An annuity is a contract between you and an insurance company that allows you to contribute money to a tax-deferred account. In return, you can get regular payments as income, or you can withdraw funds later starting on a certain date. The difference depends on whether your annuity is immediate or deferred. There are also single- and multiple-premium annuities. With the first, you pay a single lump sum at the start, and it grows. With the second, you can spread your premium payments out over time.

Annuities are also categorized by risk and how they generate earnings. Fixed annuities are considered the least risky. They’re designed to guarantee income based on a minimum interest rate for the life of the annuity. A variable annuity lets you choose one or more investment options, called subaccounts, to potentially grow your funds. The growth potential is greater because you can invest in stocks and bonds – but the risk potential is also greater. Indexed annuities fall somewhere in the middle. They offer more growth potential than a fixed annuity, with somewhat less risk than a variable annuity.

Confused yet? That’s okay because annuities are among the most varied and complex financial tools out there. But because of that, they also offer a wide range of options for a wide range of needs and situations.

In addition to risk, other considerations when choosing an annuity include structure and payouts, tax advantages or disadvantages, rates, fees and commissions, benefits, and rider options. The list goes on. All of this illustrates why professional guidance is crucial when considering an annuity.

Deciding whether an annuity is right for you, and then choosing the right annuity, will depend on a variety of factors, including the following:

• Your age and retirement timetable – Annuities are timeframe committed strategies, so the element of time will play a key role in your decision.
• Your earnings – Be aware that one of the biggest advantages of annuities is that they can allow you to put away a larger amount of cash and defer paying taxes.
• Your retirement goals – Once you know your goals, you’ll better be able to decide if an annuity is right for your strategy.
• Your other sources of retirement income – This includes social security, any pensions, and your broader income portfolio.
• The markets – Different annuities are tied to market conditions in different ways. Interest rates, tax rates, stock value, etc. Any of these things may or may not affect your annuity.

The bottom line, again, is that annuities are highly varied and complex, and should only be considered with the help and guidance of the right financial professional – ideally a fiduciary advisor who specializes in retirement income!