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The consideration to buy annuities may be one of the most important decisions that you will make about your retirement plan. There are no other retirement vehicles that will offer you all of the options and benefits that an annuity will offer you, from increased retirement savings to the various annuity payment options.

There are primarily two types of annuities, fixed and variable, and depending on the type of annuity you purchase the options and benefits vary.

Interest Calculation

The primary difference between a fixed and variable annuity is the way that your interest is determined. With a fixed annuity your interest rate is either totally or partially guaranteed. With a variable annuity the interest payments are affected by an underlying index.

Some variable annuities have certain floors, guaranteed amounts that the annuity will make each year regardless of what the index is doing. Other variable products have a step rate, if the underlying index increases and the annuities rate increases in a certain year the annuity may adjust to make that higher rate the minimum guaranteed rate.

Retirement Savings

Both annuities will provide retirement savings. Variable annuities are more appropriate for younger investors, who can afford to wait out the volatility of an index. A fixed annuity typically appeals to older investors who appreciate rate guarantees.

Both annuities are also tax-deferred, providing not-taxable growth for your investment. Of course, when the funds are withdrawn the interest is taxable as income. A fixed annuity follows a pre-determined expense ratio, meaning that the exact amount of taxable income can be determined at the time you purchase the annuity. A variable annuity can not offer those guarantees up front.

An IRA can be rolled into an annuity, but will not influence he already tax-deferred nature of an annuity.

Annuity Payment Options

Both annuity types can be annuitized, that is, they can be converted into incomes for life.

With a fixed annuity the payments generally remain level for the rest of your life. In some cases the payments can start out lower and increase over time to adjust for inflation.

With a variable annuity the payments may adjust according to the annuity's underlying index's performance. When a variable annuity is converted into an income stream the annuity is converted into a certain number of units that payments are based upon. The payments consist of the same number of units, but the value of each unit can fluctuate resulting in differing income amounts each month.

Choosing to buy annuities can prove to be an integral part of anyone's retirement plan. Carefully consider your goals, time horizon, and risk tolerance before choosing to purchase a fixed or variable product. In either case, buy annuities to ensure flexibility, retirement savings, and lifetime income.

Learn more about this author, Daniel Xiao Wang.
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