There are two main categories of annuity: fixed and variable. These categories refer to the way in which investment generates returns. However, these categories include immediate and deferred annuities, for a total of four types of basic annuities. Like most investments, the ins and outs of annuities can be a bit overwhelming for the novice investor. A solid understanding of these four basic annuity categories allows you to choose the investment that best suits your needs.

Fixed annuities

A fixed annuity is an investment that provides a fixed payment amount each year in exchange for a given number of purchase payments. Depending on the specific investment, an annuity may require an upfront payment or a number of payments over a given period.

Fixed annuities are particularly useful for those who have low risk tolerance and prefer to protect their capital against loss, even if it means sacrificing the possibility of making greater profits. Investors who do not have much to lose but who wish to be proactive about their financial future can also benefit from a fixed annuity.

Variable annuities

Like mutual funds, these funds have different investment objectives depending on the needs of annuitants. The holder of a variable annuity may choose to invest in the most profitable fund with the appropriate level of risk for their personal investment style. For example, aggressive investors who want to make big profits and are willing to take more risk to obtain them can choose a fund that invests in high-tech stocks to generate the biggest gains. The tradeoff is that the annuity loses its value and that it can generate a low income, if any, if the fund's performance is mediocre.

Variable annuities are generally best for experienced investors who have a little leeway in their finances. As with everything potentially volatile investment, the profit potential is much greater than with the fixed rent more stable, but the potential for loss is too.

Immediately vs. Deferred payment

More common for younger investors who have the time to let their investments grow, deferred annuities start paying only on a given date, usually at retirement. The advantage of deferred annuities is that the investment accumulates the tax-free income until these funds are withdrawn after retirement, much like with a 401 (k) or a IRA.

The opinion of the councilor

Some types of less popular annuities include:

  1. Immediate Annuities, which claim a lump sum and start paying income immediately. These are most often used by investors who are retiring right away and want a guaranteed source of income.
  2. Indexed annuities protect assets from market volatility, but they allow growth linked to different market indices, which may be subject to ceilings.

In the right circumstances, all types of annuities can be effective tools for an investor. However, because of their more inflexible and inflexible provisions, it is important to make sure that you are buying the right type of annuity for your own investment goals, as it can be very expensive to make changes after the fact, or even not do it. possible.

Joe Allaria
CarsonAllaria Wealth Management
Glen Carbon, IL