When it comes to planning for retirement, few things feel more uncertain than ensuring a steady income in the future. Annuities aim to take the guesswork out of the equation, offering a way to turn your savings into guaranteed income without the risks of market volatility.

But are they a suitable choice for you? Let’s explore how annuities work, their benefits, and whether they align with your financial goals.

Why Consider an Annuity?

One of the primary advantages of annuities is tax deferral. Your investment can grow without being taxed until you start making withdrawals, similar to a traditional retirement plan. Over time, this can lead to significant growth compared to taxable investments. However, unlike 401(k)s or IRAs, annuity contributions are not tax-deductible.

And if you withdraw funds before age 59½, you may face a 10% early withdrawal penalty in addition to regular income taxes.

The Four Key Players in an Annuity Contract

1. Annuity Issuer – The insurance company that provides the annuity contract and guarantees payments (subject to its financial strength).
2. Owner – The person who purchases and controls the annuity (often the same as the annuitant).
3. Annuitant – The individual whose lifespan determines the payout structure.
4. Beneficiary – The person who receives remaining benefits if the annuitant passes away.

The Two Phases of an Annuity

1. Accumulation Phase – This is when you fund the annuity, either as a lump sum or through periodic contributions. If you contribute over time, you’re purchasing a deferred annuity.
2. Distribution Phase – When you start withdrawing money. You have two main options:
   • Lump-Sum Withdrawals – Take money out as needed.
   • Guaranteed Income (Annuitization) – Convert your balance into a steady income stream that lasts a lifetime or a set period. Some annuities offer joint and survivor options to continue payments for a spouse.

Types of Annuities

• Fixed Annuities – Provide predictable, guaranteed returns.
• Variable Annuities – Returns fluctuate based on market performance.
• Indexed Annuities – Offer returns tied to a stock index (like the S&P 500) with some protection against losses.
• Immediate Annuities – Begin payouts within a year of purchase.
• Deferred Annuities – Payouts begin at a future date, allowing tax-deferred growth.

When Does an Annuity Make Sense?

Annuities can be a smart choice if you’ve already maxed out other tax-advantaged retirement accounts like 401(k)s and IRAs. They offer unlimited contributions, tax-deferred growth, and guaranteed income for life. However, they may not be the best fit if you need short-term liquidity, as early withdrawals can trigger penalties and surrender charges.

Putting Annuities in Perspective

Annuities can play a role in long-term retirement planning, but they aren’t the right fit for every situation. At Navalign Wealth Partners, we help clients evaluate annuities alongside other retirement income strategies to understand how they may—or may not—fit within a broader financial plan. If you’re considering an annuity or exploring ways to create more predictable retirement income, we’re here to help you review your options and make informed, thoughtful decisions.