Types of annuities: The main annuities you should know

The future looks bright for the next generation of retirees. People are living longer and approaching retirement with a renewed sense of purpose.

With more life to look forward to and more passions to pursue, it's essential to build a nest egg that lasts a lifetime. Annuities are products that can provide ongoing payments through your retirement years.

Learn about the types of annuities and how they can help ensure you won't outlive your money.

An annuity is a contract between you and an insurance company that can provide income in retirement. You buy the annuity with a lump sum or by making premium payments over time. Then, at a designated point in time, you can take withdrawals or the insurance company can start making income payments to you that last for a specific period of time or the rest of your lifetime.

Different types of annuities can meet your retirement needs in different ways. The varieties differ by:

• When you plan to start taking payments—generally either immediately or deferred
• How the money is invested—generally either at a fixed rate or a variable return

With an immediate annuity, you pay a lump sum to the insurance company and begin receiving a guaranteed payout stream, usually within a year. They can be either fixed or variable and are a good option if you're nearing or living in retirement and need a source of income.

If you opt for a deferred annuity, you pay a single premium or a series of premiums to an insurance company and then build your annuity investment over time. You can elect for a payout stream at a later date, usually around the time you plan to retire. They also can be either fixed or variable.

All deferred annuities have two stages: accumulation and distribution.

• In the accumulation stage, you save and potentially grow your retirement funds depending on how the underlying investment options perform.
• The distribution stage begins when you start using your money for retirement. You can elect to set up systematic withdrawals or take withdrawals whenever you like. You also have the option of setting up a guaranteed payout stream that can last for a set time period or through the rest of your life.

Immediate annuities begin distributions right away, so they don't have an accumulation stage.

If you opt for an immediate fixed annuity, you'll receive a known income immediately without needing to monitor any investments. With an immediate variable annuity, you also enjoy the possibility that your income level will rise or fall according to your underlying subaccounts.

The downsides of fixed immediate annuities include payments that may not keep up with inflation and, depending on the income type chosen, may not guarantee the return of the single premium. Immediate variable annuities can be more expensive than other retirement options, and your monthly payments may fluctuate according to the variable investment options you select.

Deferred fixed annuities offer tax-deferred growth, principal protection, and single or flexible premiums, and they aren't impacted by market volatility. For deferred variable annuities, pros include tax-deferred growth during the accumulation stage and potential for market upside.

Be aware that the money you contribute to deferred fixed and variable annuities may be subject to a 10% federal tax penalty if you access it before reaching age 59½ (unless an exception applies). If it's qualified, the entire distribution amount may be subject to the early withdrawal penalty. If non-qualified, only the earnings will be subject to the penalty. In addition, deferred fixed and variable annuities usually have surrender charges that apply to certain withdrawals within a specified time frame.

Take note that interest from a deferred fixed annuity may not keep pace with inflation and that assets in a deferred variable annuity are subject to market fluctuation and have the potential to lose value.

A fixed annuity is an insurance product that offers income predictability, which can help you feel more comfortable about the stability of your retirement plans.

A fixed annuity guarantees a fixed interest rate for a specified period of time or for the entire life of the contract and can provide an income stream in retirement during the distribution stage.

Because fixed annuities offer a guaranteed interest rate, your income typically is not impacted by market volatility, so you can anticipate the amount of your monthly payments.

Your annuity is protected, meaning you won't lose money in a fixed annuity if the market declines. Since your annuity offers a guaranteed minimum interest rate, that may help you feel comfortable taking on more risk with other investments. When you buy a fixed deferred annuity, you won't pay taxes on the growth in your annuity's value each year that a withdrawal is not made, which can help its value grow faster through compound interest. If you opt for a lifetime income option from your annuity, you'll receive reliable retirement income for life.

Fixed annuities do carry some downsides. By remaining in a fixed annuity with a guaranteed interest rate, you forfeit the ability to benefit from potential market upswings. Because inflation is unpredictable, the guaranteed interest rate may not keep pace with inflation.

Is a fixed annuity right for you? Consider some questions first. Have you contributed enough to your 401(k) to get an employer match if it's offered? Would you like to put more money away to help support yourself (and, perhaps, your spouse) in retirement? If so, a fixed annuity may be worth considering. You should consider a fixed annuity for guaranteed, predictable income over time, typically with a fixed interest rate, offering stability and security for retirement planning.

What if you want to take advantage of potential market gains? Consider a variable annuity.

A variable annuity is a type of annuity contract that allows you to select variable investment options, called subaccounts. Depending on how the subaccounts perform, they may help an annuity's growth keep up with and sometimes outpace inflation.

Like mutual funds, subaccounts depend on market risk and performance, which could result in a loss to your investment. Variable annuities may offer a death benefit and a guaranteed lifetime withdrawal rider that could provide you with guaranteed withdrawals for as long as you live.

Variable annuities offer several benefits. These include investment growth potential and the ability to choose subaccounts that suit your risk tolerance. Similar to fixed annuities, variable annuities offer tax-deferred growth and the option to select a guaranteed payout stream that can provide a consistent, dependable income in retirement.

The cons of variable annuities include the possibility that they could lose value depending on how the subaccounts perform, and they have surrender charges for most early withdrawals as well as contract and subaccount fees.

Like fixed annuities, a variable annuity can be a great addition to your retirement plan depending on your risk tolerance. Variable annuities can be a good choice if you want to participate in potential market gains throughout retirement and are comfortable with volatility and possible losses.

A fixed-indexed annuity is a special type of fixed annuity that pays interest depending on the performance, up to a cap, of a specified index, such as the S&P 500. Along with upside potential, these annuities offer built-in protection from losses due to a negative index performance.

The benefits of fixed-indexed annuities include growth potential tied to index performance and protection against loss of value due to market fluctuations. Similar to other annuities, fixed-indexed annuities may provide tax-deferred growth, guaranteed income in retirement and a death benefit for beneficiaries.

Fixed indexed annuities carry downsides, including a cap on your potential gains: If the index has positive performance that exceeds the cap, you only will have credited interest equal to the capped limit. These annuities also carry surrender charges and the risk that your annuity's interest payment may not keep pace with inflation.

Annuities can provide a guaranteed payout stream in retirement that lasts the rest of your life and helps eliminate some financial stress about outliving your savings. When you know there's a reliable income to help supplement Social Security, a pension and other retirement money, it opens up possibilities—so you can focus on living the retirement you want with confidence. Consider whether an annuity is right for you and which one to choose.

An annuity can be a good fit for some people. Are you still working and looking to save more for retirement? Saving today in a deferred fixed or variable annuity can help you put away extra funds for the future, with tax-deferred growth potential. Are you retiring and looking to turn some of your savings into a source of income? Consider an immediate fixed or variable annuity. Before you purchase any annuity, ask for details of the potential fees you may need to pay during the contract's life. Remember that understanding the tax implications of annuities is crucial for making informed decisions.

Consider how any potential annuity payments will fit in with your other retirement income—including Social Security, savings and any pension. When looking at fixed or variable annuities, consider your risk tolerance and desire to either participate in market gains or avoid volatility in favor of stable interest.

Annuities can be a great addition to your retirement plan, but it's important to choose the right type. If you need immediate income, consider an immediate annuity. If you'd rather defer income to a future date, a deferred annuity might be a better choice for you. Understanding these nuances is key to making informed choices.

Adding an annuity may be an excellent tool for your long-term retirement strategy. That's why understanding the details of each annuity type is critical before investing. A Thrivent financial advisor can help you consider your current financial situation and your future retirement goals, working to find the best possible fit for your needs.