Pension annuities are basic staples of investment portfolios that help guarantee you a steady stream of income during retirement. Typically, you make an initial lump-sum investment in the annuity, and then you receive regular proceeds from this asset on a predetermined schedule. You may either receive these payments immediately after making your investment, or you may defer them until a later point in time, such as retirement. The size of these payments depends on whether you opted for a regular, fixed income stream or a variable annuity that may rise or fall in value depending on the performance of other investments.
When you select an immediate annuity, you begin to receive income soon after making your initial investment. These types of financial instruments allow you to use a large amount of money you may have received from another investment payout to guarantee yourself future income during your retirement. The terms of the annuity contract will determine how long you will collect these payments. You may choose to receive income for a set period of time or until the end of your lifetime. Some annuity products also provide the option to provide income to your surviving spouse or other beneficiaries.
With a deferred annuity, you keep your money invested and accumulating interest until you are ready to begin receiving payments. These type of instruments allow you to build up a "nest egg" that can support you in your retirement. Unlike immediate annuities that require an initial lump sum investment, deferred annuities allow you to begin small and contribute funds periodically until you meet your financial goals. The money you invest in a deferred annuity also has more time to grow and accumulate interest, providing you with even more income to rely on during your golden years. However, you may face penalties and extra taxes if you decide to withdraw your funds earlier than planned.
You can choose a fixed distribution for both immediate and deferred annuities. A fixed annuity allows you to lock in a guaranteed income stream to help pay for day-to-day needs during your retirement. This style of distribution provides stable and predictable income after you retire, allowing you to budget and plan ahead. However, the disbursements do not account for rising inflation, and should you live long into your retirement, the future value of your fixed payments may no longer support your needs.
Variable annuities seek to remedy the falling future cash values of fixed distributions by allowing you to spread your investment among several portfolios. Available for both immediate and deferred annuities, this option provides you with the potential of higher payments if the worth of those underlying investments rise. However, you may face lower payments should the values drop, making budgeting tricky for those living on a limited means. If you choose a variable annuity, research options that may allow for a minimum guaranteed payment to ensure you can still meet your obligations should a market drop occur.
John DuBois is a copywriter based in Portland, Ore. He earned a B.A. in history from Colorado State University and an M.S. in organization and management from Capella University.