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Using annuities in retirement planning

How can annuities help you reach your goals for retirement?

Why consider annuities

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An annuity is a contract an insurance company issues that can provide income or investment guarantees to fit your individual needs. They can be an important and effective part of your overall retirement plan by helping to:

  • Generate a guaranteed lifetime income stream in retirement
  • Increase your savings through tax-deferral
  • Protect what you’ve saved
  • Provide protection for your beneficiaries

In evaluating which type of annuity might work best for you, it’s important to first determine your individual needs.

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Guaranteed income

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If you’re looking to receive a reliable, consistent income stream in retirement and are concerned about possibly outliving your savings, an annuity may be right for you. Depending on the type of annuity you choose, you can decide to receive payments for the rest of your life or for a set number of years.

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Tax deferral

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Annuities’ earnings are tax-deferred—they are not taxed until withdrawn—which can enhance your investment’s growth potential. As a result, annuities can be a good way to supplement your retirement savings, especially if you’ve already maxed out your contributions to your 401(k), IRA, or both. In addition, annuities typically do not have contribution limits, so you can invest as much you’d like for retirement.

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Asset protection

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If you’re looking to avoid fluctuations in your savings’ value, some types of annuities can provide growth potential with certain levels of protection from market loss.

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Legacy planning

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Unlike with other financial assets, annuity beneficiaries may receive a guaranteed benefit amount, regardless of the underlying investments’ performance.

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Understanding different annuity types

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It’s important to understand the different types of annuities; there are generally five to choose from:

  • Variable
  • Indexed Variable
  • Fixed
  • Fixed indexed
  • Income
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Variable annuity

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A variable annuity may be a good choice if you are looking for growth potential and could benefit from tax-deferred earnings. Variable annuities let you choose from a variety of investment alternatives called “subaccounts,” which are professionally managed and invest in stocks, bonds, and/or other investments.

Your account’s value will fluctuate depending on the performance of the subaccounts you select. That value may be more or less than the original amount you invested. Variable annuities may also offer opportunities for guaranteed lifetime income, a guaranteed death benefit, or market protection for an additional cost.

Variable annuities are long-term investments appropriate for retirement funding and are subject to market fluctuations and investment risk.

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Indexed variable annuity

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An indexed variable annuity may benefit you if you’re looking to grow your savings but want some downside protection from market loss. This annuity provides moderate upside growth potential that is tied to a particular market index up to a capped rate of return; in exchange, it provides various levels of downside protection to fit your risk tolerance.

Although you may experience some guarantees against market loss, these products are still considered variable products and are subject to market fluctuations and investment risk.

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Fixed annuity

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A fixed annuity may be appropriate if you are a conservative investor looking to protect your assets from market volatility. These annuities invest primarily in government securities and high-grade corporate bonds and provide a guaranteed, fixed rate of return typically over a period of one to 10 years. The insurance company offering the annuity sets and guarantees the rates.

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Fixed indexed annuity

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If you’re looking for conservative to moderate growth potential with full downside market protection, a fixed indexed annuity might be a good option. This is a type of fixed annuity that offers a return tied to the performance of a given market index (like the S&P 500).

Your funds are not directly invested in the market, thereby protecting your principal investment in exchange for a capped rate of return. Fixed indexed annuities may also offer alternatives that provide guaranteed lifetime income or a guaranteed death benefit for an additional cost.

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Income annuity

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If you are looking to create a pension-like income stream in retirement, you may want to consider using a portion of your savings to purchase an income annuity. This lets you convert part of your retirement funds into a guaranteed income stream for a certain time period or the rest of your life, and even your spouse’s life.

Income annuities can be immediate—starting income as early as 30 days from issue—or they can be deferred—starting income up to 30 years later on a specified date.

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Next steps

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  • Determine your retirement planning needs.
  • Understand and compare the types of annuities and how they can work in your retirement plan.
  • Talk with your financial advisor about annuities.
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Guarantees are based on the claims-paying ability of the issuing insurance company. Guarantees apply to minimum income from an annuity; they do not guarantee an investment return or the safety of the underlying funds.

Each annuity feature may incur additional cost.

Taxable distributions (and certain deemed distributions) are subject to ordinary income tax, and if made prior to age 59½ also may be subject to a 10% federal income tax penalty. Early surrender charges also may apply.

Fixed annuities may have a higher initial interest rate, which is guaranteed for a limited time period only. At the end of the guarantee period, the contract may renew at a lower rate.

Unlike variable annuities, fixed indexed annuities are typically structured so that they are not securities registered with the SEC. Nor are the sales in indexed annuities regulated by the SEC or FINRA Regulation, Inc.

Indexed Variable Annuities (IVAs) combine the long-term growth potential of variable annuities with the downside protection features of fixed indexed annuities. They feature a capped upside that’s usually higher than indexed annuities in exchange for the client taking on some, but not all of the downside risk.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a tax or legal advisor.

Retirement Professionals are registered representatives of Wells Fargo Clearing Services, LLC. Discussions with Retirement Professionals may lead to a referral to Wells Fargo Advisors’ affiliates including Wells Fargo Bank, N.A. Wells Fargo Advisors and its associates may receive a financial or other benefit for this referral.

Insurance products are offered through non-bank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies. Not available in all states.

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