Once you’ve settled on what you want to accomplish, you can decide whether an annuity makes sense for you, realizing that different types can help you meet different financial goals.

Annuities can’t all be put into one category. But the very different types of annuities have some things in common. Savings-oriented deferred annuities are tax-advantaged and guarantee principal (except for variable annuities).  Income annuities are like a private pension. They have no cash value but instead guarantee retirement income.

Ensuring successful retirement—annuities during your accumulation phase

Social Security benefits aren’t sufficient to fund retirement for most people. And given the aging of the population and projected trust-fund shortfall, they may be less generous in the future.

That’s one of the reasons why Congress authorized annuities, which let you put away money now and have it grow without taxes until you need the money in retirement. In the accumulation stage of your life, you’re working and building wealth for retirement. Financial experts agree that during this stage, you should have diversified investments and prudently use all the tax-advantaged ways to save that you can without tying up money you need for current expenses. Annuities can be part of that mix.

Risk management as you accumulate wealth and age

In their 20s and 30s, many people are paying off student debt, raising children and saving to buy a house and thus can’t afford to put aside much for retirement. If you can salt something away, investing heavily in equities (stocks and stock funds) at this stage isn’t unwise because you have decades to ride out the ups and downs of the market. And you have less at risk.

But as you get older and have more money at stake and less time until retirement, your strategy should change. Most people should reduce their equity exposure and increase their allocation to less volatile instruments, such as bonds, certificates of deposit, and fixed annuities.  

Fixed-rate and fixed-indexed annuities build savings

To reduce your risk while getting a good interest rate, consider fixed-rate annuities, also called multi-year guaranteed annuities (MYGA). They are designed to act much like tax-deferred versions of bank CDs. They too offer a set, guaranteed rate for a set period but usually pay higher rates for the same term than CDs. A database of fixed annuity rates can be found here.

Unlike bank accounts or CDs, annuities aren’t federally insured. However, life insurers are tightly regulated by the states and have a solid track record of meeting their obligations. State annuity guaranty associations offer buyers additional protection. Check the A.M. Best rating of the issuing insurer before you buy. I recommend looking for at least a B++ rating.

Fixed-indexed annuities are another good option. Like a fixed-rate annuity, they also guarantee your principal so you’re sure of getting your money back. But the interest rate varies from year to year. It varies depending on the crediting formulas used and how the stock market index or indexes you choose to align with perform. Years when the S&P 500, for example, is up significantly, you’ll get a portion of the upside and might get, say a 10% interest credit.

When the market is down for the year, you won’t lose any money but won’t get any interest either with most products. In exchange for a fluctuating, unknown interest rate, you have the potential for greater long-term returns than with fixed-rate annuities.

Fixed-indexed annuities are complex, with various crediting formulas, so it takes some careful thought to identify a product best suited to you.

Income annuities can turn cash into lifetime income

Unlike fixed-rate or fixed-index annuities, income annuities (deferred or immediate) typically don’t have cash surrender value. You’re buying a contract, a promise the insurer is legally obliged to fulfill.

In return for your single premium deposit, this type of annuity guarantees an income for a certain number of years or your lifetime. Lifetime annuities are by far more popular because they provide a set, guaranteed income that will go on for your entire life. They provide “longevity insurance.”

You can choose an immediate income annuity for immediate income or a deferred income annuity for future income.  With the latter, you’ll choose the start date.

What age is best for buying annuities?

There are tax penalties for withdrawing money from an annuity before age 59½, so most people won’t consider putting money in one until their early to mid-50s or older. But it depends on the individual. When you buy a nonqualified annuity at an earlier age, you give tax-deferred compounding more time to work.

But there’s an important exception. With a standard IRA or Roth IRA, you won’t normally take out money until you’re retired, so the pre-59½ penalties for annuities aren’t a drawback. A fixed-rate or fixed-indexed annuity can be a valuable player in your IRA allocation.

A Roth IRA annuity, like other Roth accounts, is tax-free. Both savings and income annuities work well as a Roth IRA.

Finally, there’s a special income annuity for standard IRAs: the qualified longevity annuity contract (QLAC). You now can place up to $200,000 of your IRA balance in a QLAC, up from $145,000 previously. The money in one is excluded from assets on which your future RMDs are calculated. You can defer income distributions until as late as age 85.

Annuities don’t address all financial problems and aren’t appropriate for everyone.  But like a Swiss Army knife, they offer a powerful and flexible set of tools. 

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.

Congress recently passed the SECURE 2.0 Act to help people save more for retirement by boosting tax breaks. It builds on the original SECURE Act. Three provisions will affect the most people.

Required minimum distributions (RMDs) from traditional IRAs, SEPs, 401(k)s and other retirement accounts now must begin at age 73, up from age 72 previously.

Retirees who don’t need the income thus get an extra year for their retirement-account money to grow without taxes. Just one more year of tax deferral can make a modest but real difference in how much money you’ll have for retirement later on. RMDs show up as taxable income on your 1040 form and are also taxed by many states.

To take advantage of this, you’ll need other sources of income until you turn 73. Fortunately, interest rates are up, and today you can earn more on money-market accounts, bank certificates of deposit, and fixed-rate annuities, which are issued by insurers and typically pay higher rates than bank CDs of the same term.

Retirees can now defer taxes on more of their money thanks to more generous rules on qualified longevity annuity contracts (QLACs). An IRA owner can now place up to $200,000 of his or her IRA balance in a QLAC, up from $145,000 previously. The previous restriction that limited contributions to 25% of the account balances in IRAs has been lifted.

Here’s why it’s valuable. A QLAC is a type of deferred income annuity designed to meet IRS requirements that’s only available for retirement plans. The money in one is excluded from assets on which your future RMDs are calculated. For instance, if you’ve placed $200,000 in a QLAC and turn 75 this year, you’ll reduce your 2023 RMD by $8,130, according to www.investor.gov.

You pay a single premium and then choose when to start receiving a stream of guaranteed lifetime income by age 85 at the latest. Deferring RMDs lets you keep more of your retirement plan assets intact and tax-deferred. But the biggest benefit is creating a guaranteed lifetime stream of income that will never decrease no matter how long you live.  It’s essentially a private pension that you control.

You can choose an individual or a joint lifetime payout, with the latter paying out income until the second spouse dies. The joint payee must be a spouse, which satisfies IRS death-transfer rules. There’s also a cash-refund option, in which beneficiaries can get a lump-sum payout for any of the initial deposit premiums not yet paid out at the death of the annuitant(s).

Each spouse can now allocate up to $200,000 to a QLAC

The IRA catch-up provision, which lets people 50 or older add up to $1,000 beyond the normal contribution limit, will be indexed for inflation starting in 2024. Additionally, (though not part of the SECURE Act), the maximum you can contribute to your standard and/or Roth IRAs this year is $6,500 if you’re under 50 and $7,500 if you’re 50 or older. That’s a $500 increase.

The SECURE 2.0 Act gives you the chance to defer taxes on more of your retirement money via the extra year of deferral and more generous limits on QLACs. If you have the cash flow or savings that let you take advantage of these opportunities, you can benefit.

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. One of America’s top experts on annuities, he writes on retirement income and annuities regularly.

A free quote comparison service with intere

But LTCI isn’t cheap. And there’s a big drawback. If you buy it and never collect any benefits, you’ll have spent a big sum of money and not gotten anything in return except peace of mind.

To get around the problem, insurance companies developed the long-term-care annuity. This combines a deferred fixed annuity (a tax-deferred savings vehicle) with LTCI. The insurance is provided via a long-term-care rider, a policy add-on that lets the annuity pay benefits for long-term care.

If you don’t ever use the LTCI benefit, or not much of it, you or your heirs will have the remaining annuity value to use.

But LTCI annuities are complex and can have lots of moving parts, so they have both pros and cons. While the concept isn’t new, insurers are always looking to improve their products and offer more flexibility and features.

Because the products are varied, a brief article like this can’t be comprehensive. But there are pros and cons that are pretty much common to all these products.

Some advantages:  easier acceptance, tax-deferred savings and guarantees

One key advantage is more liberal underwriting. Traditional LTCI insurers are pretty strict about who they’ll insure. If you have any significant health issues, you may be declined coverage.

LTCI annuity insurers aren’t as stringent. They’re usually much more willing to accept people with health problems. Some will even take everyone. However, if you do have a medical condition, you’ll probably be placed in a lower underwriting class and eligible for lower LTCI benefits. But you’ll still be insured.

Tax deferral is another big plus. The money you place in the annuity will grow free of taxes until you withdraw some of the interest earnings.

Normally, if you take out interest from an annuity, it counts as taxable income. However, LTCI benefits paid by the policy are not taxable.

Another plus: fixed annuities are guaranteed. The issuing insurer guarantees your principal, interest and benefits. Though insurers have an excellent record of keeping their promises and are strictly regulated by their state of domicile, consider the company’s A.M. Best rating for financial strength before you buy an annuity.

Some cons: less immediate LTC coverage and possibly a bigger upfront payment (but not always)

With a traditional LTCI policy, you typically have full coverage from the time you pay your first premium. With an LTCI annuity, the LTCI coverage may be vested over time. You will usually have some LTCI coverage right away, with the amount becoming fully vested after a few years.

Most deferred fixed annuities are single-premium policies. You buy them with a lump sum. Some LTCI annuities are single-premium too. The advantage is that once you’ve paid it, you’re paid up for life. The disadvantage is that you have to come up with a large sum to secure a reasonable level of LTCI.

Traditional LTCI premiums are tax-deductible, up to certain limits, for self-employed people and owners of partnerships, subchapter S corporations, and LLCs. Upfront deposits to fund LTCI annuities are not tax-deductible.

The LTC rider has a cost, so your annuity value will grow more slowly over time when compared to a similar annuity without the rider. If the annuity pays out substantial LTC benefits, the cash value of the annuity will eventually decline to zero.

Insurers pioneer flexibility, features and programs

Recently, some insurers have introduced flexible-premium policies. After you’ve paid the initial deposit, you may make additional deposits, up to a certain limit, to get more LTCI coverage and boost the amount you’re accumulating in the annuity. This makes the policy more affordable for people who don’t have a big lump sum to deposit but can afford to buy additional coverage over time.

Traditionally, these hybrid annuities have been fixed-rate annuities, which act much like a bank certificate of deposit, by paying a set rate of interest for a set term.

Insurers, however, are innovating. At least one company, for instance, yokes a fixed-index annuity with LTCI. The fixed-index annuity provides growth potential linked to a stock-market index without any downside risk.

Some insurers may even offer a wellness program to go along with the hybrid product.  

Financing future long-term care expenses is always a challenge. But with the continued development of LTCI annuities, people have more options now. The product is well worth considering sooner than later. The older you are, the more expensive LTCI coverage becomes and the greater the odds that you’ll have a medical condition that limits your options.

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. One of America’s top experts on annuities, he writes on retirement income and annuities regularly.

A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (80

In truth, I saw this coming. My twin brother is a diabetic and so is my sister. It is in the cards. The good news is that apparently a pre-diabetic does not have to get diabetes. If I add walking or regular exercise 20 minutes a day and change my diet, I can ward off this all too common devil.

The walking or exercise seems easy enough. I love to be outside in all kinds of weather. I love a good snow storm or rainy day. Not too fond of sleet down my neck, but I have skied in worse. In fact, I may take up skiing again since the tickets are 50% off if you are over 70.

It is the diet part that is the uphill battle. Especially around the Holidays. Any Holiday. And with a Birthday in January that is every dang month in the Calendar. My Birthday, Valentine’s Day, St. Patrick’s Day, Easter, Mother’s Day, Father’s Day, Fourth of July, August *, Labor Day, Halloween, Thanksgiving, Christmas.

* August is a virtual goldmine of Holidays. Besides week-end Bar-B-Qs there is: August 4^th – National Chocolate Chip Cookie Day, August 8 – International Cat Day, August 9^th is National Book Lovers Day, August 10^th is Lazy Day, August 12^th is Vinyl Record Day, August 15 is National Relaxation Day (not sure how this differs from August 10^th), August 16th is both National Bratwurst Day and Tell a Joke Day, which seems redundant. August 18^th is National Fajita Day, August 19^th is National Potato Day, August 20^th is National Chocolate Pecan Pie Day, August 23^rd is National Sponge Cake Day, August 26 is Women’s Equality Day, all which certainly call for cake.

With so much to celebrate I would be remiss if all I did was light a lone sparkler. These occasions call for food. And food with cream, butter, salt, sugar and carbs. FYI: I once heard that fat, salt and sugar was the chemical equivalent to crack. Certainly, adding flour brings it to lethal levels.  No wonder just the thought of giving up goodies makes me break into a cold sweat. Not to make light of diabetes, I should mention that as a child I had an uncle who had both legs amputated and eventually died from Diabetes. So, I know this can be serious as um, a heart attack. (Yup, both my birth and step-father died of heart disease).

The thing is I am the Queen of rationalization in the moment. “Just this once, okay and once more and just this last time, I swear it.” Ends up with a raging sugar rush and then crash. I deny myself for just so long and then boom! I binge and imbibe umbrella drinks and gloppy goodies galore.

I once read a Weight Watcher’s recipe for coconut cream pie which started by bleaching sauerkraut and adding coconut flavoring. Um, no. At that point just eat the dang pie. Thus, I am looking for alternatives that don’t use faux sugar or canola oil. And I won’t eat store bought sugar-free desserts because I fear they have wicked bad chemicals in them. As do diet drinks (yeah, cancer runs in the family too). I need real food that won’t kill me. Too much to ask?

So far, I have found that you can make pie shells from crushed pecans, oats and oil. Jury is still out on what to fill it with. Even unsweetened fruit is too sweet unless you have a 1/32nd of a pie slice. For now, I’m dipping fresh celery stalks into cheddar-sour cream dip. I am eating peanut butter from a soup spoon.  I’m shooting 2 T of whipped cream from a can into my mouth for dessert. Carbs only 0.9 grams.

Ken Nuss is the Founder and CEO of AnnuityAdvantage. Ken entered the financial services industry in 1986 and obtained a Series 7 securities license in 1992, becoming an investment representative with a full-service brokerage firm. In 1999, he launched the AnnuityAdvantage website to help people looking for their best options in principal protected annuities. Today, AnnuityAdvantage is a leading online provider of fixed-rate, fixed-indexed and immediate income annuities.

But you don’t have to choose the lifetime option. Instead, you may want to choose a set income term from five to 20 years. Sometimes it makes perfect sense to choose this option, called a period certain income annuity.

For instance, you may need extra income to fund early retirement until Social Security and/or a company pension kicks in. Or you may wish to delay taking Social Security until age 70 to max out your income benefits. Or you may want to prefund a loan or large life insurance policy that requires installments over a fixed period of time.

Period certain annuity provides high guaranteed income

An immediate annuity is bought with a lump sum, which is why it’s called a single premium immediate annuity (SPIA). Whether lifetime or period certain, it usually has no cash surrender value after purchase. You’ve turned over your money to an insurance company in exchange for a stream of guaranteed income.

With a lifetime income SPIA, an optional cash-refund feature guarantees that your premium payment will not be lost in the event of early death. If you die before your monthly income payments equal the full amount of your annuity purchase price, your beneficiary will receive the difference.

You may also opt to add your spouse, so he or she will continue to receive income after your death, assuming you predecease him or her. This option typically lowers your payments slightly.

With a period certain annuity, depending on your age at issue and payment term selected, you’ll usually get larger monthly payments than with a lifetime variety because the insurance company is guaranteeing income for a set period, not for your life. The shorter the period, the greater the annual or monthly income.

You’ll get a much higher guaranteed income than from other alternatives. Part of the reason is that with a period certain annuity, if nonqualified, most of the income you will receive is tax-free return of your principal, and the rest is taxable interest. (When the annuity is held in a qualified retirement plan such as a traditional IRA or a 401(k), payments are fully taxable.)  Bank certificates of deposit, for instance, don’t provide a similar amount of income because you can only take out interest unless you’re willing to pay a significant penalty to the bank. Otherwise, you must wait till maturity to get your principal back.

The other reason they produce more income is that annuities usually pay substantially higher underlying interest rates than bond funds, CDs, and money market accounts.

Furthermore, you don’t get similar guarantees. Money market rates fluctuate; bond-fund prices vary.

Let’s look at some possible uses.

Income for early retirement

For instance, suppose you want to retire now but delay taking Social Security for eight years. You could buy an eight-year period certain annuity to fill your income gap.

Here’s an example. Joe, age 60, retires and invests $200,000 in an eight-year period certain immediate annuity and lists his wife as joint annuitant so that she will be protected and continue to receive any remaining payments if he dies before the eight years are up. With this type of annuity, he can accurately calculate his annual return.

Joe will receive $2,471.21 per month, including $2,083.33 in return of principal and $387.88 of taxable interest. After eight years, he’ll start collecting Social Security and won’t need the additional income.

Pre-funding installment payments for a big life insurance policy or loan

Suppose you decide to purchase a large life insurance policy. Rather than funding the policy with a single premium payment, you could buy a 10-year period certain annuity with annual payments you’ll use to make the premium payments over time. That way, you can avoid the life policy being categorized as a modified endowment contract (MEC), which can be disadvantageous from a tax perspective.

Or let’s say you have a substantial loan that has a pre-payment penalty. Rather than paying off the loan and taking the prepayment hit, you could purchase a period certain annuity to prefund the remaining payments.

Yoking immediate and deferred annuities for better after-tax income

Here’s an interesting income strategy that combines two types of annuities.

Let’s say you have $100,000 to deposit and that your combined federal/state income tax bracket is 28%. How can you maximize your guaranteed after-tax income?

You could simply buy a 10-year fixed-rate annuity yielding 5.20%. A fixed-rate annuity acts much like a bank CD: you deposit a lump sum and the insurer agrees to pay a set guaranteed rate of interest for the term.

You could then take annual interest withdrawals of $5,200. These withdrawals are fully taxable, resulting in $1,456 in additional taxes, giving you a net after-tax income of $3,744.

Here’s an alternative. Instead, you’d place $60,234 in the fixed-rate annuity, and the balance, $39,766 in a 10-year period certain immediate annuity paying annual income of $5,010. Of that amount, $1,032 is taxable and $3,978 is nontaxable

The $60,234 allocated to the fixed rate annuity grows tax-deferred so that it will equal your original $100,000 at the end of 10 years.

At first glance, it would appear that putting all the money in a fixed-rate annuity generates more income than the split-annuity strategy. However, with the split strategy, only $1,032 of the annual income payment is taxable because the rest of the payment is a return of your premium deposit. As a result, only $289 in annual taxes are owed, leaving net after-tax income of $4,721, which is $977 more than if you placed all the money in a fixed-rate annuity.

In retirement, most people rely on a combination of Social Security, retirement plans, and personal savings for income. A split-annuity strategy can help supplement those sources, add stability and help ensure that you don’t outlive your assets.

The vast majority of immediate annuities bought include some type of lifetime payout configuration. But they’re not the only good income solution. Consider your situation and talk to an experienced annuity advisor. You may find that a period certain annuity fills the bill.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com  or by calling (800) 239-0356.

If you’re shopping for a five-year guarantee, available rates range from 2.60% to 4.65%, according to AnnuityAdvantage’s database of annuity rates.

Rates on annuities with the same term vary hugely. If you don’t shop around, you’ll almost certainly earn far less interest than you could. Unfortunately, many local annuity agents represent only a few annuity companies, sometimes just one.

Before I offer tips on how to shop around, here’s some background:

A fixed-rate deferred annuity (also called a multiyear guarantee annuity, or MYGA) resembles a bank certificate of deposit. It also pays a guaranteed rate of interest for a set term. Unlike CDs, annuities are tax-deferred. Issued by insurance companies, annuities aren’t federally insured like CDs, but state-mandated guaranty associations offer a level of protection.

While the rate isn’t the only factor in choosing an annuity, it is the single most important thing when other factors are equal. Here are the key considerations.

How long will your money be committed?

The term is the length of the annuity guarantee period. Most multiyear annuities go from two to 10 years.

Longer-term annuities usually pay more than shorter-term ones. But today, rate differences are not large. For instance, the top three-year annuity in our database now guarantees 4.25%. At seven years, you can get up to 4.72%, and at 10 years, 4.75%.

Is it worth tying up your money longer for a slight bump in the rate? It all depends on your situation and view of future interest rates. One solution is to put part of your money in a three-year annuity, for instance, and part in a five-, seven-, or 10-year contract. This is sometimes referred to as an annuity ladder.

How much can you take out while the policy is in force?

When the term ends, you’ll have the option of getting your principal plus all your accumulated interest back if you’ve reinvested interest. You can then take the proceeds in cash and pay taxes on the accumulated interest (assuming it’s a nonqualified annuity). However, you can continue to defer all taxes by rolling the money over into a new annuity at the same insurer or transferring it to a different insurer via a 1035 exchange.

What if you want or need some or all of your money back before the term ends? If it’s some of your money, you may not have a problem, since most annuities permit penalty-free partial withdrawals. Many let you withdraw up to 10% of the contract value annually, penalty-free. However, some annuities don’t have that provision and, in return, may pay a higher rate than a comparable annuity that offers more liquidity.

If you take out more than the contract allows during the penalty period, the insurer will levy a penalty. These surrender charges, and how they are applied, differ widely from company to company. However, they often start at 7% to 10% of the excessive withdrawal amount during the first year and decrease annually.

Some annuities let you surrender without penalty if you become totally disabled, are diagnosed with a terminal illness or are admitted to a nursing home for an extended period during the term.

Understanding the financial strength of life insurers

Life insurers issuing annuities are rated by AM Best for financial strength and ability to pay claims. Letter grades range from F to A++.

A lower-rated insurer may sometimes pay a higher rate. For example, in the examples at the start of this article, the insurer rated A- pays the lower rate, while the one with a B++ rating pays the higher rate. But sometimes a company with a higher rating will pay more or the same as a lower-rated carrier.

It’s a matter of personal comfort to some degree. Some people feel comfortable only with insurers that get at least an A or A- rating. Others may feel comfortable with lower-rated carriers. I recommend choosing companies rated B++ as the minimum and avoiding those rated B+ or lower.

Lesser-known (but first-rate) insurers often (but don’t always) pay higher rates than the biggest brand-name companies with more overhead and expensive advertising campaigns.

How to shop for the best deal

If you go to a local financial adviser or independent agent, he or she will probably show you products from a few insurers at most, maybe only one. You usually see only the annuity product(s) that he or she is used to presenting and wants you to buy.

If you are working with a bank or broker-dealer, the product selection will usually be even smaller. Their agents can sell only the limited number of annuity products the bank or broker-dealer makes available to them.

In other words, buying an annuity from a local, in-person salesperson dramatically reduces the odds you’ll get the best interest rate.

Shopping online lets you compare annuities from dozens of insurers and make apples-to-apples comparisons on rates and other features. There are several reputable sites in addition to my company, AnnuityAdvantage.

With a rate-comparison site, you can easily avoid poor deals and secure the best rate from a sound insurer. There are a few words of caution, though. Just because an annuity agent has a website doesn’t mean they are experienced or equipped to do business in all states. Look for a site where the agency is licensed in all states and represents a large number of insurance companies.

Once you’ve looked at rates and done some initial comparisons, you can speak to an agent, articulate your goals and see how available products would fit your needs. Ask, too, about ongoing service after you’ve bought the annuity. Long-term relationships matter.

Your services should not end with the annuity sale. A good agent should do annual reviews; inform clients of any AM Best ratings changes with the issuing insurance company; assist with beneficiary changes, death claims and annuitization if desired; and consult with the client before the end of the initial guarantee term regarding renewal opportunities with the current insurance company or better rates with other companies. And you should be able to reach a live person on the phone anytime you call with questions.

If you’re looking for a haven for your money, with a three-year fixed-rate annuity, you can choose one paying 2.00% annually or one paying 4.25%! Other than the rate, the two products are quite similar.

If you’re shopping for a five-year guarantee, available rates range from 2.60% to 4.65%, according to AnnuityAdvantage’s database of annuity rates.

Rates on annuities with the same term vary hugely. If you don’t shop around, you’ll almost certainly earn far less interest than you could. Unfortunately, many local annuity agents represent only a few annuity companies, sometimes just one.

Before I offer tips on how to shop around, here’s some background:

A fixed-rate deferred annuity (also called a multiyear guarantee annuity, or MYGA) resembles a bank certificate of deposit. It also pays a guaranteed rate of interest for a set term. Unlike CDs, annuities are tax-deferred. Issued by insurance companies, annuities aren’t federally insured like CDs, but state-mandated guaranty associations offer a level of protection.

While the rate isn’t the only factor in choosing an annuity, it is the single most important thing when other factors are equal. Here are the key considerations.

How long will your money be committed?

The term is the length of the annuity guarantee period. Most multiyear annuities go from two to 10 years.

Longer-term annuities usually pay more than shorter-term ones. But today, rate differences are not large. For instance, the top three-year annuity in our database now guarantees 4.25%. At seven years, you can get up to 4.72%, and at 10 years, 4.75%.

Is it worth tying up your money longer for a slight bump in the rate? It all depends on your situation and view of future interest rates. One solution is to put part of your money in a three-year annuity, for instance, and part in a five-, seven-, or 10-year contract. This is sometimes referred to as an annuity ladder.

How much can you take out while the policy is in force?

When the term ends, you’ll have the option of getting your principal plus all your accumulated interest back if you’ve reinvested interest. You can then take the proceeds in cash and pay taxes on the accumulated interest (assuming it’s a nonqualified annuity). However, you can continue to defer all taxes by rolling the money over into a new annuity at the same insurer or transferring it to a different insurer via a 1035 exchange.

What if you want or need some or all of your money back before the term ends? If it’s some of your money, you may not have a problem, since most annuities permit penalty-free partial withdrawals. Many let you withdraw up to 10% of the contract value annually, penalty-free. However, some annuities don’t have that provision and, in return, may pay a higher rate than a comparable annuity that offers more liquidity.

If you take out more than the contract allows during the penalty period, the insurer will levy a penalty. These surrender charges, and how they are applied, differ widely from company to company. However, they often start at 7% to 10% of the excessive withdrawal amount during the first year and decrease annually.

Some annuities let you surrender without penalty if you become totally disabled, are diagnosed with a terminal illness or are admitted to a nursing home for an extended period during the term.

Understanding the financial strength of life insurers

Life insurers issuing annuities are rated by AM Best for financial strength and ability to pay claims. Letter grades range from F to A++.

A lower-rated insurer may sometimes pay a higher rate. For example, in the examples at the start of this article, the insurer rated A- pays the lower rate, while the one with a B++ rating pays the higher rate. But sometimes a company with a higher rating will pay more or the same as a lower-rated carrier.

It’s a matter of personal comfort to some degree. Some people feel comfortable only with insurers that get at least an A or A- rating. Others may feel comfortable with lower-rated carriers. I recommend choosing companies rated B++ as the minimum and avoiding those rated B+ or lower.

Lesser-known (but first-rate) insurers often (but don’t always) pay higher rates than the biggest brand-name companies with more overhead and expensive advertising campaigns.

How to shop for the best deal

If you go to a local financial adviser or independent agent, he or she will probably show you products from a few insurers at most, maybe only one. You usually see only the annuity product(s) that he or she is used to presenting and wants you to buy.

If you are working with a bank or broker-dealer, the product selection will usually be even smaller. Their agents can sell only the limited number of annuity products the bank or broker-dealer makes available to them.

In other words, buying an annuity from a local, in-person salesperson dramatically reduces the odds you’ll get the best interest rate.

Shopping online lets you compare annuities from dozens of insurers and make apples-to-apples comparisons on rates and other features. There are several reputable sites in addition to my company, AnnuityAdvantage.

With a rate-comparison site, you can easily avoid poor deals and secure the best rate from a sound insurer. There are a few words of caution, though. Just because an annuity agent has a website doesn’t mean they are experienced or equipped to do business in all states. Look for a site where the agency is licensed in all states and represents a large number of insurance companies.

Once you’ve looked at rates and done some initial comparisons, you can speak to an agent, articulate your goals and see how available products would fit your needs. Ask, too, about ongoing service after you’ve bought the annuity. Long-term relationships matter.

Your services should not end with the annuity sale. A good agent should do annual reviews; inform clients of any AM Best ratings changes with the issuing insurance company; assist with beneficiary changes, death claims and annuitization if desired; and consult with the client before the end of the initial guarantee term regarding renewal opportunities with the current insurance company or better rates with other companies. And you should be able to reach a live person on the phone anytime you call with questions.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com  or by calling (800) 239-0356.  There are no fees or charges for the firm’s services; 100% of the client’s money goes to work for them in their annuity.

It turns out you do have options, especially with annuities.

While CDs have penalties for early termination, they usually let you withdraw accumulated interest penalty-free. You can use that interest to buy another higher-paying CD, or better yet, a higher-yielding annuity, as long as you don’t plan to withdraw any money from it before age 59½.

Sometimes it’s worth terminating entirely and paying the penalty. You just have to do the math to make sure it’s a good move.

A fixed-rate deferred annuity (also called a multi-year guarantee annuity or MYGA) acts a lot like a bank certificate of deposit because it pays a guaranteed rate of interest for a set term. They’re typically more liquid, though.  Most of these annuities let you withdraw up to 10% of the contract value annually, penalty-free. (If you take out more than 10% during the penalty period, the insurer will levy a penalty.)

This provides valuable flexibility. Penalty-free withdrawals let you transfer funds from an older low-yielding fixed annuity (or from an underperforming fixed-indexed annuity or a variable annuity) into an annuity that guarantees a higher interest rate for years.

Exchanges and transfers are tax-free

To avoid taxes, with a nonqualified annuity (one that’s not in an IRA), you must use a partial exchange to purchase your new annuity. Under a partial so-called “1035 exchange,” funds pass directly from the old insurer to the new one. A competent annuity agent can arrange for such an exchange.

With an IRA annuity, a direct transfer between insurance companies is tax-free.

How Bob gets more Interest

Bob, a retiree, has three fixed-rate annuities paying 2.50%, 2.85%, and 3.05% respectively, plus a high-fee underperforming variable annuity. All four are nonqualified annuities still subject to early-surrender penalties, so it wouldn’t make sense for Bob to surrender them entirely. Instead, he takes 10% partial exchanges from each of the fixed-rate annuities to a new seven-year annuity that pays 4.50%.

With the vast majority of annuities, you must use the partial withdrawal that year or lose it. A few allow you to carry over the 10% from one year to the next for a cumulative withdrawal. His variable annuity has that feature, so he can transfer 30% of the contract value penalty-free to the new annuity. He decided to move money out of the variable product because he wants to lower his risk and get today’s higher guaranteed annuity rates.

The fact that he can now get up to 4.50%—versus about 3.20% for a seven-year contract in late 2021—changed his calculus.

Partial 1035 exchanges—take care

A special IRS rule applies when using nonqualified funds in a partial 1035 exchange. If any withdrawals are made from either contract within 180 days of a partial exchange, the exchange is invalidated and becomes a taxable event.

Also be aware that if you withdraw money from your nonqualified annuity before age 59½, you’ll typically owe the IRS a 10% penalty on the accumulated interest earnings you’ve withdrawn (unless you’re permanently disabled) as well as ordinary income tax on the amount. Therefore, don’t buy a deferred annuity unless you’re sure they won’t need the money from it before 59½.

As mentioned, a 1035 exchange avoids this problem because it’s not considered a withdrawal by the IRS.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com  or by calling (800) 239-0356.

An annuity is the only financial product that can guarantee lifetime income. If you want to secure future income with an annuity, you have three main choices. Each can be appropriate for nonqualified (taxable) accounts as well as IRAs and Roth IRAs. Each has its pros and cons.

Option 1: A deferred income annuity (DIA) offers simplicity and predictability but little flexibility. A DIA is a promise by an insurer guaranteeing to pay a stream of income starting on a set future date. You typically pay a single premium for this contract.

You may choose to take the income for a set period, such as 15 years, but most people take the lifetime option. You can buy either a single-life annuity or a joint-life annuity to cover both spouses. The popular optional cash-refund feature guarantees that in the event of your early death prior to the income start date, your premium payment will be refunded to your beneficiaries.

This is a straightforward plan. You know exactly what your income is going to be starting on the date you’ve chosen. The downside is that there’s little or no flexibility. In exchange for the future income, you’ve turned over your money to the insurer. You’re committed.

Option 2: A fixed indexed annuity with an income rider is flexible but complex and adds fees.

Fixed indexed annuities offer buyers a chance to get a portion of the stock market’s gains while offering complete protection from loss. They credit interest based on the growth of a market index, such as the Dow Jones Industrial Average or S&P 500. But, uniquely, you lose nothing in down years.

By adding a lifetime-income guarantee rider, you can guarantee future income. Since the starting date for income is not set when you buy the annuity, you retain flexibility.

Normally, when you convert an annuity into an income stream, (“annuitization”), its cash surrender value becomes zero. That’s not the case here. You still own the full unused value of your annuity.

This makes it sound like this option is “have your cake and eat it too.”  In a way it is, but there are downsides.

One of the biggest ones is cost. Most insurers charge around 1% annually of the assets in the annuity to add an income rider. So, your money will grow more slowly than without the rider.

The lifetime income amount is determined by the income account value and your gender and age at the time you start receiving payments. The income account value typically grows at a guaranteed annual compounded rate of 4 to 8 percent, so the longer you wait, the greater the income.

The income account value and cash value of your contract are separate. The income account value is used only to calculate your guaranteed income payments. It has no cash value and cannot be withdrawn. In contrast, the contract value can be withdrawn or passed to your heirs.

Another downside is fluctuating interest rates. If the market goes thru a long bear cycle, you may earn nothing on your contract value for a number of years.

Option 3: Buying a fixed-rate annuity now and converting it to an immediate annuity later on offers flexibility and guaranteed growth but future income varies.

This can be the best choice for people who want to keep control over their money for now, stay flexible and build more future income.

A fixed-rate deferred annuity (technically, a multi-year guarantee annuity or MYGA) acts much like a bank certificate of deposit. You deposit a lump sum and get a guaranteed interest rate for a set period, usually two to 10 years.

You’ll know to the penny what your annuity will be worth (assuming no withdrawals), at the end of the term. Interest is tax-deferred as long as you reinvest it in the annuity.

Here’s how this strategy works.

Let’s say you plan to retire in five years. You buy a five-year fixed-rate annuity. Near the end of the five-year term, you can shop the market for the best deal on an immediate-income annuity. If you hold your annuity in a nonqualified account, you can swap it tax-free, via a 1035 exchange, for an immediate annuity.

An immediate annuity is pretty much identical to a DIA except that income payments begin right away. You won’t know exactly what your income will be because immediate annuity rates will have changed in the interim.

Here’s a scenario.

Joe Doe, age 60, deposits $150,000 in a five-year MYGA that pays an annual effective rate of 4.30%. Assuming he lets the interest accumulate, the annuity will be worth $185,145 at the end of the term.

He uses that sum to buy an immediate annuity. Based on today’s rates, with a joint-life policy for him and Mrs. Doe (also 60), the payout will be $964.50 per month for as long as either spouse is alive. (Of course, he might get a better or worse deal than what’s available today.)

If it’s a nonqualified annuity, $464.89 will be taxable income and $499.61 will be nontaxable return of premium. If it’s a standard IRA annuity, payments will be fully taxable. With a Roth IRA annuity, all the income will be completely tax-free.

But suppose five years from now, Joe decides to keep working for two more years. He can roll over the proceeds tax-free into a two-year MYGA and delay buying the income annuity.

Of course, he can do whatever he wants with the money in his annuity. If Joe decides to use some or all of it to sail around the world or give to charity, it’s his choice.

Different types of annuities are powerful tools for nailing down future lifetime income. None of these three options is always best for everyone. It depends on your situation and preferences.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com  or by calling (800) 239-0356.

Myth 1: annuities are all the same. They’re good only for retirees.

Fact: different types of annuities are distinct and can help a range of people achieve their financial goals.

Annuities fall into two camps:

• Deferred annuities help you build wealth through tax deferral. They include CD-like fixed-rate annuities, fixed-index annuities that offer growth potential without the downside, and variable annuities, which resemble mutual funds with tax deferral. Earnings left to grow and compound in the annuity are tax-deferred.

• Income annuities (immediate and deferred) provide a guaranteed stream of income for a set period or life. A lifetime payout annuity is the only financial product that guarantees income for life. Once payments begin, income annuities usually have no cash surrender value.

Despite their diversity, annuities aren’t suitable for everyone. If you withdraw or receive earnings from an annuity before age 59½, you’ll be hit with a 10% IRS penalty along with regular income tax.

Myth 2: all annuities have high fees or charges.

Fact: most don’t.

Because the annuity market is very competitive, insurers that don’t offer good deals won’t attract many customers.

Variable annuities do have ongoing fees that are deducted from the contract value, and fees sometimes are high. Morningstar Annuity Research Center says annual fees average 1.10% but can go much lower or higher. You can avoid pricier offerings because fees are clearly disclosed in the prospectus.

Fixed annuities have no consumer fees unless you choose optional rider(s). There’s no sales charge; all the money you deposit goes to work immediately.

The fact that fixed-rate annuities usually pay significantly more than bank CDs with the same term shows that they offer good value. Rates have increased recently.

Income annuities from different insurers produce different amounts of income. To make sure you’re getting the best deal, work with a competent annuity agent who’ll shop the market and give you comparisons from multiple insurers.

Myth 3: annuities aren’t suitable for IRAs.

Fact:  most types can work well as a traditional or a Roth IRA.

This is one of the biggest myths. One or more types of annuities can be a great choice for IRAs.

A fixed-rate annuity can be a great choice for IRA assets you want to shelter from market risk and earn a set rate of interest. It has a significant advantage over bond funds because they guarantee your principal.

A fixed-index annuity also guarantees principal. It can offer potentially higher rates of long-term return if you don’t mind a fluctuating interest rate.

An income annuity can work well as a traditional IRA. However, your income payments must begin no later than age 72 to comply with required minimum distribution (RMD) rules. If you want to defer distributions past that age, consider a qualified longevity annuity contract (QLAC). It’s a type of income annuity that lets you delay RMDs up to age 85. You can invest up to 25% of your IRA money, to a maximum of $145,000, in a QLAC.

By using an income annuity to fund a Roth IRA, you can get guaranteed tax-free income for life. Depending on how soon you need income, you can choose an immediate or deferred income annuity.

With the joint-income option, your spouse will receive regular monthly income payments for the remainder of his or her life too. Payments to a surviving spouse are always tax-free, assuming your spouse was the sole beneficiary or your ROTH IRA.

If, however, you want to use your Roth IRA to pass wealth to your children or grandchildren, an income annuity probably isn’t the best choice.

In my opinion, variable annuities aren’t usually a good choice for traditional or Roth IRAs, since you’re paying additional annuity-related fees for tax deferral you already have in an IRA.

Myth 4: annuities are rip-offs because of early-surrender charges.

Fact: these charges are easily avoidable. Furthermore, most annuities provide some liquidity and flexibility during the surrender period.If you keep your annuity for the full term, you won’t be hit with an early-surrender charge. If you’re concerned about the length of the surrender period, look for an annuity with a shorter period.What if you unexpectedly need your money during the surrender period?

First, most deferred annuities let you take a partial withdrawal, typically up to 10 percent of the accumulation value each year, without penalty. Second, you can usually annuitize the contract—turn it into a stream of income—without penalty.

Today, some income annuities let you take out a partial withdrawal before (and in rarer cases after) income payments start. The insurer may also allow you to move up the date for payments.  A cash-back option will reimburse your beneficiary if you die before the annuity has repaid your entire premium.

Annuities are meant for money you can afford to set aside for a while and won’t need until 59½. If that doesn’t apply to you, an annuity won’t be a good choice.

Myth 5: once you buy an annuity, you’re stuck with it.

Fact: there’s a “free-look” period.

Most states require a free-look period that lasts for the first 10 to 30 days after receipt of the annuity policy. If your circumstances have changed or you’ve found a better deal, you can cancel the contract and the insurer will return all your money. You won’t, however, earn any interest on the canceled policy.

While it’s unlikely you’ll use the free-look provision, it provides peace of mind.  And occasionally, it can be valuable.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com  or by calling (800) 239-0356.

It’s wonderful to live a long and healthy life. But it would be best if you spent your retirement years enjoying yourself rather than fretting about whether or not your money will last. Here are seven strategies to help you overcome your phobias.

1. Reduce your spending

That should be obvious, right? However, it is something to be aware of. If you had a budget before retiring, stick to it now. You’ll have to make adjustments to account for fluctuations in income and expenses (ideally, you’ll be spending less on clothing, fuel, and other work-related expenses). It’s not too late to create a budget if you’ve never done so before. Consider your monthly income and how you want to spend it, as well as whether you’ll need to tap into savings.

2. Opt for a long-term care insurance policy

Nursing home bills wipe out many people’s life savings. One method to avoid this is to buy long-term care insurance when you’re in your 40s or 50s when the premiums are lower. This covers costs not covered by health insurance, Medicare, or Medicaid. This insurance will help preserve your assets if you end up in a nursing home, and with 60% of people over the age of 65 requiring long-term care services at some point in their lives, it’s a good investment.

3. Pay off your debts

It’s better to avoid taking on debt in retirement, but this isn’t always possible. Try to reduce credit card debt first. Negotiate with creditors or hire professionals to get rid of debts in one go. Check out the debt relief laws, read the fine print section of the debt settlement agreements, save money, and pay the negotiated amount. You will be debt-free soon.

4. Don’t take out too much or too soon

Early withdrawals from retirement funds might have negative implications. Early withdrawal penalties may apply, and you may even lose tax benefits.

The IRS penalty for taking money out of a 401(k) early is 10% plus your income tax rate on the amount taken out. Keep in mind that the money is there to help you retire. So resist the urge to withdraw money from those accounts before reaching your retirement age.

The same can be said for withdrawing too much money after retirement. The 4 percent rule, which states that you should withdraw 4% of your retirement funds each year, is a good starting point (adjusted for inflation). The concept is that you may demand at least a 4% return on your investments, ensuring that you will not run out of money throughout your 30-year retirement.

That figure, though, is not set in stone. If you have a bigger nest egg, some experts recommend a little higher withdrawal rate of 4.5 percent to 5% — but not more than 5%. Others suggest a withdrawal rate of 3 to 3.5 percent.

5. Continue to make money

You may have taken a break from your full-time job of 40 years or more, but that doesn’t mean you have to leave the workforce entirely. Consider looking for stress-free part-time employment that allows you to maintain your hobbies, friends, and family. In addition to earning some money, that job will keep your mind sharp. Selling items you no longer need is another way to make retirement money.

6. Time your Social Security benefits correctly

It may be tempting to file for Social Security when you turn 62, but this can be a blunder unless you have a compelling reason to believe you will die soon. Early Social Security benefits can result in a permanent reduction of up to a third of monthly income. You get an 8% increase every year you wait from full retirement age to age 70 before receiving benefits.

7. Buy annuities

Certain types of annuities, though frequently misunderstood, are a fantastic strategy to assure you don’t run out of money. However, it would help if you exercise caution. There are several different types of annuities, and they are all complicated. Annuities may demand substantial upfront payment, and you should invest no more than 30 to 40 percent of your assets in them. An annuity can give lifetime payments in exchange for that payout. While it may appear to be the ideal solution for someone in need of money, there are some disadvantages. Payments may not keep pace with inflation, and fees might be substantial.

Conclusion

Don’t forget to put your money to work. Compound interest can help you save a lot of money. The sooner you start investing, much like saving, the more your money can grow.

Make sure you’re saving in a 401(k) plan provided by your employer or an IRA. If your 401(k) plan offers matching contributions, make sure you’re contributing enough to obtain the full employer match.

Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.