Funding your retirement: 6 things to know about annuities

Photo of a woman who is using annuities to help fund her retirement.

You’ve likely spent decades saving for retirement. Or maybe you’re still building your nest egg. Whether you’re ready to start enjoying what you’ve worked for now or a ways down the road, an annuity can help ensure that your money lasts for as long as you need it.

Here are 6 things to know as you consider adding an annuity to your retirement strategy.

1. Ensure guaranteed income for life

Your 401(k)s and IRAs lay a solid foundation for a secure retirement. But they can’t guarantee you income for life. Fortunately, an annuity can.

An annuity is insurance for your retirement income. It’s a way to turn part of your retirement savings into a guaranteed, steady income stream. You can set up annuity payments for life or for a set period of time, depending on your needs. It can help enure that you don’t outlive your savings.

2. Purchase an annuity with assets you already have

You can purchase an annuity with money from your savings account. Or you can use qualified money from a 401(k) or IRA, which will continue growing tax-deferred. An annuity can also offer inflation protection.

Some annuities require a one-time lump sum payment, while others may let you set up payments, similar to paying a premium on an insurance policy.

3. Help provide financial security for you—and your family

An annuity not only pays you in retirement (think of it as replacing the paycheck you got while employed), but may also cover your spouse or family when you’re gone.

It depends on how you choose to receive your income, but some annuities pay your beneficiary when you die, either in a lump sum or in installments. Other types of annuities refund unused premiums to a beneficiary, and may even provide an option to guarantee income for your spouse or loved one for as long as they live, too.

4. Get paid now, or in the future

Annuities typically work in one of two ways:

  • Immediate: The money you use to purchase an annuity is turned into an income stream right away, which you receive in monthly, quarterly, or annual payments.
  • Deferred: Your investment grows tax-deferred until you’re ready to receive income. How your investment grows is up to you. For example, you can choose a fixed interest rate for a set period of time, or a rate based on the performance of stock and bond funds. When you’re ready to start taking income, you’ll have different options to choose from, depending on the annuity.

5. Grow your money tax-deferred

With certain types of annuities (variable and fixed deferred), the money you contribute grows tax-deferred, and both your premiums and earnings benefit from compound interest.

When you start receiving income payments, any non-qualified money you contributed is not taxed, because it was taxed upfront. Any qualified contributions (e.g., from your 401(k) or IRA) or earnings are taxed upon withdrawal. As with other tax-deferred retirement accounts, there can be penalties for early or unscheduled withdrawals.

6. Choose from different types based on your needs and goals

There are 4 main types of annuities:

  • Fixed: Gives you a fixed rate of return on your investment. A good option if you want to save and grow your nest egg, without worrying about market volatility.
  • Income: Provides guaranteed income now (immediate) or in the future (deferred). Ideal if you want to ensure you don’t outlive your retirement savings. Or if you’re at or near retirement and want to start receiving income soon.
  • Indexed: Lets you invest in the market without the risk of loss. Consider this type of annuity if you want some market growth potential without the risk of losing your investment.
  • Variable: Focuses on market growth to help maximize your future guaranteed income. May be the right fit if you want to take advantage of greater market growth potential. There is the possibility of a loss; however, optional riders are available to protect against this.

Start planning now

Help make sure you have enough guaranteed income in retirement to live your best life. Learn more about annuities: 

Guarantees are based upon the claims-paying ability of the issuing insurance company

Withdrawals prior to age 59½ may be subject to a 10% IRS penalty tax.

This document is intended to be educational in nature and is not intended to be taken as a recommendation. Consult with your financial professional to discuss retirement planning.

Before investing in a variable annuity, investors should carefully consider the investment objectives, risks, charges, and expenses of the contract and the underlying investment options. This and other information is contained in the free prospectus, and if available, the summary prospectus which can be obtained from your local representative. Please read the prospectus carefully before investing. Contract rider descriptions are not intended to cover all restrictions, conditions, or limitations. Refer to rider for full details. Riders subject to state availability and may be subject to an additional charge.

Tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs are tax deferred. You derive no additional benefit from the tax-deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax-qualified retirement arrangement, to benefit from the annuity's features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees, and the ability to transfer among investment options without sales or withdrawal charges.

Not FDIC or NCUA insured. May lose value. Not a deposit. No bank or credit union guarantee. Not insured by any Federal government agency Variable Annuities are issued by Principal Life Insurance Company and distributed by Principal Securities, Inc, 800-852-4450, member SIPC and/or independent broker/dealers. Securities sold by a Principal Securities, Inc. Registered Representative are offered through Principal Securities, Inc. Principal Life and Principal Securities, Inc. are members of the Principal Financial Group, Des Moines, IA 50392