Annuities: What You Need to Know
Exploring How They Work and Whether They Fit Into Your Retirement Plan
When it comes to planning for retirement, few financial tools spark as much debate or confusion as annuities. You’ve likely heard the term tossed around, but what exactly is an annuity? Is it a smart move for your retirement strategy, or could it end up being more of a complication?
In this article, we’ll unpack what annuities are, how they work, the different types available, and, most importantly, whether they make sense for your individual needs. Let’s take a closer look.
What Is an Annuity, Really?
Think of an annuity as your own personal version of Social Security. Just like you pay into Social Security during your working years and receive income later, annuities operate on a similar premise — only instead of working with the government, you’re working with an insurance company.
You can fund an annuity with a lump sum or through ongoing payments. Later, typically in retirement, the insurance company pays you back in steady installments — often for the rest of your life. The goal? To help ensure you don’t outlive your money.
While some people purchase annuities privately, others might access them through workplace retirement plans like a 401(k). But annuities aren’t a one-size-fits-all product. For some, they can offer reliable income and a conservative way to grow retirement savings. For others, they may not be the right fit at all.
How Do Annuities Work?
At their core, annuities are long-term contracts with insurance companies. You invest money into the contract, and in return, the company provides regular income payments later, usually during retirement.
Here are a few key features to understand:
They’re not liquid. Once you invest, your money is tied up for a period of time. Early withdrawals may come with steep penalties and tax consequences.
They grow tax-deferred. During the accumulation phase, your money can grow without being taxed until you begin taking distributions.
They offer predictability. Certain types of annuities provide fixed or guaranteed returns, which can appeal to conservative investors.
They often include a “free look” period. Depending on your state, you may have 10–30 days after purchasing to cancel and receive a refund of your initial premium.
Annuities typically involve three parties:
The insurance company (the issuer)
The annuitant (you, the person funding the contract)
The beneficiary (the person who may receive any remaining benefits)
The Two Phases of an Annuity
Accumulation Phase
This is when you’re funding the annuity, either through a single payment or a series of premium payments. During this time, your investment grows tax-deferred.Annuitization Phase
This is when the annuity starts paying you income. That income can last for a specific number of years or for life, depending on the contract.
Keep in mind that annuities also have a surrender period, during which you’re generally not allowed to withdraw more than 10% per year without incurring penalties. After the surrender period ends, some restrictions may still apply, so it’s important to understand your contract terms.
Types of Annuities
One of the most important things to grasp is that not all annuities are the same. The right type depends on your financial goals, time horizon, and risk tolerance.
Let’s break down the main categories:
1. Immediate vs. Deferred Annuities
Immediate Annuities
These begin paying you income almost immediately — usually within a year of purchase. They’re often used by people who receive a large lump sum (from an inheritance, settlement, etc.) and want to turn it into steady income.Deferred Annuities
These are designed for long-term growth. You fund them now, and they begin paying income years down the road — often in retirement.
2. Fixed Annuities
These offer a guaranteed interest rate, making them predictable and low risk. They're a solid choice for someone looking for stable growth and dependable income.
3. Variable Annuities
With these, your investment is tied to market performance. This means greater upside potential and greater risk. Returns are not guaranteed, and fees can be higher.
4. Indexed Annuities
These are linked to a market index like the S&P 500, offering a balance of opportunity and protection. While they may cap your upside, they also limit your downside — making them a middle ground between fixed and variable annuities.
5. MYGAs (Multi-Year Guaranteed Annuities)
Think of these like CDs offered by insurance companies. They lock in a fixed interest rate for a period like 3, 5, or 7 years — ideal for more short- to mid-term planning.
Want to Learn More?
If you’re curious about whether an annuity belongs in your retirement plan — or you’d just like a clearer understanding of how they work — let’s have a conversation. Every situation is different, and we’re here to help you make informed, confident financial decisions.
📞 Call us at (405) 993-6296 or schedule a time to talk at www.OBWMLLC.com
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Disclosure:
All content discussed in this article is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. Opinions expressed are solely those of Olive Branch Wealth Management, LLC and its staff. The information presented is believed to be from reliable sources; however, Olive Branch Wealth Management, LLC makes no representations as to its accuracy or completeness. This article shall not be construed as an offer to sell or a solicitation to purchase any insurance product in any jurisdiction in which the agent is not licensed. Topics should be discussed with a licensed insurance agent, tax professional, or financial adviser before implementation. Olive Branch Wealth Management, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.
