Annuities Annuities There are several types of annuities that exist, all with different characteristics and qualities. Annuities can be broken down into two main categories: income annuities and savings annuities. Fixed Annuities Fixed annuities are what most people think of when they hear the word annuity. During the accumulation phase where money is invested into the annuity, the money can either be invested in a lump sum or over time. This account accrues interest at a fixed rate that grows tax deferred during this phase or it can begin to payout immediately in the case of lump sum annuities. This is called the annuity period, and the annuity begins to pay out fixed income to the annuitant. These payments are made in monthly intervals and can be set up to last for the life of the annuitant, a fixed time period, or over the life of the annuitant and his or her spouse. These payments are comprised of both principal and interest. The principal will be tax-free if non-qualified funds were used, and the interest will be subject to normal income tax. Is a Fixed Income Annuity right for me? A fixed income annuity is right for someone looking to augment their retirement income with a guaranteed source of income. Another person who may look to utilize fixed annuities would be someone looking to accrue interest for period of time and then surrender their annuity once the time period is expired. Fixed Indexed Annuities Similar to a normal fixed annuity, a fixed indexed annuity (FIA) can be invested in by either a lump sum or through a series of payments leading up to the payout period. Where they differ is how the interest accrues. As opposed to a fixed interest rate, the FIA grows at an interest rate that reflects the gains in a stock index, normally the S&P 500. This interest is subject to a cap and floor that protects your investment from losing value, but also limits upside growth. FIA's normally have a lengthy surrender charge period of anywhere from five to 10 years. These make the investment have a much longer time horizon; however, the longer you "lock-in" your money, the higher the cap. During the payout period FIA's operate like fixed annuities and have the same payout options. Is an FIA right for me? An FIA works best for someone looking for a secure retirement income, but comfortable allowing that income to grow for several years. In an FIA, the stock market determines growth, so you must be comfortable with fluctuations in the interest rate. An FIA works for an investor who desires a secure investment that has some upside potential tied into a stock market index. Variable Annuities Variable annuities are the most complex and also the riskiest form of annuities. In a variable annuity, the money you invest is then invested into a mutual fund of your choice where the interest grows tax deferred. However, as a result of this investment, your annuity may lose value, including your principal. This makes the annuity much riskier, but there are also no caps on the growth of the policy. Just like the other policies it can be funded through an upfront lump sum or payments over several years. After this period is over, the annuity pays out with the interest being taxable as ordinary income. Is a variable annuity right for me? A variable annuity only works for someone who understands the risks and opportunity involved. Someone who does not understand a variable annuity is under the risk of losing value when they thought an annuity was a fixed investment. However, if someone understands these risks a variable annuity can help them gain value and plan for retirement through a careful understanding of the investments they are making.