Why people consider them
- Income for life. An annuity can turn part of your savings into a monthly payment that lasts as long as you live, or as long as either of you lives.
- Closing the income floor gap. Some retirees use one so their essential bills don't depend on the stock market.
- Tax deferral. Growth inside an annuity is not taxed until you take it out.
The two kinds we explain most
Fixed annuities
The insurance company credits a set interest rate for a set number of years. You know the rate when you buy.
Fixed indexed annuities
The interest you're credited is tied to a market index, such as the S&P 500, but your money is not invested in the market. In a year the index falls, you're credited zero rather than a loss. In a year it rises, your credit is limited by a cap, a participation rate or a spread. So you give up some of the upside in exchange for not losing value when the index drops. Fees for optional riders can still reduce your account value.
Income riders
Many annuities offer an optional rider that pays lifetime income. Riders usually charge a yearly fee. Read exactly how the income amount is figured, because the number used to calculate income is often not money you could walk away with.
The limits, in plain words
- Surrender charges. Most annuities charge a fee if you take out more than a set amount in the early years, often for several years. Many allow a portion each year without a charge.
- Less upside. Caps and participation rates mean you won't get the full gain of the market in a good year.
- Taxes. Gains are taxed as ordinary income when you take them out, and withdrawals before 59½ can face a 10% penalty.
- Inflation. A level income payment buys less over time unless the contract adjusts for it.
- The company behind it. Any promise in an annuity is only as strong as the insurance company that makes it. Ask about its financial strength.
- They are not for every dollar. Money you may need soon, and your emergency fund, usually belong somewhere else.
Before you buy any annuity
Read our free guide, 10 Questions to Ask Before You Buy an Annuity. Bring it to any meeting, including one with us.
Tim is a licensed insurance agent. You should always know how anyone who helps you with an annuity is paid. Lankford Wealth Advisors is paid by the insurance company, and only if you choose a product. See how we get paid.
This page is educational. It is not tax, legal or investment advice, and rules change. We check the current rules against your own situation before you decide anything.