Your Guide to Annuities: An Introduction

Your Guide to Annuities: An Introduction

Annuities provide protected lifetime income you can’t outlive.

What is an annuity?

Nationwide annuities are designed to help you grow your retirement income. They’re a long-term contract from an insurance company where you invest your money. In return, you get income in the form of regular payments.

Types of annuities

There are several types of annuity products available to choose from. Whether you’re looking for income options, legacy planning tools or spousal protection, your advisor can tailor a plan to meet your specific goals.

Variable - Potential for increased earnings, but also more risk
Fixed - Your investment grows based on a guaranteed rate of return.
Immediate - Convert a lump sum of money into a stream of income.
Fixed indexed - Potential for increased earnings based on index growth, with downside protection.

How Annuities Work

While traditional life insurance guards against “dying too soon,” an annuity, in essence, can be used as insurance against “living too long.”

In brief, when you buy an annuity (generally from an insurance company, that invests your funds), you in turn receive a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (keep in mind that there are many other options), you will have a guaranteed source of “income” until your death. If you “die too soon” (that is, you don’t outlive your life expectancy), you will get back from the insurer far less than you paid in. On the other hand, if you “live too long” (and do outlive your life expectancy), you may get back far more than the cost of your annuity (and the resultant earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.

The earnings that occur during the term of the annuity are tax-deferred. You are not taxed on them until they are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.

Annuities are available that combine both fixed and variable features.

Are Annuities a Good Idea?

Whether annuities are a good idea depends on your circumstances, your needs and whether the particular annuity type is a good fit.

If you already have a healthy pension or another source of income sufficient to support your everyday needs in retirement, you may not need an annuity.

If you don’t have a guaranteed stream of retirement income, you should consider investing in annuities. They’re a good source of lifetime income.

On the other hand, if you don’t have enough savings to buy an annuity and have enough available for unexpected expenses, you should be cautious about purchasing annuities. That’s because you won’t have access to the money you used to buy the annuity. Generally, it’s best to ensure you have enough accessible savings for potential needs, such as medical bills.