financial foundation for retirement while benefiting from potential growth during the accumulation phase. Note, though, that if you withdraw funds before the age of 59½, you may face an IRS 10% tax penalty; and if you are within your surrender period the insurance company may charge you a surrender penalty and/or market value adjustment.

How does a deferred annuity work?

Deferred annuities operate in two main phases — the accumulation phase and the payout phase. Here’s a basic breakdown of each:

5 types of deferred annuities

Deferred annuities come in various forms, each catering to different investment strategies and risk tolerances. Here are the five primary types of deferred annuities available.

1. Fixed deferred annuity

A deferred fixed annuity offers a guaranteed interest rate on your deposit for a specific time period. Although the interest rate may be lower than potential market returns, the certainty of the guaranteed interest rate lets you know exactly how much money you'll have for retirement. 

Fixed annuities are an excellent choice if you prioritize stability and want to let your savings grow, even if only modestly, without jeopardizing your future income.

2. Variable deferred annuity

A variable deferred annuity lets you to select one or more subaccounts to allocate your deposit. Variable annuities carry risks, but they also have the potential to achieve greater market returns based on market performance. 

Your account balance grows if your subaccounts perform well, leading to a higher future payout. Alternatively, if your subaccounts underperform, your account value may not increase as anticipated and could even decrease, resulting in a lower payout, or no payout at all. 

3. Indexed deferred annuity 

An indexed deferred annuity combines features of both fixed and variable contracts. It guarantees you won’t lose your deposit an also offers the potential for growth. A fixed index annuity is designed to provide growth potential based on the returns of a market index (e.g., the S&P 500® Index) while providing protection against negative returns of the same market index. With a fixed index annuity, you don’t invest directly in the market, instead the money you allocate to a selected index can is credited interest based on the market index it tracks.

4. Single premium deferred annuity

A single premium deferred annuity lets you make a one-time lump-sum payment to secure future income. You can use this option if you receive a large sum and wish to create a reliable income stream without making monthly contributions.

5. Flexible premium deferred annuity

With a flexible premium annuity, you can make multiple contributions over time rather than committing to one large payment. This adaptability lets you adjust your investments according to changing financial situations.

Benefits of deferred annuities

Investing in a deferred annuity comes with the following advantages:

Potential disadvantages of deferred annuities

While deferred annuities offer many benefits, it’s wise to consider the following potential drawbacks before committing to a contract:

How do interest earnings accumulate in a deferred annuity?

In a deferred annuity, your income grows tax-free, meaning you can benefit from compounding interest. Here’s a quick summary of how some annuity types accumulate earnings: 

Compounding occurs when you add the interest you earn back to your principal balance, meaning you earn interest on a larger balance over time. It creates a snowball effect that boosts your annuity, especially if you leave the account untouched. The more often interest compounds — daily, monthly, or yearly — the faster your account can grow, maximizing its long-term potential.

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Annual Percentage Yield (APY) rates are subject to change at any time.

All guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. 

SteadyPaceTM is issued by Gainbridge Life Insurance Company (Zionsville, Indiana.)

Secure your future with Gainbridge®’s SteadyPace™

Gainbridge®’s SteadyPace™ offers a valuable option for those looking to protect their financial future with tax-deferred growth. SteadyPace™ lets you enjoy guaranteed growth with fixed rates of up to XX APY, principal protection, and tax-deferred growth.

Brandon Lawler

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Brandon is a financial operations and annuity specialist at Gainbridge®.