Financial advisors and individual investors favor annuities for income potential and security. There are several types to choose from: fixed, indexed, and variable. Selecting the best annuity for retirement depends on your current savings and how close you are to retirement.
This article will highlight annuities for more risk-averse customers, potential investment strategies, and how you can use annuities to support retirement income.
What’s an annuity for retirement?
An annuity is a contract between you and an insurance company. You can buy an annuity with a lump sum or through a series of payments. During the accumulation phase, your money can grow tax-deferred. After a set period, the annuity enters the payout (or annuitization) phase, often providing a guaranteed income stream.
Annuities can be a valuable part of a retirement strategy for several reasons:
- Principal protection: Some annuities guarantee the return of your initial investment, and others may let you buy optional riders with this protection. This helps preserve your hard-earned savings, particularly important as you near retirement and have less time to recover from market downturns.
- Predictable returns: Fixed annuities offer consistent, predictable growth. Knowing what to expect from your investment can make it easier to plan your retirement income.
- Higher growth potential: While indexed and variable annuities involve more risk, they also offer greater potential for growth based on market performance.
- Guaranteed income: For retirees looking to supplement Social Security Income (SSI), annuities can provide a steady income stream for a fixed period, or even for life, reducing the risk of outliving your savings.
- Flexibility: Annuities are highly customizable. You can choose different payout structures and investment types to suit your financial goals, retirement timeline, and risk tolerance.
Types of annuities for retirement: Which is right for you?
While annuities can come with many features and optional riders, most fall into a few primary categories. Understanding the various options can help you determine the best type of annuity for retirement.
Immediate vs. deferred annuities
All annuities fall into one of two payout categories, immediate or deferred, depending on when you want to start receiving income:
- Immediate annuities: Immediate annuities begin sending payouts anywhere from 30 days to a year after purchase. Which may be ideal for filling short-term income gaps in retirement.
- Example: If you’re 60 but don’t want to draw on your SSI until age 70, an immediate annuity could provide income for that 10-year timeframe.
- Deferred annuities: Deferred annuities delay payments for a specified period, giving your investment more time to grow before distributions begin. They work well for long-term planning and can offer larger payouts later in retirement.
- Example: If you’re 50 and plan to retire at 65, a deferred annuity can accumulate value over 15 years and start providing income once you leave the workforce.
Fixed annuities
A fixed annuity offers a guaranteed interest rate for a set period, so you know its future value on the day you purchase it. Your principal and earnings are protected, making this a conservative option for investors looking for a guaranteed return.
Example: You invest $50,000 in a 10-year fixed annuity with a 4.5% interest rate, compounding monthly. At the end of 10 years, the annuity will be worth $78,351.68.
Variable annuities
Variable annuities provide the potential for growth based on the market performance of subaccounts, which typically include stock and bond funds. Returns fluctuate with the market, so earnings may be higher than those of fixed annuities, but your principal isn’t protected from downturns. For this reason, variable annuities often appeal to investors who still have time until retirement and could make up for any losses.
Example: You invest $100,000 in a variable annuity tied to a portfolio of equity and bond subaccounts. If the market performs well and your accounts return 7% annually, your investment could grow to approximately $196,715 after 10 years. Poor market performance with an annual return of -2% would reduce the value of your investment to around $81,707 after 10 years.
Fixed indexed annuities
Fixed index annuities are linked to a market index, like the S&P 500. They offer a balance of growth and protection: You can take advantage of the market's growth, but a floor is in place to protect you from losses.
Example: You buy a fixed indexed annuity tied to the S&P 500. It has a 0% floor and a 6% cap. If the index gains 10% annually, your annuity earns 6%. With a loss of 12%, you earn 0%, but your principal stays intact.
What type of annuity provides more protections?
As retirement approaches, your investment priorities may shift from growth to income stability and long-term security. Certain annuity types may be more appealing at this stage. Here are key factors investors nearing retirement should consider:
- Principal protection: The closer you are to retirement, the less time you have to recover losses. fFxed annuities and fixed indexed annuities both offer principal protection so you don’t lose valuable funds late in retirement.
- Lifetime income: Many annuities guarantee income for life or offer a lifetime rider. While this feature may decrease the payout amount, it can give you peace of mind knowing that you won’t run out of money, no matter how long you live.
- Beneficiaries: Some annuities let you leave the remainder of the principal to designated beneficiaries if you die before the payout period ends. This feature may be of interest if you want to support a spouse, children, or other dependents financially.
- Flexibility: Annuities are long-term investments, so companies often have surrender charges and/or market value adjustments— penalties to discourage early withdrawal. However, some annuity products let you withdraw up to 10% of your annuity’s account value annually, giving you more flexibility should you need access to your money. However, withdrawals will reduce the account value and therefore impact future payouts, and if you are under age 59 ½, your withdrawal may be subject to a 10% IRS early withdrawal tax penalty.
Choosing the best annuities for retirement income
When selecting an annuity for retirement income, weigh the potential benefits against your financial goals.
Payout options
Annuities offer a range of payout structures — monthly, quarterly, annually, or even a lump sum. Generally, the longer the payout period, the smaller each payment will be.
Fees
Maintenance fees and one-time charges can reduce your annuity's growth over time. Review the contract terms carefully and ask your provider questions about anything you don’t understand.
Inflation protection
Some annuities offer optional inflation protection riders, which increase your payments over time to help maintain purchasing power. This feature may cost extra, but it may be a valuable safeguard if you retire early or need your payments to last several decades.
Liquidity features
While annuities are designed for long-term income, certain products allow partial withdrawals without penalties. This flexibility can be helpful in emergencies or for covering unexpected expenses.
Tax implications
Annuities grow tax-deferred, which means you only pay tax when you start receiving payments. This can be beneficial if you end up in a lower tax bracket during the payment period, as you’ll likely be in a lower income tax bracket. Paying taxes later also gives you more money to invest during accumulation.
Once payments begin, how much you owe depends on the type of annuity you own:
- Qualified: These accounts are funded with pre-tax dollars (through a traditional IRA or 401(k) rollover, for example). For qualified annuities, both your principal and earnings are fully taxable as ordinary income.
- Non-qualified: Only the earnings portion of your payments is taxed if funded with post-tax dollars.
Why Gainbridge is a strong choice for retirement annuities
Gainbridge’s transparent products and competitive rates simplify investing. Our products have flexible features tailored to meet different retirement needs. Here’s a breakdown of our popular annuities:
- Gainbridge Save Traditional Annuity: Ideal for customers seeking guaranteed earnings, who want to pay taxes annually, as it does not provide a tax-deferral feature. Save Traditional is a fixed annuity with competitive rates. Because this annuity doesn’t provide tax-deferral, you can earn and withdraw at any age without incurring IRS early withdrawal tax penalty.
- Gainbridge Save Retirement Annuity: Designed for long-term planners, Save Retirement is a multi-year guaranteed annuity (MYGA) that offers tax-deferred growth and fixed guaranteed earnings.
All three annuities allow penalty-free withdrawals of 10% (certain restrictions apply), offering access to your funds if needed.
Retire confidently with the right annuity
Gainbridge has a 30-day guarantee, so you can lock in your annuity today and receive a full refund if you change your mind. With reliable products and no hidden fees, Gainbridge is your trusted partner for long-term financial security. Start exploring options for your retirement 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. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.
Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company.
Annuities are issued by Gainbridge Life Insurance Company, located in Zionsville, Indiana. Annuities are long-term investment vehicles and contain terms for keeping them in force.
For tax-deferred annuities, withdrawals of taxable amounts are subject to ordinary income tax. Withdrawals made before age 59½ may also be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a non-qualified annuity may also be subject to the 3.8% Net Investment Income Tax that is generally imposed on interest, dividends, and annuity income if the modified adjusted gross income exceeds the applicable threshold amount. Withdrawals will reduce the death benefit and account value. Withdrawals above the free withdrawal amount may be subject to withdrawal charges and a market value adjustment. Any withdrawal will reduce your contract value and your initial deposit will not be guaranteed.
All illustrated projected values are hypothetical in nature and are for illustrative purposes only. You should not rely on these calculations as investment advice or how the product works. You should read your contract details carefully before contributing to an annuity.
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