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How annuities work & when you might need one

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The bottom line:

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The right annuity can help ensure income, no matter how long you live.
Annuities combine savings and insurance into one financial product.
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There are four main types of annuities to choose from. Your risk tolerance and timeline can help you know which type may meet your needs.

What is an annuity?

An annuity is an insurance contract that guarantees income in retirement. It can guarantee income for a set period of time (such as 25 years) or for the rest of your life. You put money into it once or make a series of payments. In return, you receive income in retirement. Income is usually monthly but can be paid at other intervals such as yearly.

There are several types of annuities to choose from. They have different intended uses and fee structures. The type you choose and the details of your contract will determine when and how you receive payouts. Annuities are intended to be a long-term investment.

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Why do people buy annuities?

People buy annuities to help ensure they will have enough money in retirement. This financial product is one of the few that provide a lifetime income stream. If you’re thinking to yourself, “Wait a minute. Social Security provides a lifetime income stream in retirement,” you’re right. Social Security is similar to an annuity income stream.

But Social Security and pensions (if you have one) often fall short of providing enough money for retirement. And it can be tough to predict how long your savings will need to last. Will you live to age 75? Or to age 105? It’s scary, but possible, to run out of money in retirement. In fact, in 2019, 9% of U.S. adults ages 65 or older lived below the poverty line, according to a 2021 Congressional Research Service report.

When done well, annuities can help provide cash for your later years. They’re somewhat like insuring your home or car for the unexpected. They help ensure that you don’t outlive your savings in retirement. You’ll see annuities used alongside a 401(k) or other retirement planning tools.

Some annuities are relatively low-risk, guaranteeing income in retirement at a steady growth rate—often around 1% to 2%. Other annuities are higher-risk, with funds tied to market performance—and the gains and losses that come with it. All annuities come with costs such as surrender charges, mortality and expense risk charges, and administrative fees. The money contributed to an annuity typically can't be removed without a penalty charge. You’re trading access now for guaranteed payouts later on.

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How do you choose an annuity?

The first step to choosing an annuity is to decide which type may be an option for you. There are immediate fixed, immediate variable, deferred fixed and deferred variable annuities. Read about the four main types of annuities to learn about your options. After evaluating which type of annuity may be a good fit, you can comparison shop and choose what’s best for your situation.

1. Ask yourself: Do I need retirement income now or later?

People who need retirement income now should start by looking at an immediate annuity. For retirement income later, start with a deferred annuity.

2. Now ask: How much risk am I comfortable with?

Do you want to play it safe and have a guaranteed stream of retirement income? Or do you want to take a financial risk in exchange for potentially higher rewards or losses? If you have a lower risk tolerance, start by looking at a fixed annuity. If your risk tolerance is higher, start by looking at a variable annuity.

3. Combine your first two answers.

By doing this, you’ll know what type of annuity aligns with your financial strategy and goals. Read the types of annuities section for more help on this.

4. Talk with your spouse or family.

If you want to include the people who are affected by your decision, now may be a good time. Some people instead choose to take this step after talking with a financial advisor.

5. Comparison shop and pick an annuity.

Comparison shopping can help you see differences in annuity fees and expenses. Enlist the help of a financial advisor if you could benefit from help understanding the options. Pay special attention to annuity fees and expenses.

6. Put a yearly retirement checkup on the calendar.

Make a retirement review part of your year-end financial checkup. Reevaluate if you’re on track for retirement.

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Types of annuities

Annuities come in many shapes and sizes. There are immediate fixed, immediate variable, deferred fixed and deferred variable annuities. There are also options to adjust the length of time you receive income payments. You can choose whether your contributions are before- or after-tax. A qualified annuity is paid for with pre-tax money. A nonqualified annuity is paid for with after-tax money. You can also decide what happens to your contract value when you die. With lots of options available, it’s important to understand the basics.

Immediate annuities

Immediate annuities provide a retirement income stream that starts right away. There are two main types of immediate annuities: immediate fixed and immediate variable. You usually pay your insurer a one-time amount (a lump sum). Then, you begin receiving payouts.

Read more: What is an immediate annuity & how does it work?

Deferred annuities

Deferred annuities provide a retirement income stream that starts at a later date. You can pay your insurer a one-time amount or make a series of payments over time. Your income payouts will begin at an agreed-upon future date. One of the benefits of a deferred annuity is that earnings grow tax-deferred. The money in your annuity can grow now, with taxes owed later when you withdraw funds. There are two main types of deferred annuities: deferred fixed and deferred variable.

Read more: What is a deferred annuity & how does it work?

Fixed annuities

Fixed annuities include fixed rate annuities and fixed indexed annuities. Fixed rate annuities pay a fixed rate—usually 1% to 2% each year. Fixed indexed annuities apply interest based on the performance of an index, like the S&P 500 index. Fixed annuities are generally considered low-risk. But they won't keep up with high inflation rates on their own. There are two main types of fixed annuities: immediate fixed and deferred fixed.

Read more: What is a fixed annuity & how does it work?

Variable annuities

Variable annuities can gain or lose value based on the underlying investments. With a variable annuity, you can invest in the financial markets through subaccounts. This puts you in a higher-risk environment with the potential for rewards or losses. If the market performs poorly, a variable annuity could lose all its value.

Read more: What is a variable annuity & how does it work?

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When should you think about buying an annuity?

You should consider buying an annuity if you’re building a retirement plan. Though planning for retirement often works better the earlier you start, many people don’t consider an annuity until late in life. But there are other common times and life events when it makes sense to consider an annuity. Here are a few of them:

  • You’re building a retirement plan. Annuities and retirement planning go hand-in-hand. While annuities may not be the right fit for everyone, it’s worth asking whether they make sense for your nest egg.
  • You’re nearing (or already at) retirement age and have limited funds in a pension account. Do you have your retirement money sitting in a low-interest savings account? Then an annuity may be worth considering.
  • You want to delay Social Security income. Annuities may provide an income stream that allows you to delay when you begin collecting Social Security.
  • You’ve maxed out your 401(k). Annuities are a retirement planning product. Consider them as you look for other places to make retirement contributions.
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    Is an annuity a good investment for an elderly person?

    Annuities may be a good choice for an older person if they align with that person's financial goals and strategy.

    Because Social Security and pensions can fall short, annuities may help provide enough funds in retirement. Use them to complement other sources of income. Before buying, consider impacts to health care, expected nursing home contributions and taxes. Factor in your age, savings, single/joint status, life expectancy, state of residence, retirement financials and risk tolerance when selecting.

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    How much money do you need to start an annuity?

    Insurers often require a minimum initial contribution to open an annuity. This may be an amount like $5,000 or $10,000. However, it will vary by insurer and contract.

    Also pay attention to maximum contribution limits. As with other tax-deferred products, annuities sometimes have contribution limits set by the IRS. A qualified longevity annuity contract, for example—which requires contributions through an IRA or other qualified funding source—can accept the lesser of $135,000 or 25% of your qualified account balance in 2021. Each type of annuity will have its own requirements, so consult with a tax professional for details.

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    Who should not buy an annuity?

    If you’re in poor health and have a shortened life expectancy, annuities may not be right for you. Annuities can also be the wrong choice when they don’t align with your overall financial strategy or goals. For example, if you’re saving to start a business when you turn 40 years old, annuities probably don’t make sense. Annuities are a long-term retirement product.

    There are also scenarios where annuities generally make less sense. At certain ages, for example, an annuity may not be the right savings vehicle. At an advanced age like 90, the value of a lifetime income source is significantly diminished for most people. At a younger age like 18, it may be a better financial move to focus on maxing out an employer-sponsored 401(k) match. However, your situation may vary from these examples.

    Consider enlisting the help of a financial advisor or broker. They can help sort through the diversity of annuity products on the market. You’ll need to consider age, savings, single/joint status, life expectancy, state of residence, retirement finances and risk tolerance to find an appropriate annuity.

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    Can you lose your money in an annuity?

    Yes, you can lose money in an annuity. First, understand what type of annuity you have. Variable annuities may experience loss because of how the product is structured. Variable annuities are tied to market investments, which involve risk. You could lose your interest or earnings and the principal you contributed. Don’t choose a variable annuity as part of your retirement plan if you are averse to this type of risk.

    It’s also possible to lose money in annuities if the organization you choose dissolves. Or if it is unable to pay its obligations when you retire. Avoid this problem by choosing an organization with a strong rating. Look at reports from institutions such as AM Best, Fitch, Moody’s, or Standard & Poor’s.

    Fees, expenses and penalties can also impact the amount of money in an annuity. Factor them in as you calculate expected returns. Early withdrawals (before age 59½), for example, can result in a 10% penalty paid to the IRS on the amount of the gain withdrawn, in addition to your normal income tax. Early withdrawals often carry surrender charges owed to your financial institution, too. As always, read your prospectus and contract documents to learn what’s true for your contract.

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    Do annuities count as assets?

    Yes, an annuity is an asset. It is something of value that’s available to meet commitments or debts. However, the time when your annuity will be available to meet commitments or debts varies with the type of annuity you have. This means that an annuity (especially a deferred annuity) might not always qualify as a liquid asset during financial reporting. Usually, the decision to buy an annuity means trading access (liquidity) now for an income stream later on.

    Consult with a tax advisor for advice specific to your situation.

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    What happens to the money in an annuity when I die?

    Some annuities provide a death benefit. It guarantees your beneficiaries receive at least the amount you contributed, minus any withdrawals or fees. Lifetime income annuities usually provide a death benefit. If this applies to you, don't forget to name a beneficiary.

    For other annuities, the insurance company may state in the contract documents that the money is theirs to keep at the time of your death. (This is true of life-only annuities.) Rules vary by organization and annuity type. Talk with a financial advisor and read your contract documents to learn what’s true for you.

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    What are the tax advantages of annuities?

    The growth within an annuity is tax-deferred. So taxes on earnings or interest aren’t due until you begin receiving payouts (usually, after you retire). This means the money inside an annuity can grow faster. Beyond that, tax advantages vary by type of annuity. For example, immediate annuities begin paying you right away. So they don’t leave much time for growth—tax-deferred or otherwise. Deferred annuities are the opposite. They leave ample time for growth.

    Choosing to buy your annuities with before- or after-tax money can also make a difference at tax time. Before-tax money is money from an IRA rollover or a 401(k). With before-tax money, you’ll pay income taxes on your total withdrawal. After-tax money is from your savings account, an inheritance or a work bonus. With after-tax money, you’ll only pay taxes on growth.

    Tax downsides include: Withdrawals from annuities, including partial withdrawals and surrenders, may be taxable. If you take a withdrawal before age 59½, you may have to pay a 10% penalty to the IRS in addition to your normal income tax. Additional surrender charges may also apply. As always, read your prospectus and contract documents for full information.

    Note that we at Thrivent don’t provide tax advice. You’ll need to consult your tax professional for that. However, our financial advisors do have general knowledge of Social Security basics. If you’re looking for complete details on your unique Social Security situation, you’ll have to contact the Social Security Administration.

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    Learn more

    Want to learn more about how annuities can help reduce the risk of outliving your savings in retirement by creating a reliable income stream? Contact a Thrivent financial advisor to find out if an annuity is right for you.

    This webpage provides general annuities information. It does not contain information specific to a Thrivent financial product. If you are looking for information specific to a Thrivent financial product or your existing annuity contract, please log in and refer to your contract or prospectus document—or visit our annuities product webpage.

    Annuities are intended to be long-term, particularly for retirement. Product availability and features may vary by state.

    Surrenders or partial withdrawals/surrenders may be subject to income taxes and/or surrender charges.

    Guarantees are based on the financial strength and claims paying ability of Thrivent.

    Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits.

    Refer to the Thrivent Investment Management Inc. Form CRS Relationship Summary for more information about us; our relationships and services; fees, costs, conflicts, and standard of conduct; disciplinary history; and additional information. Refer to the Thrivent Investment Management Inc. Regulation Best Interest Disclosure document for information on fees, products, services, potential conflicts of interest, and additional information. Both are available upon request from your financial advisor and on

    Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable annuity contract and underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing. Available at

    Thrivent and its financial advisors do not provide legal, accounting or tax advice. Consult your attorney or tax professional.