A straightforward look at annuities
Annuities aren't one-size-fits-all. That's why it's important to learn how they work.
What's an annuity?
An annuity is a financial product typically used by investors to save tax-deferred for retirement or to generate regular income payments, helping to replace a paycheck in retirement.
Annuities are insurance contracts whose payments are guaranteed by the company issuing the contract.*
Are there different types of annuities?
There are 2 major categories: variable annuities and income annuities.
What's a variable annuity?
Advantages of variable annuities
Similar to an IRA, a variable annuity lets you save for retirement and delay paying taxes on your earnings until you make withdrawals.
By deferring taxes, you can increase compounded earnings growth and potentially end up with a bigger nest egg.
- A range of portfolios, which are similar to mutual funds. Returns vary depending on the performance of the selected portfolios.
- Tax-free exchanges among investment portfolios.
- Death benefits payable directly to beneficiaries, avoiding the delays and costs of probate court.
- No tax limit on contributions.
- No tax requirement to start withdrawing money after you turn age 70½ if you bought your annuity with nonqualified (after-tax) assets.
Disadvantages of variable annuities
- Have higher costs than other retirement savings vehicles like IRAs and 401(k) plans because annuities are insurance contracts that have extra fees.
- May charge withdrawal penalties called "surrender charges."
- Must be held for many years to allow time for the tax deferral benefit to outweigh the higher expense.
- Carry investment risk—you could lose money.
What's an income annuity?
An income annuity provides guaranteed income in retirement.
- You trade a portion of your retirement assets in return for guaranteed income, which is based on your lifetime or the lifetimes of you and another person, or for a fixed period of time.
- You have the flexibility to choose how much income you need and when you'd like your income to begin.
Types of income annuities
Immediate income annuity
Begin receiving regular income payments between 30 days to within 1 year of purchase.
Deferred income annuity
Begin receiving regular income payments at least 1 year after purchase.
Advantages of income annuities
An income annuity offers you a way to establish a stable cash flow after you retire, helping to protect against the risk that you'll outlive your savings.
The insurance company invests your money and guarantees monthly payments for your lifetime.
Disadvantages of income annuities
It's important that you set aside money for emergencies and other expenses because you'll have no access to your original purchase amount other than your monthly income payments.
Watch and learn ... Understand how an income annuity works.
How to shop for an annuity
Here's what to look for to make sure an annuity is right for you.
Fees & expenses
The costs of your annuity will impact its returns. It's important to compare annuity contracts because costs can vary widely among issuing companies.
The issuing company
Annuities are insurance products, and the issuer is responsible for the guarantees it makes. Look for stable, responsible, highly rated companies.
The Vanguard Variable Annuity is issued by Transamerica Premier Life Insurance Company and, in New York state only, by Transamerica Financial Life Insurance Company.
Leading independent rating agencies give both companies high ratings for financial strength.**
A variable annuity offers access to portfolios across all major asset classes. Like mutual funds, the portfolios offer upside market potential, but the downside risk is that you could lose money.
Savings vs. income
An income annuity can provide secure, stable income but won't accumulate additional savings.
A variable annuity with a lifetime withdrawal benefit typically provides lower guaranteed income but offers more investment accessibility. Plus, the Vanguard Variable Annuity has the potential for savings growth, which in turn, can provide an increase in your guaranteed income.
Some income annuities offer the option of receiving payments for your lifetime, the lifetimes of you and another person, or for a fixed period. Generally, payments can start as soon as 30 days from purchase, as late as your 85th birthday, or on any date in between.
How annuities work at Vanguard
Our licensed annuity specialists are here to help.
Monday through Friday
8 a.m. to 8 p.m., Eastern time
How annuities can work for you
INVEST IN THE VANGUARD VARIABLE ANNUITY
Choose from a diverse lineup of stock, bond, and money market portfolios.
Delaying the payment of income taxes on income. For example, owners of traditional IRAs do not pay income taxes on the interest, dividends, or capital gains accumulating in their retirement accounts until they begin making withdrawals.
The investment returns you accumulate on the savings in your account.
A person or organization designated to receive the proceeds of an annuity contract after the owner dies.
A type of account created by the IRS that offers tax benefits when you use it to save for retirement.
When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In this example, you'd earn over $1,600 in the 30th year.
An investment option—offered by an annuity—that holds a range of underlying investments.
A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.
The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.
A type of employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars by deferring salary. Many plans offer a variety of investment options, and employers often match a percentage of employee contributions.
A fee that may be charged on withdrawals or surrenders from an annuity before annuity payments have begun.
Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.
General categories of investments. The 3 major asset classes are stocks, bonds, and cash investments.
Steve Utkus: An income annuity is an insurance contract that provides you with a guaranteed income for life. You invest a lump sum, give up access to your money, and in exchange you receive a monthly income – for your life and, if you choose, for the life of a beneficiary. The income will continue no matter how long you live. And what's more, the income is guaranteed and so doesn’t fluctuate with the financial markets.
Our licensed annuity specialists are here to help with income annuities. Call 800-600-4816, Monday through Friday from 8 a.m. to 8 p.m., Eastern time.
All investing is subject to risk, including the possible loss of the money you invest.
Guarantees are subject to the claims-paying ability of the issuing insurance company.
footnote© 2018 The Vanguard Group, Inc. All rights reserved.
A fee charged by a broker for buying and selling securities.
To access your annuity online, log on to your account or register for online access if you haven't done so already.
Once you've registered, you can make exchanges between annuity portfolios online.
You can also log on to check the following:
- Your contract balances.
- The status of pending and processed transactions.
- Information on death benefit and Guaranteed Lifetime Withdrawal Benefit riders.*
- Statements and confirmations.
If you have any questions about your annuity, call one of our licensed specialists at 800-357-4720 Monday through Friday from 8 a.m. to 8 p.m., Eastern time. We're always happy to help.
footnote*Product guarantees are subject to the claims-paying ability of the issuing insurance company.
A contract issued by an insurance company, which agrees to make payments to you based on the contract's value. The value varies based on the annuity's underlying investments.