What Are Annuities? Everything You Should Know

Financial and retirement planning are complex topics, and it’s in your best interests to seek some professional assistance as you navigate them. One question you might want to ask as you meet with an expert is, “What are annuities?”

Learning as much as possible about the various investment tools you can use makes it easier to plan your future. This guide will take a close look at annuities so you can decide if they could benefit you.

What Are Annuities?

An annuity is a financial product that provides steady income when you retire or to your beneficiaries when you pass away. The idea is that you invest in these financial plans now and receive regular income when you stop working. 

The annuity life cycle includes a stage where you contribute through a lump sum or a series of installments and one where you begin receiving payouts. Your returns are dependent on how much you invest, how long you plan to receive payments, and how your investments perform.

person pointing at a piece of paper that says annuity

Why Annuities Are a Good Investment

Speaking with a financial planner is a great way to learn about annuities and their benefits. Some reasons why advisors see these products as beneficial for many investors include:

They’re Tax-Deferred

You won’t pay taxes on your investment gains until you withdraw the money. This feature comes in handy if you’ve already maxed out your 401(k) or IRA and want to minimize taxes on your current income.

They Offer Set Payouts

You can set your payouts for a certain amount every month so you can set a budget for retirement. This feature makes it easier to plan your finances once you stop working.

They’re Customizable

You get to customize your payouts based on how long you want to receive them. Investors will often set these payments to continue until both they and their spouse die.

They Provide Death Benefits

It’s possible to give the remaining money in your fund to a beneficiary when you die. This feature eliminates potential issues by presenting the money directly to your chosen recipient.

The benefits of annuities are pretty straightforward for investors because they offer a steady income stream when you’re no longer working. Having the ability to take care of a spouse after you die is another excellent feature to keep in mind.

6 Types of Annuities

You’ll quickly figure out that there are several annuity types from which to choose. These different financial products will influence when you begin receiving payouts, when you make payments, and where the money is invested. Here are some to know about:

1. Immediate

An immediate annuity begins paying out on the investment right away. The gist is that you’ll make a lump sum payment and receive monthly payments immediately. The rest of the money is invested.

2. Deferred

A deferred annuity begins paying out later. This format is better if you’re a long way from retirement because it gives your investment time to grow before you start taking payments. 

3. Fixed

A fixed annuity calls for you to invest a set amount of money at regular intervals. The investment will then grow at a guaranteed level of return.

4. Variable

Variable annuities give you a choice on where you want to invest your money. You could put it into bonds or mutual funds, for example, and receive payouts later based on the return. Some variable annuities have guaranteed minimum payouts and cap your return, while others come with greater risk and higher ceilings.

5. Equity-Indexed

An equity-indexed annuity ties your investments to a stock index like the S&P 500 or the Dow Jones. You’ll receive guaranteed minimum payments with this investment, but there is some risk involved if the market crashes.

6. Riders

Riders are an add-on feature to these annuities that allow you to customize your financial product. Examples of riders include living benefits that increase your payouts at certain times and death benefits that pay for your funeral costs.

The annuity type you select usually depends on how close you are to retirement, the amount of money you have to make a lump sum investment, and your risk tolerance. Speaking with a financial planner will provide you with a clearer picture of the best moves to make in your situation.

Couple in financial planners office looking over financials

Drawbacks of Annuities

There are some negatives associated with annuities that you’ll want to learn about as well. These drawbacks could influence the annuity type you select or force you away from them altogether. 

Inflation-Driven Erosion

A dollar doesn’t have the same value today that it will 10 years from now because of inflation. This makes it challenging to predict how far your retirement money will go, so you could run into a situation where your annuity payouts aren’t enough.

Little Say in Investments

Most annuities don’t offer you any input on the investments made with your money. This lack of power could be frustrating for experienced or hands-on investors. 


Annuities come with higher costs than IRAs. There are fees for administrative expenses, expense risk, underlying funds, and any special features like guaranteed income your plan includes. You could also end up paying tax penalties and surrender charges for early withdraws.

Capped Return

The returns on your investment could be capped. This feature means that if your investment performs exceptionally well, your insurer will end up keeping the difference between the actual return and your capped return. 

Only you know if these drawbacks are dealbreakers because it depends on your preferences, goals, and risk threshold. It’s usually best to speak with a financial planning expert to ensure you have the information you need to make an informed decision.

Get Expert Help in Choosing Between Investment Options

Knowing as much as possible about the positives and negatives of annuities is essential before diving in because they can be confusing. It can also help to speak with a financial planner with detailed answers to your questions about what are annuities. 

Bogart Wealth offers financial, estate, and retirement planning services in McLean, Virginia, and the Houston, Texas, area. Our team can create a custom financial plan for you and your family, mapping out your finances so you can reach your goals. Contact Bogart Wealth today for independent advice you can trust.

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