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There are three main kinds of annuities, all of which generate returns in different ways:2
- Fixed – Earns a guaranteed interest rate, which is set by the insurance company you purchased the annuity from.
- Variable – Returns are generated by underlying annuity investments, or sub-accounts.
- Indexed – Returns are based on the performance of an underlying index, such as the Standard and Poor's 500 index.
Annuities have a funding period, in which money is paid in, and a payment period, in which money is paid out to you. The three types of annuities outlined here can be further classified as immediate or deferred, based on when the payment period begins.
- An immediate annuity can begin making payments as soon as the annuity is funded.
- With deferred annuities, payments begin at a future date of your choosing.
The pros and cons of annuities
For instance, you could structure your annuity to deliver a monthly payment beginning when you retire and continuing until you pass away. If you're married, you can structure the annuity to transfer that payment over to your spouse after your death. If you're unmarried or widowed, any remaining annuity payments can be distributed to the beneficiary of your choice.
Annuities are advantageous from an investment-planning perspective because of their tax-deferred nature. Taxes aren't due on gains earned with an annuity until you begin receiving payments.2
If you're considering an annuity as part of your investment strategy, there are a few potential downsides to keep in mind:
- Review the costs of purchasing an annuity, as you may pay a sales commission or stiff management fee.
- Consider also the annuity's return potential. If your goal with investment planning is to drive growth in your portfolio, you need to understand what kind of returns an annuity can deliver.
- Remember that while a fixed annuity can generate a guaranteed return, there may be more risk involved with variable or indexed annuities.
Finally, be aware that fees may apply if you need to access the funds in the annuity, or surrender the annuity.
Think about your larger investment strategy
An annuity may be a welcome addition to your portfolio if lifetime income is something you're interested in as part of your broader retirement plan, or if you're seeking diversification in your portfolio. However, if you have yet to consistently max out contributions to your employer-sponsored retirement plan or an IRA, an annuity may not be the right move.
If you're not sure whether an annuity is appropriate for you, Synovus is here to help. When you're ready to talk with a financial consultant, call us at 1-888-SYNOVUS (1-888-796-6887).