1. Define Your Investment Goals & Objectives
  2. Define Your Investment Strategy for Your Portfolio
  3. Building Your Own Portfolio to Match Your Goals
  4. Monitoring and Rebalancing Your Portfolio
  5. The Bottom Line
  6. 401(k)s
  7. Exchange Traded Funds (ETFs)
  8. IRAs and Roth IRAs
  9. Mutual Funds
  10. 529 Plans
  11. Stocks
  12. Life Insurance
  13. Bonds
  14. Annuities
  15. Health Savings Accounts (HSAs)

Annuity Basics

  • What they are: Insurance products that provide a source of monthly, quarterly, annual or lump-sum income during retirement.
  • Pros: Tax-deferred growth of earnings; no annual contribution limit; steady income source during retirement.
  • Cons: Particularly high expenses; surrender charges; early withdrawal penalties; payments may be taxed as ordinary income; no additional death benefit.
  • How to invest: Life insurance companies, brokerage firms and other financial institutions.
  • Tip: Because of the high fees, you should consider an annuity only after you’ve maxed out your other tax-advantaged retirement options, including 401(k)s and IRAs.

While life insurance pays a benefit when you die, annuities normally make payments as long as you live. Annuities are investment products that are used to generate an income stream during retirement. An annuity is a contract between you and an insurance company that agrees to make periodic payments for a set period of time, or until a certain event occurs – such as your death. The money you invest in an annuity grows tax-deferred; when you make withdrawals, any amount you contributed is not taxed, but earnings will be taxed at your regular income tax rate.

The owner of the annuity purchases the contract and can make changes to the policy. The annuitant is the insured person, and the beneficiary is the one designated by the owner to receive whatever is left in the annuity after the annuitant dies. Often, the owner and the annuitant are the same person, and the beneficiary is a spouse, child or other dependent (it is possible for the owner and the annuitant to be different people). Who the annuitant is becomes significant when the contract is annuitized.

When a contract becomes annuitized, the annuitant collects a fixed monthly payment from the insurance company, typically for life. The annuitant’s age and life expectancy (not the owner’s) determine the amount of monthly income. Given the same policy, a 50-year-old annuitant would receive a smaller monthly payment than a 70-year-old annuitant because the insurance company would expect to make more payments to the younger person. 

Types of Annuities

Annuities can be deferred or immediate. With a deferred annuity, your money is invested for a certain amount of time until you are ready to start taking withdrawals (usually during retirement). With an immediate annuity, you start receiving payments shortly after you make the initial investment. You can convert a deferred annuity into an immediate annuity if you want to start receiving payments sooner.

Within these categories, annuities can also be either fixed or variable. With fixed annuities, the insurance company pays a fixed rate of interest while the account is growing, similar in function to a CD (but not FDIC-insured). Fixed annuities can be life annuities or term certain annuities. Life annuities pay a fixed amount each period (e.g., month) until the annuitant dies, and term certain annuities pay a fixed amount per period for a set amount of time (the “term”)  – after that, the annuity is spent, even if the annuitant is still living. 

With variable annuities, you choose from a selection of investments in mutual-fund-like portfolios called subaccounts – and the performance of those investments determine how much income you receive from the annuity during retirement. Investments can be very conservative (e.g., a money-market subaccount) to very aggressive (e.g., an aggressive growth stock fund subaccount). Variable annuities are considered securities, and are regulated by the Securities and Exchange Commission (SEC). (Read Introduction to Annuities for a more extensive overview.)

Health Savings Accounts (HSAs)
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